China: The US Is "Insolvent and Faces Bankruptcy"

The common thought amongst even reasonably educated and economically literate Americans is that China is 'stuck with US Treasuries' and has no choice, so it must perform within the status quo and do as the US wishes, or face a ruinous decline in their reserve holdings of US Treasuries.

And with real short term US Treasury interest rates decidedly negative, meaning that it is costing you money to hold dollars, there is a case to be made that there are a lot of 'price takers' out there in this world. Wow, they are just that good, aren't they. Having their heyday in a genuine deflation. A subtle tax levied on all holders of US dollars, probably more significant because of the official understatement of inflation. Yo, come git some.

I think China is already diversifying their reserve portfolio, and more stealthily and effectively than one would imagine into 'real goods.'

Further, I suspect that through the use of hedging short positions and derivatives such as Credit Default Swaps, China would be able to cover a greater portion of its reserves than the common mind might allow, which is 'none' because of the obvious counter party risk in the event of a total collapse, a typical Western reaction, never seeing the gradations of outcomes.

And if this is in reality one theater in a global struggle for power, sacrificing a pawn or two, and even a bishop, would be a small price to pay to bring down the world's remaining superpower, as indirectly and gracefully as is possible. War is never cheaply waged.

It would most certainly be a nuclear option to outright dump Treasuries outright, and would raise the ire of what is still a formidable military power. But it is the Western mind that is so incapable of seeing the many shades of gray in every situation, the subtle gradations in a range of choices that I believe China not only sees but is already actively pursuing.

China is not the only country that resents the devastating frauds that the US has perpetrated on not only its own people but the rest of the world through its Wall Street banks and ratings agencies.

Most Americans overlook this developing estrangement that is beginning to isolate the US and UK from even their traditional allies in Europe and South America and Asia. This is a serious error, but so typical of the short term mentality dominated by greed, dishonesty, and self-delusion that captured the American psyche in the latter part of The New American Century. But what choice does Europe have except to take what the Anglo-Americans serve them. Take it or leave it. And ain't currency war hell?

It never pays to have a 'checkerboard mentality' when your opponent is playing Go."

Financial Times
China rating agency condemns rivals
By Jamil Anderlini in Beijing
July 21 2010 16:22

The head of China’s largest credit rating agency has slammed his western counterparts for causing the global financial crisis and said that as the world’s largest creditor nation China should have a bigger say in how governments and their debt are rated.

“The western rating agencies are politicised and highly ideological and they do not adhere to objective standards,” Guan Jianzhong, chairman of Dagong Global Credit Rating, told the Financial Times in an interview. “China is the biggest creditor nation in the world and with the rise and national rejuvenation of China we should have our say in how the credit risks of states are judged.”

He specifically criticised the practice of “rating shopping” by companies who offer their business to the agency that provides the most favourable rating.

In the aftermath of the financial crisis “rating shopping” has been one of the key complaints from western regulators , who have heavily criticised the big three agencies for handing top ratings to mortgage-linked securities that turned toxic when the US housing market collapsed in 2007.

“The financial crisis was caused because rating agencies didn’t properly disclose risk and this brought the entire US financial system to the verge of collapse, causing huge damage to the US and its strategic interests,” Mr Guan said.

Recently, the rating agencies have been criticised for being too slow to downgrade some of the heavily indebted peripheral eurozone economies, most notably Spain, which still holds triple A ratings from Moody’s.

There is also a view among many investors that the agencies would shy away from withdrawing triple A ratings to countries such as the US and UK because of the political pressure that would bear down on them in the event of such actions.

Last week, privately-owned Dagong published its own sovereign credit ranking in what it said was a first for a non-western credit rating agency.

The results were very different from those published by Moody’s, Standard & Poor’s and Fitch, with China ranking higher than the United States, Britain, Japan, France and most other major economies, reflecting Dagong’s belief that China is more politically and economically stable than all of these countries.

Mr Guan said his company’s methodology has been developed over the last five years and reflects a more objective assessment of a government’s fiscal position, ability to govern, economic power, foreign reserves, debt burden and ability to create future wealth.

“The US is insolvent and faces bankruptcy as a pure debtor nation but the rating agencies still give it high rankings ,” Mr Guan said. “Actually, the huge military expenditure of the US is not created by themselves but comes from borrowed money, which is not sustainable.”

A wildly enthusiastic editorial published by Xinhua , China’s official state newswire, lauded Dagong’s report as a significant step toward breaking the monopoly of western rating agencies of which it said China has long been a “victim”.

“Compared with the US’ conquest of the world by means of force, Moody’s has controlled the world through its dominance in credit ratings,” the editorial said...

Fiscal Union Is Implied if Not Required by a Monetary Union

In 1991 during a visit to Brussels for a discussion of the EU '92 event with some of the bureaucrats engaged in planning there, my old economics professor predicted that no matter what they said, a monetary union implies a fiscal union, greater than the targets and harmonisation which they would admit, men being the creatures that they are.

It makes sense when one understands monetary policy and its theory, and the implications it has in restricting the freedom to save or spend as one may wish to pursue as a fact of fiscal policy.

Here is a story below in which France and Germany discuss their moves to bring more uniformity to their fiscal policies. Quite frankly I am surprised that it has taken this long for it to happen. With the financial crisis tearing down the facades, the extend and pretend policies of the EU have collapsed, and the cheating behind their targets have been exposed for the farce that they are.

And by extension, if one's monetary and fiscal policies are no longer their own, but shared with another and intimately bound by a common currency, then a greater political union and independent governance is a moot point.

This is what my old professor predicted in 1991. And on the train ride back to Paris he said, "Watch what happens if there is a move to establish a single world currency that is a sovereign instrument, and not merely a reference to a basket of currencies and commodities. And then he quoted the famous observation from Mayer Rothschild: "Give me control of a nation's money and I care not who makes the laws."

It has been many years since we have spoken. He was tottering towards his retirement then, and I suspect that he is smiling at all these developments from some better and kinder vantage now, as I know he would be even if it was a profane preference. It was always his first joy to probe the subtle mysteries of money, and how they related to the political follies of men. It was he who first infused me with an interest in the study of money, an aspect of macroeconomics which bordered on his obsession. And it opened a new world to me, and an endless fascination with what is difficult, but so wonderfully, and often subtlety vast.

"Much have I travell’d in the realms of gold,
And many goodly states and kingdoms seen;
Round many western islands have I been
Which bards in fealty to Apollo hold.
Oft of one wide expanse had I been told
That deep-brow’d Homer ruled as his demesne;
Yet did I never breathe its pure serene
Till I heard Chapman speak out loud and bold:
Then felt I like some watcher of the skies
When a new planet swims into his ken;
Or like stout Cortez when with eagle eyes
He star'd at the Pacific--and all his men
Look'd at each other with a wild surmise--
Silent, upon a peak in Darien."

John Keats, On First Looking Into Chapman's Homer

LesEchos.fr
France
et Allemagne s'attaquent à l'harmonisation de leur fiscalité

La bonne gouvernance européenne implique, notamment, l'harmonisation des politiques fiscales. Paris et Berlin en font leur credo, qui ont fait un pas ce mercredi vers une convergence de leurs systèmes fiscaux, à l'occasion de l'invitation au Conseil des ministres français du ministre allemand de l'Economie et des Finances Wolfgang Schäuble.

L'objectif est que « nos deux gouvernements soient ensemble en mesure de prendre des décisions pour aller vers la nécessaire convergence fiscale, tant dans le domaine de la fiscalité des entreprises que dans celui de la fiscalité des particuliers », a annoncé l'Elysée dans un communiqué. « La convergence entre nos systèmes fiscaux est un élément essentiel de notre intégration économique et de l'approfondissement du marché intérieur en Europe », a estimé Nicolas Sarkozy. La première étape de cette convergence devrait passer par un état des lieux des deux systèmes. La Cour des comptes s'en chargerait, côté français, un organisme équivalent s'y attelant outre-Rhin.

Le plan de rigueur allemand est soumis à des risques d'exécution

Le rapprochement franco-allemand en matière de fiscalité ressemble fort, côté français, à une volonté d'aligner le système fiscal sur le modèle allemand. Le poids des prélèvements obligatoires sur l'économie est globalement inférieur chez les deux plus proches partenaires de l'UE (42,8% du PIB en France et de 39,5% en Allemagne en 2008, selon les données énoncées par Nicolas Sarkozy ce mercredi), et leur répartition y est sensiblement différente (moins d'impôt direct, mais TVA plus forte
outre-Rhin)...

Jim Grant on the New Federal Reserve Governor Nominees; Economic Groupthink

Organizations, whether it be a club or a profession or a department, too often over time develop a sort of intellectual inertia, a bureaucratic mindset that tends to perpetuate and validate a certain view of the world amongst its members, particularly if they share other elements in background and world view.

This works to its advantage when they are right, and when the scope of the tasks which they must address are limited to largely operational concerns, without significant risk in the classic sense of the term.

But when the situation becomes different, the environment changes, this organizational mindset not only stifles innovation and adaptation, it can literally reach out and strangle it, well beyond its members, using the entrenched power of its tenure. We see this tendency clearly in organizations that have enjoyed long periods of organizational growth under the leadership of strong personalities, such as the FBI under Hoover, and the Federal Reserve under Greenspan.

We can see this same tendency on a micro level in our daily life on chatboards, in clubs, in our company departments, in civic organizations. It is a tribalistic instinct, that urges the adoption of a consensus view, often influenced and promoted by articulate and single minded individuals, which then musters and focuses the energy and vitality of the group in the execution of its mission.

When it is right, it brings success. But when it goes wrong, when it feeds on itself, becomes defensive and inwardly focused, when perpetuation of the group view overtakes all other considerations, when tribal loyalty and sameness is valued over results, it leads to a cult like behaviour, inbred thinking, that may be inimical to the best intentions of the group, and the sort of behavioural anomalies which we have seen in the tragedies of Watergate, the latter stage Hoover FBI, and even Jonestown.

Economics is in the grips of such a period in its development. One of the primary causes of this problem has been the rise of a few well funded think tanks, universities, and of course the Federal Reserve, that have become powerful influencers, and guardians, dogmatisers of the status quo. The petty sniping among the schools notwithstanding, the current debate of stimulus versus austerity serves to show how anemic, how self referential, how predictable the discussion has become.

The US politicians and economists are doing the same things over and over, expecting a different outcome. For the past twenty years the world has been lurching forward in a series of increasingly destructive asset bubbles, supported by the corruption of thought, and the transfer of wealth from the many to the few, as a direct result of fiscal and monetary policy fomented by relatively small number of powerful people, the monied interests. At some point this will change, and the grip of the status quo will be broken. How much energy will be released, and in what directions, only time can tell.

Janet Yellen: "...has had thirty six opportunities to vote on monetary policy at the FOMC, and she has voted 'aye,' yes, thirty six times. Thirty six for thirty six. Has the Fed been right thirty six consecutive times? No. A well credentialed, consensus hugging economist straight out of the Fed HR department. She is ideal from the point of view of the Fed bureaucracy. She will make not one ripple."

Peter Diamond and Sarah Bloom Raskin: "Diamond is a formidable academic, and Raskin is a formidable regulator, but neither is a formidable thinker about the nature of money, or about the history of money, or about how the Fed might paradoxically make things worse by doing what it does, trying to make things better, which I think is the great question. These are people who I think are unlikely to propose novel solutions to our fundamental monetary dilemma which is that the US dollar is a faith based currency of no intrinsic value that is manipulated by the Fed, and the consequences of the manipulation are often quite distinct, different from what was intended. That's the problem."

"In questions of power, then, let no more be heard of confidence in a man, but bind him down from mischief by the chains of the Constitution."

Thomas Jefferson

Gold Daily and Weekly Charts; Silver Weekly Chart; Bernanke's Bluff; Endgame

The Federal Reserve and its friends in the European central banks, the IMF, and BIS are running a bluff against the developing nations and the rest of the world, and to their shame, the majority of their own people.

They will have to engage in wider scale monetization and 'quantitative easing,' which is a polite euphemism for the debasement of the currency, to cover the collapse of their expansion of the money supply, the misprision of felony, and the subornation of perjury, to facilitate the mass transfer of wealth from the public to their friends. This is why they must operate in the dark. Ponzi schemes must always expand, and always in secret.

The increasing manipulation of gold, silver and the currency markets, and the monetization of the public debt, is a sign of the endgame for the sorcerer’s apprentices. These are the signs for our times.

In the short run things will be confusing, and difficult. In the longer term the outcome is as it has always been. You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time.

Bernanke and his ilk will fail, not with a bang but a faltering failure, and a final whimper. But this will take time, and in the short term they will act with a con man's bravado, for con men they are, wielding power and using public funds unjustly, in secret, in an unconstitutional collaboration of financial institutions, the corporations that have risen around them, and the government.

"A collective tyrant, spread over the length and breadth of the land, is no more acceptable than a single tyrant ensconced on his throne."

Georges Clemenceau

The lifting of the veil from their scheme will be like the rising of the sun, as things long hidden become known. And we will look upon money and value in fresh ways.

Gold Daily Chart



Gold Weekly Chart



Silver Weekly Chart

"If the people only understood the rank injustice of our money and banking system, there would be a revolution before morning."

President Andrew Jackson, 1829

SP 500 September Futures Daily Chart

There are powerful cross currents at work in the US equities market.

A resolution, at least for the short term, should be forthcoming.

China Should Sell US Treasuries When the Market Is Strong (Like Now) and Diversify Its Reserves

If the Treasury market is robust, as it is now, China might be able to sell its Treasuries without disrupting the market, but it would also then have to sell dollars to diversify into other assets in constructing a portfolio. This might show up in the value of the dollar if not in the bonds.

I wonder how much of that BIS / IMF gold is being diverted to China in private sales in order to allow confidence to remain high in the fiat, and to not disrupt the public markets with large price fluctuations. The US banking system has a significant risk exposure to the gold and silver markets through a few of its banks who are leverage short to the hilt.

This same story prompted Max Keiser to write the following in Game Theory and Gold: Countdown to Meltup

"Soon enough, a G20 nation will announce a full or partial gold backed currency forcing every other country to either reply with their own gold backed currency – or equivalence – or risk 100% capital flight."

Reuters
China should cut U.S. Treasury holdings: economist
by Langi Chiang and Alan Wheatley
BEIJING Sun Jul 18, 2010 9:24pm EDT

(Reuters) - China should cut its holdings of U.S. Treasury securities when market demand is strong, a prominent economist said in remarks published on Monday.

Beijing reduced its Treasury holdings in May by $32.5 billion to $867.7 billion, but it actually bought a net $3 billion in long-term Treasuries and remained the largest single holder of U.S. government debt, the Treasury reported on Friday.

Yu Yongding, a former academic adviser to the central bank and now a professor with the Chinese Academy of Social Sciences, said Beijing should invest in assets denominated in other currencies as well as other financial instruments and real goods.

"Although assets in other currencies and forms are not an ideal replacement for U.S. Treasury bonds, diversification should be a basic principle," Yu wrote in the China Securities Journal.

"When demand for U.S. Treasury securities is strong, it's a rare opportunity for us to gradually pull back. That way, it will not have a big impact on prices and China will not suffer too much," he said.

Zhang Monan, a researcher with the State Information Center, a think tank under the powerful National Development and Reform Commission, told the paper that China should invest more of its $2.5 trillion of foreign exchange reserves, the world's largest stockpile, in hard assets such as gold.

Maestro Redux: Bringing in the Sheep

This cartoon is from a few years ago. I remember running it on my old site at the time.

I think it is not only relevant today, but will likely strike a stronger chord with more people since things are progressing in this direction.

How Goldman and J P Morgan May Intend to Rape the Mining Industry (Again) and Take It Over 'On the Cheap' As Bullion Rallies

Those who have followed the mining industry over the years know how painful it was for those who had sold their bullion forward, on the advice of bullion banks like Goldman and J P Morgan, to unwind those hedges. The cost was company insolvency and a sale on the cheap for the smaller players, and billions in writeoffs for the larger, like Barrick Gold.

Perhaps a round of precision naked short selling and bullion price suppression will soften them up the cash strapped miners, and curtail their access to the alternative sources of capital and credit enough to prompt some soft-headed and desperate CEO's make their (sometimes self-serving) deal with the devil again.

You will forgive me if I wonder if Goldman would be taking the other side of this trade with their customers, waiting gleefully for the day when their 'forecast' proved to be wrong, and the miners found themselves unwittingly in their greedy little hands, God's work having been done once again.

And if they are caught, well, the going price of fraud on a massive and obvious scale seems to be about $550 million, so that will have to be factored into the business plan. Short sales on the collateral damage should cover that cost of doing business nicely, and keep the moral hazard and faux regulators happy.

And as for investors, they may wish to consider putting any miner who buys into this scheme on their 'do not buy' list. Although it should be noted that Barrick had a few good years, while its peers suffered, for its betrayal of its industry and ultimately its shareholders, when the devil had his due. In the famous New Orleans lawsuit they claimed that they had been working with JPM at the behest of the Federal Reserve.

Are the BIS, the IMF, the ECB, and the Fed starting to scrape the bottom of their bullion barrel, requiring fresh sources of physical to sell into the market, and feeling the twinges of anxiety that disclosure is near, the jig is up? Hope so. Could not happen to a more deserving group. And I hope to live to see the day.

Mineweb
Goldman predicts falling gold price beyond 2011, recommends gold hedging
Lawrence Williams
Thursday, 15 Jul 2010

Goldman Sachs has raised its medium term gold price forecast to $1,355, but reckons prices will fall from 2011 and recommends producers sell gold forward.

LONDON - Plus ça change. Goldman Sachs is suggesting that mining companies sell gold forward again. The logic behind this is that although the bank reckons the gold price will increase to $1,355 an ounce over the next 12 months - a tiny increase from its earlier prediction of $1,335 - beyond that it is looking for prices to stabilise and fall as the U.S. Fed tightens monetary policy and the recession is seen to be ending.

Of course the big gold banks, of which Goldman is probably the most successful, can do very well out of its clients hedging their gold forward whatever the fortunes of its clients in so doing. It was notably the bank which reputedly advised Ashanti Goldfields to sell its gold forward at gold's low point back at the end of the 1990s - a policy which brought the gold miner to its knees leading to its takeover by AngloGold - another Goldman client. Indeed commentators have suggested that Goldman made profits on every angle of the Ashanti hedging debacle, and on the sale of one of its clients to another.

Goldman would probably counter that its primary responsibility was to its shareholders - perhaps even more so than its clients - and that the sudden turn-around in the gold price which caused Ashanti's effective bankruptcy, was completely unforeseen, but the whole episode left a bitter taste that lingers to this day, particularly in Ghana where Ashanti was seen as the country's major gold player on the world scene.

However, the fact that Goldman is still looking for an increase in the gold price, even if only over the next 12 months, is positive for gold. The bank actually forecast a six-month gold price (effectively a year-end figure) gold price of $1,290 rising to the $1,355 figure over the following six months. With predictions being regularly updated (the latest figure is an update from Goldman's previous one of only three weeks earlier) the position may again change depending on how quickly the global economy is seen as recovering.

Goldman also delivered forecasts for base metals and silver, all of which ranged higher than previous ones apart from zinc where the bank was looking or an 18% fall.

Should the Fed Buy Gold At $5,000 per Ounce? Should Mexico Go to a De Facto Silver Standard?

These are two different interviews on two related topics: the place of specie in the reconstitution of national currencies in facilitating the recovery from a financial crisis.

I have to confess that there were some historical observations made by Lee Quaintance that made me scratch my head, wondering if we were coexisting in the same or parallel universes. I have tried to note them as they occurred in the text. What was most puzzling is that they seemed to be inserted in a line of thinking with which I was in completely agreement. Perhaps I just need another cup of coffee.

But in sum I found both interviews innovative and thought provoking. The concept of using Gresham's Law to induce people to save is interesting. I think the valuation model which my friend Hugo puts forward for a silver coin needs some work and some further thought, most likely on my part.

The status quo of economists and financial engineers, with their attendants politicians, will just hate these ideas. So I would not expect them to gain much traction, until things get substantially worse than they are today.

Hugo Salinas-Price on the Silver Peso and Deflation: Should the Fed be Buying Gold?
Chris Whalen, Institutional Risk AnalystJuly 19, 2010

"The difficulty lies, not in the new ideas, but in escaping from the old ones."

John Maynard Keynes
(1883-1946)

In this issue of The Institutional Risk Analyst, we shift focus from the U.S. to Mexico and feature a comment by Hugo Salinas-Price on his proposal for a silver-peso coin. We saw such a big response to the conversation with Jim Rickards about a gold-backed euro ("Paper Gold vs the Dollar? Interview with James Rickards," July 7, 2010) that we wanted to come back to the subject by speaking with an old friend from one of our favorite countries.

Salinas is founder, former chief executive officer, and honorary president of Grupo Elektra, the Mexican retailing company. He is also founder of the Mexican Civic Association Pro Silver, which for 10 years has been advocating the introduction of a monetized silver coin in parallel circulation with fiat pesos in Mexico. Legislation to that effect now is under serious consideration before the Mexican Congress.

Salinas describes the Mexican peso as a "derivative" of the dollar, a troubling prospect since, as we discuss below, the dollar itself is a derivative of nothing, at best a mere representation of a unit of work. But before we go to our feature, we need to comment on the latest minutes from the FOMC and the growing indication that the U.S. economy is continuing to slow.

To us, there is no "double dip" in the economy. We never recovered from the first decline in aggregate demand. Forget the bogus inflation and GDP statistics coming from Washington. Talk to your neighbors and family, the people in the community who own businesses. Ask them how their revenues for 1H 2010 are doing YOY...

In response to mounting concerns about deflation, news reports are filled with speculation that the Federal Reserve System will "ease" monetary policy further, an interesting idea given that interest rates already are at zero. The concept of further quantitative easing, as we understand it, would be for the Fed to purchase more securities from the Wall Street banks and hope -- repeat hope -- that a few pennies trickle down to the real economy. But mindful of the quotation from Lord Keynes above, maybe there is a better idea.

Last week The IRA spoke to Lee Quaintance, co-founder of QB Asset Management. Lee had worked in high yield credit and government bonds for several decades for the likes of Goldman Sachs (GS), CSFB and DLJ. Lee and his partner Paul Brodsky write a fascinating monthly market comment.

The IRA: So Lee, we see deflation as far as the eye can see but also rising costs. What's your view of the inflation/deflation debate amongst the chattering classes?

Quaintance: Credit inflations create asset bubbles that destroy the organic equilibrium mix between the factors of production. The deflation process curtails production and shrinks overall wealth but, ironically enough, redistributes a vast portion of the wealth that's left to the privileged few, mostly banks and government.

The IRA: We have created quite a mess.

Quaintance: A mess, yes, but, a predictable one nonetheless. Inflation and deflation are two sides of the same coin. Fiat currency and unreserved lending privileges are the root causes of all these imbalances. Throw in a bit of greed and malice too no doubt. The Austrians modeled it and predicted it. The Keynesians make excuses for it.

The IRA: Years ago, we made our friend Bill Janeway angry at us for calling Keynesian economics a coward's road to socialism (See "New Hope for Financial Economics: Interview with Bill Janeway," November 17, 2008). Now that we are at that endpoint, our political leaders are completely clueless. We have yet to find a single American politician able to talk about the role of the dollar in the global economy.

Quaintance: Have you asked yourself why most people have come to believe that deflation is to be avoided at all costs? It's painfully obvious to us -- because it destroys the banks and handcuffs the politicians. For everyone else, it's seemingly a zero sum game. Why all the fuss? (A zero sum game? Perhaps it has something to do with mass unemployment, and the transfers of wealth from the many to the few, the banks and the government, which Quaintance noted previously, leading to the decimation of the middle class, and a nation of hobos and millionaires. If all deflation did was destroy banks and harm politicians I would think it would be the most popular thing since the pre-elected version of Obama - Jesse)

The IRA: Well, if the U.S. economy continues to decelerate and deflate, we are going to see a lot of politicians facing mandatory "retirement" a la Harrison Ford in the film Blade Runner. A large portion of the U.S. population thinks that we are entitled to full employment, price stability and early retirement even as the government expands the deficit and currency at a double digit rates. The Chartalists think that we should just print money and use it to monetize all existing debt. The neo-Chartelist framework comes from the same intellectual wellspring as Keynesian economics and has been extended by the likes of Nobel laureate Bob Mundell. The current policy of the Obama Administration to borrow trillions of dollars to fund future deficits is similar madness, in our view, but is Fed-induced inflation better? What do you propose?

Quaintance: We have some basic views on what should be done and it comes in two steps. First, there needs to be a coordinated global currency devaluation. We argue for the Fed to tender for private gold holdings at something like $5,000 per ounce and to maintain that bid/offer. This would be the true economic/regulatory function of a central bank and/or monetary authority.

The IRA: The U.S. central bank has not had any gold holdings since FDR's expropriation of the private banking industry's gold in the 1930s. All of the gold in the Fed's vaults belongs to somebody else. We have a reserve bank with no reserves. So you would have the Fed buy gold rather than purchase more crap assets from the large dealer banks via a second round of quantitative easing (QE II)?

Quaintance: Precisely. The second step would be a major policy-mandated contraction in unreserved bank lending. These two simple steps would not only rebalance the financial books globally but would prevent leverage from over-inflating asset prices going forward, in turn creating another non-sustainable bubble economy. This isn't just theory. Let's look back. Employment trends in developed economies are being strangled presently by prior asset price inflation. As an admittedly crude example, the cost of shops on Main Street are overvalued and require artificially high rents to service debts. The average would-be shop owner can choose to pay his inflated lease or choose to pay workers - but not both. So, asset price inflation due to excessive unreserved credit expansion is not wealth enhancing but, rather, productivity destroying. (As a counterpoint though, it was not asset price inflation that started the process of breaking labor through offshoring and anti-union activity, a trend with its roots in the Reagan presidency, but general greed and lower tax rates on the monied interests. Why pay wages when you can pay yourself bonuses and tax free dividends to yourself and your friends? Capitalism has a natural dynamic to self-destruction, despite the mythology spun by the efficient market hypothesis folks. Given free rein, it will destroy itself by destorying its customers - Jesse)

The IRA: That is a structural problem. How does the Fed buying gold help?

Quaintance: You want organic employment growth? Lower the relative price of other factors of production. Boosting asset prices unilaterally while wage rates remain relatively stagnant is a recipe for unemployment. This is just common sense and it's what we're seeing today. The system yearns for more money, not more credit.

The IRA: Yes, their operating costs are rising but selling prices are compressed, just like our favorite Italian food dispensary in New York. As we have long argued with our friend Bill Greider, consumers and small businesses who do not do business with JPMorgan and Goldman Sachs are the big losers in the fiat system. You must be smart enough to surf the waves of inflation, not just swim with the tide, and that makes us all speculators. (It is really the arbitrariness of the money that is a root cause, and the creation of a monopolization of credit under an incompetent/corrupt Federal Reserve - Jesse)

Quaintance: Agreed. In the end, credit inflation historically leads to asset inflation while base money inflation leads to wage and basic goods/consumables inflation. No matter how you slice it, the ratio of outstanding global debts to global base money is irreconcilable. This is a mathematical tautology. From this imbalance flow many of the imbalances you cite, in my mind. Chris, as I said, we think this is as simple a problem as too little "money" in existence attempting to service and ultimately reconcile too much debt.

The IRA: So where do we go from here?

Quaintance: When the ratio of productive asset prices exceeds a theoretical limit vis-à-vis the other factors of production, the productive process breaks down. In the case of the U.S., it headed to developing economies overseas where labor demographics, regulatory apparatuses and asset pricing environments were far more in balance. This trend should continue until there is a serious reconciliation of that debt-to-base money gap.

The IRA: The one-sided era of free trade, with the U.S. open to all other nations but without reciprocity, has been like Smoot-Hawley in reverse, draining resources from the U.S. economy instead of what happened once WW II began. America ended up with much of the gold reserves and industry in the world but now we have swung to the other extreme. But most people don't realize that technological changes such as the electrification of the U.S. and resulting overcapacity in the 1920s drove the deflation of the 1930s, (What! How about the huge waves of bank failures? There is nothing like vaporizing a class of person's life savings to provoke deflation. How can someone make such a sweeping statement and ignore the most prominent feature of the time from an economic perspective! - Jesse) not the marginal increase in tariffs. Tariffs were already high and had been for 50 years. So Lee what we hear you saying is that we need another global reflation a la FDR's purchases of gold?

Quaintance: Yes. I abhor as much as the next guy proactive public sector administration of anything that a free market can manage better. But given the massive unreserved credit inflation of the last 20-plus years, a major -- and I mean major -- expansion of the global stock of base money must be administered ASAP to avoid further nominal private credit deflation and subsequent real economic contraction. Simply replacing vaporizing private debts with public debts is a mug's game -- a poorly-veiled requirement to inflate tomorrow. Why dance around the obvious here?

The IRA: So in a nutshell...

Quaintance: It's all about excessive unreserved credit having created real economic distortions that can't be reconciled through further debt creation. For a true financial reconciliation to occur the debt-to-monetary base ratio has to narrow significantly, and to set a sustainable course the growth rate of global money should be capped in a credible fashion. The easiest way to do this is by reinstituting and maintaining a true gold standard, at least for base money. This is not a radical notion. Remember the reason the gold standard "failed" historically was not the basic mechanics of hard money being "too restrictive". The problem has always been unreserved leverage that accompanies "gold standards" creating non-sustainable economic imbalances. There is plenty of gold, at the right price, to reserve all money and credit.

The IRA: The new $5,000 per ounce price for gold in greenbacks suggests a huge degree of suppressed inflation in the dollar system.

Quaintance: We see no other way to re-ignite the real economy and put it on a sustainable path. Policy makers are holding a burning match. They have to act or the markets and global trade partners will act for them.

The IRA: Thanks Lee.

And now to our feature. We have long believed that the U.S. government should issue silver and gold coins that are valued by weight. Most people are sophisticated enough to go down to their bank branch, look in the newspaper or online to ascertain the current value of silver or gold. By allowing the metal coins to trade on their intrinsic value instead of the arbitrary, political value assigned by the state, it would provide a way for average Americans to save and protect themselves from inflation. Hugo Salinas Price talks about how just such a system soon may be implemented in Mexico.

The Monetization of the "LIBERTAD" Silver Ounce in Mexico
By Hugo Salinas-Price
www.plata.com.mx

The correct diagnosis of the world's economic sickness is: there has been too much spending based on too much debt and there is a starvation of real savings.

What would be the treatment for the illness? Flush out the excessive debt accumulated by excessive spending with a laxative which will cancel that debt, and provide the patient with some healthy real money which he will greedily gobble up.

This is the philosophy which has led me to propose the reintroduction of silver money into renewed use in Mexico. I leave the cancellation of debt to others; my contribution is real, healthy money for the Mexican nation.

How to reintroduce silver into permanent use as money in Mexico?

First, since I do not wish to kill the patient, I prescribe a gradual introduction of silver into circulation, in parallel with fake money, which is the only kind of money in the world today. We shall gradually increase the amount of silver money in circulation in Mexico, as it circulates along with fake, fiat money.

It is necessary to take into account that although at one time - about a hundred years ago, in the case of Mexico - people calculated value in terms of weight of silver, today they would not be able to do so. People have become accustomed to using numbers to designate value.

Thus, if we want silver to circulate in the hands of the Mexican people, we must devise a silver coin to which is attributed a number. If the silver coin has a number officially attributed to it, the Mexican people will snap up all the coins they can afford to purchase, because they know they will be able to use the coin in commercial transactions at any moment - though we know they will not do so: they will instinctively save these coins (Gresham's Law). And that is what we want the patient to do!

There were silver coins circulating in many parts of the world, just after World War II. They had all disappeared from circulation a few years later. What happened? There was inflation of paper money all over the world, due to credit expansion. This inflation caused the price of silver to rise. Since all the silver coinage in circulation had engraved numbers signifying monetary value, and the engravings could not be erased, the silver coinage became more valuable if it was melted down into silver bullion. That sealed the fate of the silver coinage: it was all melted down and never came back. In fact, silver coins with engraved value can never come back as long as there is paper money in circulation - they will all suffer the same fate, they will all be melted down eventually, no matter what value is engraved, because paper or digital money leads to constant inflation.

You have Silver Eagle one-ounce bullion coins in the US, but they are purposely demonetized by having an engraved value of $1 Dollar; this makes them useless as ready money.

So the silver coin which is to be introduced into permanent circulation must have no engraved value. Providentially, there is such a coin in existence in Mexico: the "Libertad" pure silver ounce. We don't have to invent a new coin.

All we have to do is to obtain Legislation which will attribute a monetary value to this coin by means of a quote from the monetary authority, the Bank of Mexico. The quote will simply take the place of the engraved value.

It so happens that a former President of Mexico, Jose Lopez Portillo (1976-1982), tried to do just this, in a moment of inspiration, back in 1979. However, his legislation was defective and the measure was a failure because that legislation decreed that the Bank of Mexico should issue a monetary quote for the silver ounce, to depend directly on the international price of silver. The intention was excellent, but the legislation deficient, because the silver ounce bounced about in monetary value from day to day and no one could use it as money under those conditions. The law was allowed to lapse in 1981, but never repealed.

It took me many months of thought to find the solution to the monetization of the silver ounce, with no engraved value, but one day it came to me, right out of the blue: the Bank of Mexico must issue a quote which will give the Libertad a monetary value, but once given a monetary value, that value must not be reduced, under any circumstances! The central bank must stand ready to make an infinite market at the minimum quoted value. (I can see some a large hedge funds having fun with this one, testing the resolve of the Bank of Mexico. It probably needs more thought, as it is an absolutely pivotal point, and one on which the idea foundered before. I thought Hugo's idea of gold / silver for regulating international trade was brilliant, but I need to think more of how this one might survive the inevitable attacks of an unreformed financial system, capable of perverting almost anything it touches. - Jesse)

People will gladly receive a silver coin for savings, if it has a monetary value ascribed to it by a quote. But the quote must be stable, it must not be reduced - no one can accept as money, a coin whose monetary value may be less tomorrow that it is today. If we compare with paper money, a paper bill is acceptable because it says $100 pesos, and will always say $100 pesos. Its purchasing power may decline, but the bill will always say $100 pesos.

The same principle applies to a silver one ounce coin with no engraved value: if the quote is $300 pesos, the public must have the certainty that the quote will not be reduced. A fluctuating quote is what caused the failure of our former President's legislation: the coin had different monetary values from day to day, some days worth more, some days worth less.

On the other hand, people will joyfully accept a silver coin whose quote may be increased due to the increasing value of silver. In fact, this is an extremely powerful incentive to savings, and that is what we are looking for: more savings! No interest payment is necessary to entice people into saving this coin - silver is an irresistible magnet for savings. (The US is using it on a much smaller scale through the issuance of common coins with a marketing appeal, like the states and presidents series - Jesse)

So our proposed legislation is this:

The Bank of Mexico shall publish a monetary quote for the silver ounce, based on this procedure:

a. To the international price of silver in pesos, Bank of Mexico shall add a 10% seigniorage (profit) for itself. ($231.41 pesos X 1.1 = $254.55 pesos. Today's values of silver and pesos, at kitco.com)

b. The Bank of Mexico shall add to this, the cost of minting the silver ounce. ($254.55 + $19.02 estimate = $273.57 pesos)

c. The Bank of Mexico shall round out the sum of the two foregoing, to the nearest multiple of 5, to make the monetary value easy to remember. ($273.57 rounded out = $275 pesos quoted monetary value of the "Libertad" silver ounce)

d. When the international price of silver in pesos falls, the Bank of Mexico shall do nothing.

e. When the international price of silver in pesos rises and impinges upon the seigniorage of the Bank of Mexico, it shall increase the quoted monetary value to restore its seigniorage.

f. The Bank of Mexico shall mint sufficient quantity of Libertad ounces to satisfy market demand and prevent the appearance of a premium over the quoted monetary value of the Libertad.

By this means, the people of Mexico will have an ideal vehicle for savings and even those who cannot read or write will accumulate these coins as a family patrimony. A recent Mexican Treasury study discovered that 85% of all Mexicans do not have bank accounts. These are the candidates for savings in silver!

Under this legislation, the silver Libertad will never be melted down into bullion, as its predecessors. The coin will always be worth more as money, than as bullion.

A fall in the value of silver will not affect this coin. No matter how severe a collapse in the price of silver, this coin will always be preferable to any paper bill or digital money, because the paper bill and digital money have absolutely nothing to back them up, whereas this coin will always have some value due to its being silver. I find such a collapse hard to conceive, but one must take into account this possibility.

I cannot help adding that I believe that this silver money is what the whole world is waiting for, "waiting for the sunrise" out of our present deathly darkness. I believe that if it becomes a reality, it will be an enormous success.

Three Interesting Interviews on King World News

John Williams of Shadow Government Statistics on the Economy

• US is in the structural change of an Economic Depression and is starting the next leg down.
  
  
• Heavy dumping of US dollar assets is coming which will inhibit the Fed's ability to monetize and the Treasury's ability to issue new debt; this will trigger very serious inflation problems leading to genuine hyperinflation.

Ted Butler on the weekly action in the Precious Metals Markets

• Friday's price declines on Friday were nothing but 'crooked dealers on the Comex trying to liquidate as many technical funds and speculative longs as possible.
  
  
• You cannot rule anything out in a manipulated market, but the selling appears to be coming to an end.
  
  
• In the Financial Reform Bill the Congress has given strong direction to the CFTC to look into position limits. (The CFTC now has all the tools they need to regulate the manipulation in the US markets, but I am not holding my breath while Gary Gensler is in office as Chairman. - Jesse)

Matt Simmons on the Oil Markets and the Gulf Oil Spill

• BP has been lying and covering up the incident in the Gulf of Mexico from day one, because of the risk of criminal prosecution for gross negligence
  
  
• People who live in the Gulf states are still in danger because of lethal methane gas. A hurricane may bring up a poisonous lake of toxic oil from the bottom of the Gulf. He believes that we might be facing one of the largest losses of life from a natural non-war related disaster.
  
  
• The practical solution is a small diameter nuclear device to glass over the well bore. The nuclear device offers no risk.
  
  
• The skimmers are only wiping up the scum but are not addressing the real problem.
  
  
• BP will have to be liquidated to cover all the claims. Apache might buy the North Slope of Alaska which is a good development because BP is irresponsible. BP's stock will effectively become worthless.
  
  
• BP continues to perjure itself and manipulate the press. They are distracting attention from the real problem which is a much bigger leak that cannot be controlled by this cap.

Both John Williams and Ted Butler make sense to me, since they talk about areas in which I have experience and adequate knowledge for a probability.

I do not know enough or have enough data to have an informed opinion on what Matt Simmons is saying. It is hard to believe that the government could be so incompetent to take the risks that he outlines. It should be relatively easy for the US Navy to lead an effort to ascertain if some of the things that he says is true.

If he is wrong, then his reputation and credibility will be destroyed. If he is right, the Obama government, BP, and possibly the corporatocracy will be brought down in a spasm of popular rage.

I sincerely hope he is completely wrong, and would have to view some of his claims with skepticism until proof emerges.

False flag in September, anyone? You just know that is being teed up as an option on Obama's policy plate by the neo-Machiavelians in his administration.