James West: “Gold Price is No Bubble”

The price performance of gold recently has all sorts of armchair economists waxing philosophical on the idea that this is the advent of a price “bubble”. While certainly everyone has and is entitled to their opinion, there are other features of humanity that we all possess, and much like many opinions, are best obscured from view.

Declaring that gold is in a “bubble” demonstrates complete ignorance of or disregard for the fundamental drivers of the almost ten year ascent of gold. And saying that the price is forming a bubble implies that, like the real estate bubble, the tech bubble, and the tulip bubble, the price must necessarily “pop” and return to a sustainable long term average.

During each of the bubbles of recent and distant history, the cause of the meteoric price ascents of these various asset classes were all predicated by the same string of events.

Supply was far outstripped by demand because the public perception emerged that the asset class in question was the ultimate asset class at that point in time. Disproportionately high levels of capital were directed to them, and upon the eventual discovery that supply could easily meet and exceed demand, the bubble pops, the price declines, and the herd mentality resumes its frantic search for the next ‘ultimate’ asset class.

Homes, technology and tulips are all a product of effort. With increased effort, more of each of these can be created. Supply can easily be ramped up to meet demand.

Not so much, in the case of gold. The availability of economic concentrations of gold in deposits near to the surface of terra firma is finite. Increased effort might guarantee the temporary increase in supply from known deposits, but each deposit is eventually exhausted, and no amount of increased effort can bring back the gold.

Gold, for the most part, is not used up. It is fabricated into jewellery or bullion or coins, and hoarded and preserved.

Technology, real estate, and tulips, on the other hand, are consumed and replaced. Technology becomes obsolete, homes wear out, tulips die and are reborn each spring.

Gold? Gold goes nowhere. Gold stays put. Gold is passed from generation to generation in last wills and as heirloom collectors items. Gold is recognized as a store of value that is not temporary.

The only way to diminish that is through government interference, such as the various legislative actions that have historically capped gold’s value at a fixed price, or if, for some reason, humanity decided to abandon its greedy predisposition to hoard value against future financial calamity.

The latter is just as improbable as the former.

The idea of capping the price of gold through international agreements flies in the face of the entire concept of free markets, now the near universally accepted preferred economic style. And the innate fear of not having enough that is a basic element of the human cerebral infrastructure is eternal, or at least, that’s how it seems.

So what could, for arguments sake, cause the price of gold to plummet suddenly, thus obviating the recent spike as a bubble?

Well, the forces of supply and demand are always dominant. If those who want to buy gold and are willing to pay the market price for it exceed the number of those who have gold and are willing to sell it, the price will be forced upward. Just as elementally, if sellers outnumber buyers, the price must needs decline. So simple.

And who’s selling gold?

Well we can point to the International Monetary Funds plan to divest itself of 400 tonnes of gold, ostensibly to finance the stimulus of nations unable to underwrite their own economic stimulus. But just as soon as the proposed sale is announced, India steps up to the plate to take half. In one transaction. The largest single lot of gold made available since the onset of the secular bull market, and a buyer is found easily.

Russia, the economic basket case of the world thanks to its national inability to govern itself with laws and reason as opposed to brute force, recently announced the necessity of a sale. But that is clearly necessitated by the national hands’ inability to refrain from raiding its own pockets. A genetic defect, it would appear.

Who else has sufficient gold to sell, that might drastically influence the supply/demand matrix to cause a popular abandonment of gold? China, the United States, and various G7 nations. But none of them are selling. Indeed, China has revealed that it has been the principle sovereign accumulator of gold for over 5 years.

Even during and post economic crisis, the impetus was to retain and accumulate, not sell gold.

No. The bubble we are immersed in at present is the currency bubble. Led by the disingenuous United States, the world has temporarily forgotten that despite the fact it is possible to print currency easily and with abandon, the laws of supply and demand will definitely re-assert themselves in due course. And that is what we are seeing now with the gold price.

The confidence in a dollar printed on paper being able to obtain a dollar’s worth of merchandise is fading with every treasury auction. The popular perception is growing that gold is indeed a monetary standard, and a store of value that can be trusted in both turbulent and stable economic conditions.

There is nothing on the economic horizon that can change this. We are in the period of descent for the American empire and its feeble dollar. The nation is bankrupt, morally and economically. It can no longer bamboozle the world into accepting its counterfeit currency in exchange for trade. Only nations who are forced by their vast holdings of the monopoly dough to entertain the notion that it has value participate in the illusion, because the alternative would necessitate a drastic re-valuation of their own financial integrity.

So on the supply side, there is no availability. No one is selling. The miners are mining as much as they can as fast as they can and still the buyers are lining up.

On the demand side, nothing but more, more and more demand. No trustworthy currency in sight (except perhaps the renmibi, increasingly a gold-backed currency), no asset class alternative that is comparable, no new bubble to chase.

I suppose its good to have alternative viewpoints in media. Its important to listen to all sides of a story. But if the issuing orifice declaring a bubble inhabits a region below the waist, those who act on such advice will find themselves duly smeared in good time.

Gold price bubble? Give me a break!

James West

www.MidasLetter.com

 

Salinas Price: It’s time to end World War II

It’s time to end World War II

Hugo Salinas Price

Oct 29, 2009

The shooting, the bombing and the killing of World War II stopped in August of 1945, and the War was formally over.

The United States and Britain knew the War was won, in 1944.

At that time, a Conference was called among the 44 Allied Powers, to determine the nature of the world’s monetary and financial system after the fighting was over. It was held at Bretton Woods, New Hampshire, USA, in July of 1944.

As a result of the Conference, a set of Agreements were signed.

The most important of all the agreements was the one that established that gold should be the money to be used to settle all trade deficits between nations, but in lieu of gold, dollars could be used to settle these deficits; at the option of all Central Banks, these banks could demand gold from the United States Treasury at a redemption rate of $35 dollars for each ounce demanded.

Thus, the United States could pay for its trade deficits either in gold or in dollars. No other nation was allowed to pay for its trade deficits in its own currency; for all other nations, settlement of trade deficits had to be done with gold or with dollars previously acquired in the course of trade with the U.S. or with other nations who had dollars. In other words, dollars – and only dollars – were as good as gold.

General de Gaulle (President of France, 1959 – 1969) has been quoted as saying that this was “an exorbitant privilege”. And so it was, a privilege of the victor in World War II.

Under the rules of war, a country at war may loot and plunder its enemy, if it can do so. Booty has always been a great incentive to get soldiers to fight, and World War II was no exception. When a war is over the looting and plunder stops and nations renew commercial relations, exchanging their goods in peaceful international trade.

In forcing on the Bretton Woods Agreements the acceptance of the dollar as a means of settling international debts, along with gold, the US established the will of a victorious power to continue to loot and plunder the whole world.

Formally, World War II was over. But in fact, World War II was not only not over, but the US had implicitly declared war on the whole rest of the world by imposing the dollar as a means of settling trade deficits, along with gold.

By running huge trade deficits which arose out of its expansion of credit and consequent money-printing, the US was able to leverage its gold holdings and send abroad masses of dollars to pay for imports. The exporting countries received dollars – not gold – for their export surpluses to the US. The dollars began to pile up in foreign Central Banks as “Reserves”. The exporting countries, not being nuclear powers, were afraid to demand gold in payment of their export surpluses, since such a request would very probably irritate the great power, and nobody wanted to offend the USA.

All this export of dollars in payment of trade deficits finally moved General de Gaulle to demand gold for dollars held by the Banque de France. This annoyed the US government and shortly thereafter, not coincidentally, there was an outbreak of rioting in France which threatened to unseat President de Gaulle, who had offended the US by simply asking for France’s gold.

The US, by means of the “dollar as good as gold” provision of the Bretton Woods Agreements, has been looting and plundering the rest of the world, non-stop, since the end of World War II. Very subtly, based on Bretton Woods, the US has continued to act as the triumphant victor in a war; it has never since the end of World War II ” [reassumed] among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature’s God entitle” it, as expressed in the Declaration of Independence, 1776.

The US has not assumed an equal station among the powers of the earth, since World War II came to a formal end. It has continued to impose its Imperial Will upon the rest of the world, as vassal states, and has been duly exacting tribute from the rest of the world, by means of its paying its trade deficits with dollars, which are nothing at all since 1971. The US did not truly “normalize” relations, neither with the Axis powers when World War II was declared formally over, nor with the rest of the world.

Commerce is an eminently peaceful activity. The seller forces no one to buy; the buyer forces no one to sell. The means of payment of commerce, since written history began, has been either goods for goods, i.e., barter, or goods for gold – a perfected form of barter. Silver has also worked well, as a means of payment of commerce. But anything else, any innovation, anything decreed to be a means of payment by anybody whatsoever, cannot be anything but an imposition, a violation of the rules of commerce.

The present ruinous condition of the world’s finances and its lopsided industrial development has not yet corrected itself. If anything, we are in the “eye of the hurricane” for the moment.

If all governments in the world were to collapse, commerce would not disappear; it would arise out of the disorder, and its money would be gold or silver, or both. Gold and silver are the natural means of payment for humans. Such is the intellectual decline in the world, that those in power have forgotten this; they and their paid lackeys in the financial press and financial media are dreaming when they think that they can come up with some effective but artificial, fiat means of payment, decreed by some governmental body. Any such fiat means of payment will inevitably preserve privileges for some, and impose burdens on others. Commerce cannot thrive under those conditions; it will go into permanent decline, along with our industrial civilization.

“Regionalizing” fiat currencies will only have the result of pitting region against region – as illustrated in Orwell’s “1984″. This is the fallacy underlying all talk about a “multi-polar world” while ignoring the need for a neutral, real and time-tested medium for exchange of goods.

The world’s principal powers should convene and come to an agreement for the establishment of the world’s monetary and financial system on the basis of gold as the exclusive medium for settlement of international trade deficits – a neutral, real and objective medium for commerce and finance.

If the governments of individual nations want to allow their banking systems to diddle with fractional banking and inflation, it is their right to do so. But when it comes to settling accounts with other nations, they must come up with the required gold.

Only then will we be able to say that World War II has ended.

###

27 Oct, 2009

Hugo Salinas Price

President

Asociación Cívica Mexicana Pro Plata, A.C.

Mexico City

email: plata@plata.com.mx

website: http://www.plata.com.mx

 

Antal E. Fekete: An open letter to Paul Volcker

REMOBILIZE GOLD TO SAVE THE WORLD ECONOMY!

An open letter to Paul Volcker, Chairman of the Board of Governors of the Federal Reserve, 1979-1987; Chairman of President Obama’s Economic Recovery Advisory Board

*

Antal E. Fekete

San Francisco School of Economics

E-mail: aefekete@hotmail.com

*

Dear Paul:

In 35 years our paths have crossed for the second time. In 1974/75 you and I were Visiting Fellows at Princeton University. Now, in 2009, both you and I are attending the Santa Colomba Conference on the present debt crisis at the invitation of Bob Mundell.

In 1975 you conducted a seminar on the international monetary system and invited me to contribute a paper on gold which I did. Those were halcyon days by comparison. The United States, after the turbulence of 1971, successfully consolidated the international position of the dollar and could confidently lift the 42-year old ban on the ownership and trading in gold.

On December 31, 1974, trading of gold futures contracts started in New York and Chicago. It showed a robust contango at full carrying charge, that is to say, the gold basis (the spread between the futures and the cash price) was at its peak. It indicated that monetary gold was available in great abundance to meet any demand for any reason. It showed that the gold futures markets could serve as the fulcrum in seeking out the equilibrium between the supply of and demand for gold. They could act as a safety valve, releasing occasional pressures that, in the absence of paper gold, may be a threat to the monetary system. It looked as if the gold problem has been solved for once and all.

But as I feared, and as the intervening 35 years have proved, rather than moving towards equilibrium we have been constantly moving ever farther away from it, as measured by the gold basis. The secular vanishing of the gold basis is a most ominous danger signal. It indicates that monetary gold is increasingly unavailable, and in case of a crisis it can no longer be relied upon to come to the rescue. Basis started out at 100 percent of the prevailing interest rate, but has been steadily eroding all the way to zero percent today. Permanent gold backwardation (negative gold basis) is staring us in the face. The gold basis is trying to tell you something. It heralds the greatest monetary crisis of all times. It warns about the possible collapse of the international monetary and payments system.

Let me explain. Gold is the only ultimate extinguisher of debt. Other extinguishers do, of course, exist but they are not ultimate in that they have a counterpart in the liability column of the balance sheet of someone else. Gold has no such liability attached to it. Gold is where the buck stops. It is this property that makes gold unique as a financial asset. Historically, gold discharged its function as the ultimate extinguisher of debt through the gold clauses written into the bonds of the U.S. government before 1933. Gold could also discharge this function, albeit rather imperfectly, under the gold exchange standard of 1934 with gold redeemability limited to foreign holders. Still more imperfect was the system of fluctuating gold prices introduced in 1971, thanks to the availability of paper gold. Imperfect as though these stratagems were, they served as a pacifier to the bond market. But as the threat of permanent backwardation indicates, all offers to put monetary gold at the disposal of the international monetary system could be abruptly withdrawn. In that event there would be no ultimate extinguisher of debt. The world is totally unprepared for such a momentous development. I ask you: are there contingency plans in the U.S. Treasury and in the Federal Reserve what to do if backwardation makes monetary gold unavailable for the indirect retirement of debt?

The message to debt holders would be: sauve qui peut. There would be a rush to the exit doors and people would trample one another to death in trying to get out. The debt crisis of 2008 was a dress rehearsal. It gave the world a foretaste. This crisis is a gold crisis. It is a crisis indicating the threat of a shortage of the ultimate extinguisher of debt, without which our runaway debt tower is doomed. When it topples, it will bury the world economy under the rubble, as the Twin Towers buried the people working inside in 2001.

All kinds of ad hoc explanations have been offered for the debt crisis. But the real explanation is that under the threat of gold backwardation creditors are scrambling for liquidity. There will be no recovery unless provision is made for the orderly retirement of debt through a mechanism using gold as the ultimate extinguisher. The alternative is a Great Depression worse than that of the 1930’s. To understand this we have only to contemplate the shock to the world if it was revealed that the debt of the U.S. government was in fact irredeemable. The Emperor is naked. As long as bonds carry a gold clause, or the bond market is supported by the trading of paper gold, bonds are deemed redeemable. But once permanent backwardation makes gold unavailable, debt becomes irredeemable in the eyes of the bondholders. Paying U.S. bonds at maturity in F.R. notes does not establish redeemability. The latter is just evidence of debt secured by the former as collateral revealing that bonds are not really redeemable at all. An interest-bearing bond is replaced by a non-interest-bearing bond, that is, by an inferior instrument. All you do is shuffle various forms of irredeemable debt. When the world wakes up to this prestidigitation, the international monetary system will not be able to survive the shock-waves. The chaos that will engulf the world is appalling.

The solution is relatively simple. The world’s monetary gold should be remobilized. This can be accomplished by opening the U.S. Mint to the free and unlimited coinage of gold. There should be no attempt to fix, cap, or otherwise control the dollar price of gold. The gold coins of the United States ought to be made available to bondholders in order to provide for an orderly retirement of debt, if that is what the bondholders want. When they become convinced that this avenue is open to them through the unlimited availability of gold coins of the realm, the scrambling for liquidity will peter out and stability return. If other great nations wanted to join opening their Mints to the free and unlimited coinage of gold, so much the better. It should not be beyond the power and the wit of the U.S. government to rein in this crisis and make a decisive move in the direction of full recovery through opening the U.S. Mint to gold, as demanded by the Constitution.

Gold is a great world resource. It would be foolish if, for parochial or ideological reasons, we failed to enlist it in the cause of economic development — even in the absence of a great crisis. But given the present crisis situation, remobilization of gold is imperative.

Yours very sincerely,

Antal E. Fekete

Santa Colomba, July 10, 2009.

 

Boys will be “boys”…

Causes and effects

Hugo Salinas Price

Jul 18, 2009

Let us imagine that in August of 1971 the governments of the world decreed that as of that date all vehicles of the world should run on water rather than on gasoline. Within 48 hours, at the most, all vehicular traffic in the world would have ceased.

The cause – an absurd decree – would have produced disastrous effects immediately.

In human affairs, which are much more complex, it generally happens that bad decisions do not produce all their bad effects immediately, but only in the course of time.

Today the world is struggling with an unprecedented economic collapse, caused by a mistaken decision taken almost 38 years ago.

The distance of 38 years in time, in a world which is undergoing change at such a rapid pace as ours, is a great distance. Those who can remember the bad decision of August 15, 1971, and who can recall how the world worked before that date, are today at least 63 years of age. They are already either retired or about to retire from active life.

For men who are active today, 1971 is a date that is beyond the horizon of their interest. For those men, what they have seen in their lives seems to them completely normal; they think that life has always been as they have known it. Why should it not continue to be so?

Perhaps this is the reason that all we read in magazines and newspapers and all that we see on TV never mentions the mistaken decision taken on August 15, 1971. Both those who govern and those who are governed cannot establish an intellectual link between a cause,which happened either before they were born or when they were still wearing short pants, and an effect, the present global economic disaster.

What happened on that fateful day?

What happened was the equivalent of decreeing that cars should run on water: for the first time in history, the whole world began using fictitious money, papers that simulated real money. This happened when President Nixon of the United States decreed that as of that date, the dollar – the central currency of the world on which rested all the other currencies – ceased to be redeemable through the delivery of one ounce of gold for each $35 dollars which central banks of the world might present for collection in gold.

The effect of this event has taken 38 years to be felt in all its enormity.

Nature does not care if human beings think or do not think. Nature does not care if humans take note of causes and effects, or if they ignore them. Nature does not care if they are wise or foolish: Nature is pitiless about collecting its due. If you do not sow, you will go hungry. Academic discussions do not influence the inexorable operation of the Laws of Nature.

Cars do not run on water, they run on gasoline. Economies – civilizations themselves – cannot function on simulated money, money that is fraudulent, fictitious and imaginary (in the case of bank money).

Tacitus, the Roman historian, wrote: “The man who is ignorant of that which happened before he was born will always remain a boy.”

Only boys, and nothing more, are the great pundits of economics, the great directors of national economies, the great presidents and prime ministers of the Powers, who cannot or will not recognize that everything that has been built in the world since 1971 has had as a foundation nothing more than quicksand.

As long as the use of real money – either gold, or both gold and silver money – is not reestablished in the world, the civilization which we have known is in danger of disappearing.

At the recent meeting of the Heads of State of the “Group of Eight” (G-8) the President of Russia, Dmitry Medvedev, presented a coin which he said was to be the new international currency. He is in the photo below. Note that he is holding a gold coin.

Therefore we have hope that at last, a true Statesman will take the historic decision to reinstate gold as money. The adjustment of the world to this measure will be painful, but the return to real money is indispensable if our world is to endure.

The alternative is too terrible to contemplate

July 2009
Hugo Salinas Price, President
Asociación Cívica Mexicana Pro Plata, A.C.
Mexico City
email: plata@plata.com.mx
website: http://www.plata.com.mx

 

J. Rubino: A Tremendous Secret

In his new essay, “A Tremendous Secret,” financial writer John A. Rubino, co-author with GoldMoney’s James Turk of “The Coming Collapse of the Dollar,” foresees an imminent worldwide currency revaluation. This revaluation, Rubino thinks, will correct the biggest financial imbalance of all, the ratio between the value of the world gold supply and the supply of fiat money.

Such a prospect is not quite a secret to GATA supporters. They may remember that the British economist Peter Millar contemplated in great detail such a worldwide currency valuation relative to gold in the May 2006 edition of his Valu-Trac Investment Research newsletter, to which GATA has called attention from time to time:

http://www.gata.org/node/4843

Such revaluations, as Rubino notes, are not done gradually but overnight, so that no one can trade against them and so there is no chaotic escape from the new currency system after it is imposed.

A clue in support of Rubino’s speculation may be found in the communique issued last week by the G8 conference in Italy, which said: “We will refrain from competitive devaluations of our currencies. …”

See:

http://finance.yahoo.com/news/Sarkozy-calls-for-talks-on-apf-1742717360.html?x=0&.v=3

But of course the G8 pledge against “competitive devaluations” was not a pledge against coordinated and cooperative devaluations.

***

“A Tremendous Secret”

7/14/2009

by John Rubino

Last week FOFOA posted a long article on the coming devaluation of the dollar and how it might play out. He thinks it will be sprung on us without warning — sooner rather than later:

The point is that during times of transition, surprises are always the order of the day. We have a crazy-out-of-control government that has given in to the temptation of printing its way out of this mess. The deflationists view this as an exercise in futility, while the inflationists say that you cannot print these amounts of dollars without it affecting the markets sooner or later. A few cunning analysts are hedging their bets saying we will see another deflationary collapse first, followed by a bout of high inflation. But nearly all of the pundits who are still predicting “doom” have lengthened their horizon to several years to make way for the slow speed at which this train is tumbling down the tracks. Frankly, I’m not buying it. Call me contrarian, but I say that when the rubber band breaks this time it will snap back with a speed and fury that will make your head spin. In fact, I think that the longer this drags out (and I’m only talking weeks and months now), the more abrupt the correction will be. Both the 38 year timeline and the 96 year timeline have created an imbalance in the fractional reserve system that has gone parabolic in the last decade. I am talking about gold. No, the price of gold has not gone parabolic, but the ratio of available gold to outstanding paper currency HAS gone parabolic. The central banks of the world are well aware of this. It is why they have slowly, inconspicuously changed from net sellers into net buyers. This gradual shift is extremely significant, because as net sellers they were supporting their own fiat regime. But now as net buyers, they, as a group, are stressing it. Why would they do this unless they knew it was about to reset? This fractional gold reserve imbalance is the one imbalance the media and governments do not want you to know about. This is the one that will RESET the entire system. This imbalance, once corrected, will make central bank fiat currencies sustainable once again. This is why they are net buyers! Do I think this magnitude of a reset could happen overnight? Yes, I do. Why? Because that is the way you get the most “bang for your buck”. Surprise is the order of the day! “Devaluations always happen by complete surprise as to exert maximum leverage effect.”

The idea that we’ll wake up one day to discover that the international monetary system has been “reset” and that our dollar/euro/yen savings have taken a huge hit (while the local currency value of our gold and silver soar) reminds me of an exchange in The Virgin’s Lover, by Philippa Gregory (yes, I like historical romances). The year is 1560 and the young queen Elizabeth rules a country nearly bankrupted by a Spanish alliance that produced only war and debt. The English treasury has been systemically debasing its coins by clipping and shaving them, so that their face value vastly exceeds their gold content.

Elizabeth’s advisors have decided that the monetary system needs to be reset, and have been importing borrowed gold. On the appointed day they intend to call in the circulating coins and replace them — by weight rather than face value — with newly-minted coins. This devaluation will transfer citizens’ wealth to the government, impoverishing the former and enriching the latter. And if all goes as planned it will come as a surprise to most of the country.

But Elizabeth’s lover, Sir Robert Dudley, learns of the plan and is not happy:

Elizabeth turned and smiled at him and took his hand and held it to her cheek. “My Robert.” “Tell me, my pretty love,” Robert said quietly. “Why are you bringing in boatloads of Spanish gold from Antwerp, and how are you paying for it all?” She gave a little gasp and the color went from her face, the smile from her eyes. “Oh,” she said. “That.” “Yes,” he replied evenly. “That. Don’t you think you had better tell me what is going on?” “How did you find out? It is supposed to be a great secret.” “Never mind,” he said. “But I am sorry to learn that you still keep secrets from me, after your promises.” “I was going to tell you,” she said at once. “It is just that Scotland has driven everything from my mind.” “I am sure,” he sad coldly. “For if you had continued with your forgetfulness till the day that you called in the old coin and issued new, I would have been left with a small treasure room filled with dross, would I not? And left at a substantial loss, would I not? Was it your intention that I should suffer?” Elizabeth flushed. “I didn’t know you were storing small coin.” “I have lands; my tenants do not pay their rents in bullion, alas. I have trading debts which are paid in small coin. I have chests and chests of pennies and farthings. Do tell me what I may get for them?” “A little more than their weight,” she said in a very small voice. “Not their face value?” She shook her head in silence. “We are calling in the coins and issuing new,” she said. “It is Gresham’s plan — you know of it yourself. We have to make the coins anew.” Robert let go of her hand and walked to the center of the room while she sat and watched him wondering what he would do. She realized that the sinking feeling in her belly was apprehension. For the first time in her life she was afraid what a man was thinking of her — not for policy but for love. “Robert, don’t be angry with me. I didn’t mean to disadvantage you,” she said and heard the weakness in her own voice. “I know,” he said shortly. “It is partly that which amazes me. Did you not think that this would cost me money?” She gasped. “I only thought it had to be a secret, a tremendous secret, or everyone will trade among themselves and the coins will be worse and worse regarded,” she said quickly. “It is an awful thing, Robert, to know that people think that your very coins are next to worthless.”

Now, at least three things can be gleaned from all this:

1) FOFOA is right that the world’s governments stand to gain most from asurprise devaluation, since it will prevent us commoners from preemptively swapping our paper for real things, setting off an inflation that would make an even deeper devaluation necessary.

There’s a rumor that I was reluctant to mention when it first started circulating, because it seemed a little too far down the tin foil hat / black helicopter road. But in this context it seems pretty reasonable. According to widely-followed newsletter writers Harry Schultz and Bob Chapman:

”Some US embassies worldwide are being advised to purchase massive amounts of local currencies; enough to last them a year. Some embassies are being sent enormous amounts of US cash to purchase currencies from those govts, quietly. But not £’s. Inside the State Dept there is a sense of sadness & foreboding that ‘something’ is about to happen, unknown re a date—just that within 180 days, but could be 120-150 days.” Bob quotes another source that “Panasonic has told their people to be back in Japan by Sept 09.” Harry Schultz’s remarkable take on the situation: “My HSL suspicion is that the elite plan another FDR style “bank holiday” of indefinite length, perhaps very soon, to let the insiders sort-out the bank mess which is getting more out of their control every day. Insiders want/need to impose new bank rules. Widespread nationalization could result, already under way. It could also lead to a formal US$ devaluation, as FDR did by revaluing gold (& then confiscating it). But devalue against what? The euro? Doubtful. Gold? Maybe. Or vs. the IMF basket of currencies (which seems more likely)—& much in the news recently. Any kind of bank holiday will push the US$ lower, which may be a bonus benefit to their ongoing scenario of letting the $ fall. Such a fall would get the devaluation they want without having to declare it. In sum, the insiders want more bank & system control, fewer banks & a lower US$. A bank holiday would suit all their needs.”

2) The details of the plan will spread within an ever-widening circle of banking and government folks who, like Sir Robert, will demand the chance to profit from the insider trade of the century. Because such a secret is impossible to contain for long, once in place the plan has to be executed as soon as possible.

3) If the rest of us play it right, we’ll be able to at least protect ourselves, and maybe even make out (in percentage terms at least) like Goldman Sachs no doubt will.

Harry Shultz: “Obviously, U can’t open safeboxes if the banks are closed, so plan accordingly. During the FDR bank holiday, thousands of banks never reopened; it was a face-saving way of shutting them down. I would guess the same would occur today; thousands have little or no net value, loaded with debt, bad mortgages.”

FOFOA: “It matters not one iota how well you do in the stock and bond markets leading up to the reset. Neither does it matter what the “gold market” does between now and then. The ONLY thing that matters is how you are positioned on that one – fateful – day! Everything will be reset and surprises will abound.”

BUY OFFSHORE GOLD AND SILVER AT GOLDMONEY

 

Hyperinflation Nation!

The following is a -must see- video documentary (in 3 parts) entitled, “Hyperinflation Nation” which tells all about the past, present, and future state with regards to the outlook of the USD.

 

Ron Paul: Audit the Fed, Then End It!

I have been very pleased with the progress of my legislation, HR 1207, which calls for a complete audit of the Federal Reserve and removes many significant barriers towards transparency of our monetary system. This bill now has nearly 170 cosponsors, with support from both Republicans and Democrats. Senator Bernie Sanders has introduced a companion bill in the Senate S 604, which will hopefully begin to gain momentum as well. I am very encouraged to see so many of my colleagues in Congress stand with me for greater transparency in government.

Some have begun to push back against this bill, and I am very happy to address their concerns.

The main argument seems to be that Congressional oversight over the Fed is government interference in the free market. This argument shows a misunderstanding of what a free market really is. Fundamentally, you cannot defend the Federal Reserve and the free market at the same time. The Fed negates the very foundation of a free market by artificially manipulating the price and supply of money – the lifeblood of the economy. In a free market, interest rates, like the price of any other consumer good, are decentralized and set by the market. The only legitimate, Constitutional role of government in monetary policy is to protect the integrity of the monetary unit and defend against counterfeiters.

Instead, Congress has abdicated this responsibility to a cabal of elite, quasi-governmental banks who, instead of stabilizing the economy, have destabilized it. It took less than two decades for the Federal Reserve to bring on the Great Depression of the 1930’s. It has also inflated away the value of our currency by over 96 percent since its inception. It has invisibly stolen from the poor and given to the rich through this controlled inflation, and now openly stolen through recent bank bailouts. It has predictably exacerbated the very problems it was meant to solve.

Detractors have also argued that the Fed must remain immune from the political process, and that that more congressional oversight would distort their very important decisions. On the contrary, the Federal Reserve is already heavily entrenched in the political process, as the Fed chairman is a political appointee. High level officials routinely make the rounds between positions at the Fed, member banks, Treasury and back again, taking care of friends and each other along the way.

As far as the foolishness of placing complex monetary policy decisions in the hands of politicians – I couldn’t agree more. No politician or central banker, no matter how brilliant, is smart enough to know more than the market itself. The failure of central economic planning has been witnessed over and over. It is frankly beyond me why we ever agreed to try it again.

To understand how unwise it is to have the Federal Reserve, one must first understand the magnitude of the privileges they have. They have been given the power to create money, by the trillions, and to give it to their friends, under any terms they wish, with little or no meaningful oversight or accountability. Thus the loudest arguments against greater transparency are likely to come from those friends, and understandably so.

However, it is the responsibility of every member of Congress to represent the interests of the people that sent them to Washington and find out what has been happening with our money. As the branch of government with the power of the purse, we really have no other reasonable choice when the economy is in the shape it is in.

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U.S. Rep. Ron Paul is a Republican representing the 14th District of Texas. He sought the Republican presidential nomination last year.

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In uncertain times, all that glisters is a gold standard…

By Gillian Tett
Financial Times, London
Thursday, April 9, 2009

A few months ago, Terry Smith, head of Tullett Prebon, the interdealer broker, chaired a panel at the World Economic Forum meeting in Davos which was asked to produce one concrete recommendation to fix the global financial crisis.

The top pick? Not anything on toxic assets or fiscal spending. Instead, this gaggle of leading financiers called for a new reserve currency, akin to an old-style gold standard.

“Two-thirds of the world’s assets are denominated in a fiat currency issued by a country whose authorities are taking policy actions which seem inevitably to lead to its debasement,” explains Mr Smith, noting that “it seems … the Chinese have now concluded that this is not acceptable.”

Just a bit of pie-in-the-sky posturing of the sort that often occurs in high-altitude Davos? Perhaps. But Mr Smith is hardly a do-gooding, state-loving dreamer; on the contrary, Tullett Prebon is about as ruthlessly free-market as they come.

Moreover, these musings about a gold standard are currently cropping up in all manner of unlikely places. One savvy European property developer (who aggressively sold most of his holdings in early 2007) recently told me that he is now moving a growing proportion of his assets from government bonds into gold, even at today’s elevated prices.

“The logical conclusion of where we will end up eventually is with some type of gold standard,” he explains, arguing that future inflation will almost inevitably cause a future collapse in government bonds.

Half a world away in the Middle East, some sovereign wealth funds now say that they are stocking up enthusiastically on food and gold, due to similar reasoning.

Meanwhile, in New York a (still) formidable American hedge fund recently circulated private research that echoes the reasoning of Mr Smith. Most notably, this hedge fund points out that since the world abandoned the gold standard on August 15, 1971 credit creation has spiralled completely out of control.

But this four-decade long experiment with fiat currency is not just something of a historical aberration, it argues – but potentially very fragile too. After all, the only thing that ever underpins a fiat currency is a belief that governments are credible. In the past 18 months that belief has been tested to its limits. In coming years it could be shattered, particularly if the current wave of extraordinary policy measures unleashes a wild bout of inflation.

Hence that chatter about a gold standard. Indeed, as the debate bubbles up, some financiers are now even e-mailing each other an extraordinary little essay that Alan Greenspan himself wrote in support of a gold standard back in the 1960s, called “Gold and Economic Freedom“:

http://www.financialsense.com/metals/greenspan1966.html

In the years since he penned this essay, Greenspan has partly backed away from those ideas (and he blatantly ignored their implications when he was at the Fed) But now they look prescient.

“Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets . . . [but] in the absence of the gold standard … there is no safe store of value,” Greenspan wrote back then, pointing out that without a gold standard in place, there is little to prevent governments indulging in wild credit creation. “Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.”

Of course, for the moment all this muttering about gold is simply wild speculation. Even if Western leaders suddenly were to decide they wished to turn back the clock, the logistics of embracing a new gold standard would be mind-boggling. UBS, for example, calculates that the US reserves of gold are so small, relative to its monetary base, that a price above $6,000 an ounce would be needed to reintroduce a gold standard. To implement that standard in Japan, China and the US, the price would be more than $9,000. Moreover, right now few western governments have any motive to even entertain the debate, given that inflation may soon seem the least bad way to tackle the current overhang of debt.

But what this debate does show is just how much cognitive dissonance — and utter uncertainty — continues to stalk the markets. It might seem almost unthinkable to propose a return to a gold standard, in other words. However, the key point is that the last 18 months have already produced a stream of once unimaginable events.

Given that, shell-shocked investors are increasingly reluctant to rule anything out, as they stare at such uncharted waters. So while I would not bet today on a gold standard returning any time soon, I would also not bet that the debate dies away. Nor would I bet that the gold price crashes too far from its current rate of $900, while so much fear continues to stalk the world.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

—–

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

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Judy Shelton: Capitalism needs a sound-money foundation

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

The following article is worth its weight in gold:

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

Let’s go back to the gold standard.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

—-

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

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Bank of England: oiling the printing presses…

Reform Plan Raises Fears of Bank secrecy

By Edmund Conway
The Telegraph, London
Saturday, January 10, 2009

The Bank of England will be able to print extra money without having legally to declare it under new plans which will heighten fears that the Government will secretly pump extra cash into the economy.

The Government is set to throw out the 165-year-old law that obliges the Bank to publish a weekly account of its balance sheet — a move that will allow it theoretically to embark covertly on so-called quantitative easing. The Banking Bill, which is currently passing through Parliament, abolishes a key section of the law laid down by Robert Peel’s Government in 1844 that originally granted the Bank the sole right to print UK money.

The ostensible reason for the reform, which means the Bank will not have to print details of its own accounts and the amount of notes and coins flowing through the UK economy, is to allow the Bank more power to overhaul troubled financial institutions in the future, under its Special Resolution Authority.

However, some have warned that it means “there is nothing to stop an unreported and unmonitored flooding of the money market by the undisciplined use of the printing presses.”

It comes after the Bank’s Monetary Policy Committee cut interest rates by half a percentage point, leaving them at the lowest level since the bank’s foundation in 1694.

With the Bank rate now at 1.5 percent, most economists suspect that the Government and Bank will soon be forced to start quantitative easing — directly increasing the quantity of money in the economy — in a drastic attempt to prevent a recession of unprecedented depth.

Although the amount of easing is likely to be limited, news of this increased secrecy will spark comparisons with Weimar Germany and Zimbabwe, where uncontrolled use of the central banks’ printing presses ultimately caused hyperinflation.

The Bank said it will still publish details of its balance sheet, but, significantly, the data — the main indicator of the extent of quantitative easing — will not be presented until more than a month has elapsed. For instance, under the new terms of the law, if the Bank were to have embarked on a policy of quantitative easing last month, the figures on this would not be published until the end of this month.

The reforms, which are likely to be implemented later this year, will make the Bank of England by far the most secretive major central in the world, experts said.

In the US, where the Federal Reserve has already cut rates to close to zero and started quantitative easing, the main way to track its purchases of securities and the expansion of its balance sheet is through precisely these same weekly accounts.

“Quite why the Bank has to keep its operations so shrouded in secrecy is a mystery to me,” said Simon Ward, economist at New Star. “This will make it much more difficult to track what the Bank is doing.”

Among the details which will no longer be published are those revealing the extent to which London’s banks are using the Bank’s deposit facilities — a yardstick of pressure in the financial system.

Debating the issue in the House of Lords recently, Lord James of Blackheath, a Conservative peer, said: “Remove [this] control and there is nothing to stop an unreported and unmonitored flooding of the money market by the undisciplined use of the printing presses.

“If we went down that path we would be following a road which starts in Weimar, goes on through Harare, and must not end in Westminster and London. That is the great fear that the abolition of that section will bring about — but the Bill abolishes it.”

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David Hale: Only one alternative to the dollar — gold

By David Hale
Financial Times, London
Monday, January 5, 2009

The great challenge confronting the foreign exchange market at the start of 2009 is finding a good alternative to the US dollar. One of the ironies of market events during 2008 was that the US financial crisis produced a flight to safety in the dollar. The dollar emerged triumphant from a financial debacle that centered on $1,300 billion of subprime US mortgage loans. The fallout has triggered a $32,000 billion decline in global stock market capitalisation and driven all the Group of Seven leading industrialised countries into recession.

The dollar slumped against the euro during the final weeks of 2008 but fears about the financial system still drove US Treasury yields down to zero on three-month paper and less than 2.1 per cent on 10-year notes. This fear factor is likely to sustain demand for the dollar during the early months of 2009.

There is not now a clear alternative to the dollar because all big economies have slid into recession. Real gross domestic product could contract by 1.5 per cent in both the US and Europe during 2009 and by as much as 2.5 per cent in Japan. The decline in world trade and commodity prices will also reduce significantly the growth rates of the emerging market economies. South Korea and Taiwan are already in severe slumps. The growth rate of China could halve.

The US economy could be the first to emerge from recession this year because it appears to be headed for a far more aggressive macroeconomic stimulus programme than any other country. Barack Obama’s administration will announce a $700 billion-$800 billion multi-year fiscal package focusing on cuts in payroll taxes, aid to state and local governments, and infrastructure investment. The Federal Reserve is also engaging in a programme of unprecedented monetary stimulus. It has slashed its core lending rate to zero and tripled the size of its balance sheet since August. Ben Bernanke, the Fed chairman, has also stated his willingness to engage in further large liquidity injections to buy mortgages, consumer loans and government securities. Mortgage rates have recently eased to 5.1 per cent after remaining above 6 per cent during the past year.

The European response to the recession has been far less aggressive. The European Central Bank is still under the influence of the Bundesbank and will ease monetary policy far more gradually than the Fed. Some Bundesbankers are opposed to cutting interest rates at this month’s meeting. The ECB policy could produce political tensions because interest rate spreads on Greek and Spanish bonds have risen sharply compared with German bonds. Japan’s government has been announcing modest fiscal policy changes but it cannot act decisively since it no longer controls the upper house of the Diet. And an election, before September, could produce a change of government.

The Kevin Rudd government in Australia announced a fiscal stimulus programme in October and Canada will announce a big fiscal package at the end of this month. But both currencies are dominated by market perceptions of the outlook for Chinese industrial production and commodity prices, not domestic economic policy.

If the US stimulus policy revives the economy by spring or summer, the dollar could rally further. The risk posed by US policy comes from potential market concerns about monetary policy becoming inflationary. The current growth rate of the Fed’s balance sheet is totally unprecedented. As a result of the Obama fiscal policy and the troubled asset relief programme, the Federal government’s borrowing requirement could rise to $1,500 billion-$1,700 billion this year. Government bond yields have collapsed because of investor fears about the safety of the financial system but they could rebound when conditions normalise. The current level of yields is the lowest since the period of official interest rate controls during the Second World War. Mr Bernanke has indicated that he would be prepared to return to the wartime policy of restraining yields. What remains unclear is whether such a policy of accommodation would provoke fears about inflation and encourage dollar selling, which could in turn drive up bond yields.

Foreign central banks could play an important role in the US government bond market because they already own about half of the existing debt stock. China recently displaced Japan to become the largest holder of US government securities because of its long-standing policy of intervening to manage its exchange rate against the US dollar policy. As a result of the downturn in its economy, China has recently begun to lose foreign exchange reserves and may not need to intervene in the market again to restrain the renminbi. Japan, by contrast, has been experiencing significant upward pressure against the yen despite the severe downturn in its exports and output growth. Japan has not intervened since 2003 but, if the yen rallies another 5 per cent, the country could be forced to spend large sums restraining its currency. If it does, Japan could provide $200 billion-$300 billion of funding for the US deficit during 2009 while Chinese demand for US securities fades.

As a result of the global scope of the recession, there is no country that wants its exchange rate to appreciate. The clear alternative to the dollar in 2009 is not other currencies but that ancient form of money: gold. Precious metals could emerge as a hedge for investors suspicious of central banks and fearful that inflation will be the simplest solution to the challenge of global deleveraging.

—–

The writer is chairman of David Hale Global Economics.

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