September 2007


Can We Have Inflation And Deflation All At The Same Time
by Antal E. Fekete

Antal E. Fekete
Gold Standard University Live

Executive SummaryVery few people understand the “continental drift” that threatens with a fracture of the U.S. (and hence, the world) monetary system. There are two tectonic plates: one, the supply of Federal Reserve notes (FR notes), and the other, the supply of electronic dollars in the form of an inverted pyramid that rests on the supply of FR deposits. The fault line between the two tectonic plates, like San Andreas fault in California, is a worrisome source of unpredictable earthquakes that could cause massive and permanent damage to the U.S. and world economy.

The monetary fault line exists because of the different statutory requirements the Federal Reserve has to meet in order to increase the supply of “high-powered money”:

  1. FR notes must be collateralized by gold or by U.S. Treasury bills and Federal Agency securities. The Federal Reserve does not print FR notes (still less can it air drop them); it gets them from a government official called Federal Reserve Agent against pledging appropriate collateral.
  2. FR deposits may simply be collateralized by the note of the borrower who borrows from any of the FR banks. Thus the Federal Reserve can increase FR deposits on its own authority, without reference to the government. The banking system then builds its own pyramid of deposits upon the fractional reserve of FR deposits

Thus there is a serious obstacle in the way of increasing the money supply by increasing the volume of FR notes in circulation, giving the lie to Chairman Ben Bernanke’s promise to air drop them from helicopters. The obstacle: falling interest rates. For example, if the T-bill rate dips into negative territory, then the market value of T-bills exceeds their face value and the Federal Reserve “cannot afford” to buy them in the open market. The shortage of eligible collateral will restrict the inflation of FR notes in circulation. By contrast, FR deposits can be created out of the thin air in unlimited quantities at the click of the mouse.

Herein lies the danger of monetary earthquake along the fault line. The outstanding issue of FR notes as of September 20, 2007, was a paltry $760 billion (note that a sizeable fraction is being hoarded by foreigners overseas), see:, which is less than two tenth of one percent of the notional value of derivatives. Just a drop in the ocean of potential bad debt.

It is possible for the tectonic plate of hand-to-hand money, the FR notes to deflate, while that of electronic dollars to go into hyperinflation. The decoupling has frightening consequences for the financial and economic future of the world.

The curse of electronic dollars

Helicopter Ben has just made a most unpleasant discovery. Earlier he has promised that the Federal Reserve will not stand idly by while the dollar deflates and the economy slides into depression. If need be, he will go as far as having dollars air dropped from helicopters.

Time has come to make good on those promises in August when the subprime crisis erupted. To his chagrin Ben found that electronic dollars, the kind he can create instantaneously at the click of the mouse in unlimited quantities, cannot be air dropped. They just won’t drop.

For electronic dollars to work they have to trickle down through the banking system. The trouble is that when bad debt in the economy reaches critical mass, it will start playing hide-and-seek. All of a sudden banks become suspicious of one another. Is the other guy trying to pass his bad penny on to me? In extremis, one bank may refuse to take an overnight draft from the other and will insist on spot payment. A field day for Brink’s. The clearing house is idled, and armored cars run in both directions up and down Wall Street delivering FR notes and certified checks on FR deposits.

Under such circumstances electronic dollars won’t trickle down. In effect they could be frozen and, ultimately, they may be demonetized altogether by the market. How awkward for Helicopter Ben. His boasting of air drops is an empty threat.

Northern Rock and Roll

The Northern Rock and Roll fever may spill over across the Atlantic from England to the United States. Northern Rock is a bank headquartered in Newcastle with lots of branches in the Northern Counties. It was a high-flyer using novel ways of financing mortgages through conduits and other SIV’s, instead of using the more traditional methods of building societies through savings. (SIV or Structured Investment Vehicle is euphemism for borrowing short, lending long through securitization). Now a run on the bank has grounded the high-flier. As long queues in front of the doors of branch offices indicate, a world-wide run on banks may be in the offing. Bank runs were thought to be a pathology of the gold standard. In England they haven’t seen the like of it since 1931 when the bag lady of Threadneedle Street went off gold. Surprise, surprise: bank runs are now back in vogue playing havoc on the fiat money world. Depositors want to get their money. Not the electronic variety. They want money they can fold.

There’s the rub. Pity Helicopter Ben. It looked so simple a couple of weeks ago. The promise of an air drop should stem any run. It sufficed to tell people that he could do it. No reason to mistrust the banks since they are backed up by air drops. Now people have different ideas. The air drop is humbug. Can’t be done. Ben is bluffing. He has no authority to run the printing presses as he sees fit. He’s got to have collateral. Moreover, as calculated by Alf Field writing in Gear Today, Gone Tomorrow (, September 6, 2007) if only ten percent of the notional value of derivatives is bailed out by dropping $500 FR notes the pile, if notes are stacked upon one another, would be nearly 9000 miles high. Helicopter Ben hasn’t reckoned that FR notes do not exist in such quantities. They will have to be printed, not to say collateraliyed, before they can be dropped. It is true that the Federal Reserve has an additional $225 billion in unissued and uncollateralized FR notes, just in case. However, before the air drop they have to be collateralized, and that is easier said than done. There is not enough of T-bills and agency securities to be used as collateral.


What does it all mean? At minimum it means that we can have inflation cum deflation. I am not referring to stagflation. I refer to the seemingly impossible phenomenon that the money supply inflates and deflates at the same time. The miracle would occur through the devolution of money. This is Alf Field’s admirable phrase to describe the “good money is driven out by bad” syndrome a.k.a. Gresham’s Law. Electronic dollars driving out FR notes. The more electronic money is created by Helcopter Ben, the more FR notes will be hoarded by banks and financial institutions while passing along electronic dollars as fast as they can. Most disturbing of all is the fact that FR notes will be hoarded by the people, too. If banks cannot trust one another, why should people trust the banks?

Devolution is the revenge of fiat money on its creator, the government. The money supply will split up tectonically into two parts. One part will continue to inflate at an accelerating pace, but the other will deflate. Try as they might, the government and the Federal Reserve will not be able to print paper money in the usual denominations fast enough, especially since the demand for FR notes is global. Regardless of statistical figures showing that the global money supply is increasing at an unprecedented rate, the hand-to-hand money supply may well be shrinking as hoarding demand for FR notes becomes voracious. The economy will be starved of hand-to-hand money. Depression follows deflation as night follows day.

Decoupling tectonic plates

Next to deflation of hand-to-hand money there will be hyperinflation as the stock of electronic money will keep exploding along with the price of assets. You will be in the same boat with the Chinese (and the son of Zeus: Tantalus). You will be put through the tantalising water torture — trillions of dollars floating by, all yours, but which you are not allowed to spend. The two tectonic plates will disconnect: the plate of electronic dollars from the plate of FR notes, with lots of earthquakes along the fault line. No Herculean effort on the part of the government and the Federal Reserve will be able to reunite them. At first, electronic dollars can be exchanged for FR notes but only against payment of a premium, and then, not at all.

The curse of negative discount rate

If you think this is fantasy, think again. Look at the charts showing the collapse of the yield on T-bills. While it may bounce back, next time around the discount rate may go negative. You say it’s impossible? Why, it routinely happened during the Great Depression of the 1930’s. Negative discount rate means that the T-bill gets an agio, the discount goes into premium even before maturity, and keeps its elevated value after. This perverse behavior is due to the fact that T-bills are superior to FR notes in that they earn a yield while they are just as acceptable (if not more acceptable in very large amounts) as are FR notes. Yes, people will clamor for money they can fold, the kind that is in demand exceeding supply, the kind people and financial institutions hoard, the kind foreigners have been hoarding for decades through thick and thin: FR notes. Thus T-bills are a substitute for the hard-to-come-by FR notes. Mature bills may stay in circulation in the interbank market, in preference to electronic dollar credits. Why, their supply is limited, isn’t it, while the supply of electronic dollars is unlimited! The beauty of it all is that we have an accurate and omnipresent indicator of the premium that cannot be suppressed like M3: the (negative) T-bill rate. It is an indicator showing how the Federal Reserve is losing the fight against deflation.

Inverted pyramid of John Exter

The grand old man of the New York Federal Reserve bank’s gold department, the last Mohican, John Exter explained the devolution of money (not his term) using the model of an inverted pyramid, delicately balanced on its apex at the bottom consisting of pure gold. The pyramid has many other layers of asset classes graded according to safety, from the safest and least prolific at bottom to the least safe and most prolific asset layer, electronic dollar credits on top. (When Exter developed his model, electronic dollars had not yet been invented; he talked about FR deposits and other bank deposits built upon them as fractional reserve.) In between you find, in decreasing order of safety, as you pass from the lower to the higher layer: silver, FR notes, FR deposits, T-bills, agency paper, T-bonds, other loans and liabilities of the banking system denominated in dollars. In times of financial crisis people scramble downwards in the pyramid trying to get to the next and nearest safer and less prolific layer underneath. But down there the pyramid gets narrower. There is not enough of the safer and less prolific kind of assets to accommodate all who want to “devolve”.

Devolution is also called “flight to safety”. An example occurred on Friday, August 31, 2007, as indicated by the sharp drop in the T-bill rate from 4 to 3%, having been at 5% only a couple of days before. As people were scrambling to move from the higher to the lower layer in the inverted pyramid, they were pushing others below them further downwards. There was a ripple effect in the T-bill market. The extra demand for T-bills made bill prices rise or, what is the same to say, T-bill rates to fall. This was panic that was never reported, still less interpreted. Yet it shows you the shape of things to come. We are going to see unprecedented leaps in the market value of T-bills, regardless of face value! You have been warned: the dollar is not a pushover. Electronic dollars, maybe. But T-bills (especially if you can fold them) and FR notes will have enormous staying power. Watch for the discount rate on T-bills morphing into a premium rate!

It is interesting to note that gold, the apex of the inverted pyramid, remained relatively unaffected during the turmoil in August. Scrambling originated in the higher layers. Nevertheless, ultimately gold is going to be engulfed by the ripple effect as scrambling cascades downwards. This is inevitable. Every financial crisis in the world, however remote it may look in relation to gold, will ultimately affect gold, perhaps with a substantial lag. The U.S. Government destroyed the gold standard 35 years ago, but it could not get gold out of the system. It was not for want of trying, either, as we all know. Gold remains firmly embedded as the apex of Exter’s inverted pyramid. Incidentally, it is a lie that gold has been demonetized. Gold is still a collateral used for FR notes. What happened was that further monetization of gold was blocked by fixing the official price of gold at $42.22 per Troy ounce, and at that price nobody is offering gold to the Federal Reserve. If someone did, according to existing statutes the Federal Reserve was duty bound to monetize it. Shame on academia for spreading lies about the demonetization of gold!

Vertical devolution is not the only kind that occurs in the inverted pyramid. There are similar movements that can be described as horizontal. Nathan Narusis of Vancouver, Canada, is doing interesting research on the Exter-pyramid. He noted that in addition to vertical there is also horizontal devolution. Within each horizontal layer of the same safety class there are discernible differences. An example is the difference between gold in bar form and gold in bullion coin form, or silver in bar form and silver in the form of bags of junk silver coins. Franklin Sanders in Tennessee is an expert on horizontal devolution of silver and has a fascinating study how the discount on bags of junk silver coins may go into premium, and vice versa. There may also be differences between FR notes of older issues and FR notes of the most recent vintage. There are obvious differences between the CD’s of a multinational bank and those of an obscure country bank. The point is that movement of assets horizontally between such pockets within the same safety layer is possible and may be of significance as the crisis unfolds and deepens.

Dousing insolvency with liquidity

In a few days during the month of August central banks of the world added between $300 and 500 billion in new liquidity in an effort to prevent credit markets from seizing up. The trouble is that all this injection of new funds was in the form of electronic credits, boosting mostly the top layer where there was no shortage at all. Acute shortage occurred precisely in the lower layers. This goes to show that, ultimately, central banks are pretty helpless in fighting future crises in an effort to prevent scrambling to escalate into a stampede. They think it is a crisis of scarcity whereas it is, in fact, a crisis of overabundance. They are trying to douse insolvency with liquidity.

I feel strongly that this aspect of research on the denouement of the fiat money era has been lost in the endless debates on the barren question whether it will be in the form of deflation or hyperinflation. Chances are that it will be neither, rather, it will be both, simultaneously. There is a little-noticed and little-studied continental drift beween the money supply of electronic dollars and that of FR notes. (Continental drift of the geological variety is invisible and can only be detected with the aid of high-precision instruments.) The tectonic plate of electronic dollars will keep inflating at a furious pace, while that of FR notes and T-bills will deflate because of hoarding by financial institutions and the people themselves. The Federal Reserve will be unable to convert electronic dollars into FR notes. Apart from lack of collateral, present denominations cannot be printed fast enough, physically, in times of crisis. If the Federal Reserve comes out with new denominations by adding lot more zero’s to the face value of the FR notes, Zimbabwe-style, then the market will treat the new notes the same way as it treats electronic dollars: with contempt.

Genesis of derivatives

Alf Field (op.cit.) is talking about the “seven D’s” of the developing monetary disaster: Deficits, Dollars, Devaluations, Debts, Demographics, Derivatives, and Devolution. Let me add that the root of all evil is the double D, or DD: Delibetare Debasement. In 1933 the government of the United States embraced that toxic theory of John Maynard Keynes (who borrowed it from Silvio Gesell). It was put into effect piecemeal over a period of four decades. But what the Constitution and the entire judiciary system of the United States could not prevent, gold did. It was found that gold in the international monetary system was a stubborn stumbling block to the centralization and globalization of credit.

So gold was overthrown by President Nixon on August 15, 1971 by a stroke of the pen, as he reneged on the international gold obligations of the United States. This had the immediate effect that foreign exchange and interest rates were destabilized. The prices of marketable goods embarked upon an endless spiral. In due course derivates markets sprang up where risks inherent in interest and forex rate variations could allegedly be hedged. The trouble with this idea, never investigated by the economic profession, was that these risks, having been artificially created, could only be shifted but never absorbed. By contrast, the price risks inherent in agricultural commodities are nature-given and, as such, can be absorbed by the speculators.

This important difference between nature-given and man-made risks is the very cause of the mushrooming proliferation of derivatives markets, at last count half a quadrillion dollars strong (or should I say weak?!) Since the risk involved in the gyration of interest and forex rates can only be shifted but cannot be cushioned, there started an infinite regression as follows.

Let us call the risk involved in the variation of long-term interest rates x. The problem of hedging risk x calls for the creation of derivatives X (e.g., futures contracts on T-bonds). But the sellers of X have a new risk, call it y. Hedging y calls for the creation of derivatives Y (e.g., calls, puts, strips, swaps, repos). Now the sellers of Y have a new risk called z. The problem of hedging z will necessitate the creation of derivatives Z (such as options on futures and, with tongue in cheek: futures on options, options on options, etc.) And so on and so forth, ad infinitum. Thus the construction of the Tower of Babel is merrily going on.


We have to interpret the new phenomenon, the falling tendency of the T-bill rate. Maybe the financial media will try to put a positive spin on it, for example, that it demonstrates the newly-found strength of the dollar. However, I want to issue a warning. Just the opposite is the case. We are witnessing a sea change, tectonic decoupling, a cataclismic decline in the soundness of the international monetary system. The world’s payments system is in an advanced state of disintegration. It is the beginning of a world-wide economic depression, possibly much worse than that of the 1930’s. The falling T-bill rate must be seen as a sign of the government of the U.S. and the Federal Reserve losing their battle against deflation. We have reached a landmark: that of the breaking up of centralized and globalized credit, the close of the dollar system.

J’accuse — said Zola when he assailed the French government for fabricating a case of treason against artillery captain Alfred Dreyfus in 1893. It is now my turn.

J’accuse — the government of the United States under president Roosevelt reneged on the domestic gold obligations of the U.S. in violation of the Constitution: it violated people’s property rights in confiscating gold without due processes

J’accuse — academia has been pussyfooting the government by failing to point out the economic consequences of gold confiscation, namely, the prolonged suppression of interest rates that was ultimately the cause of prolonging depression. (The causal connection between gold confiscation and the prolonging of the Great Depression should be clear. Gold must be seen as the main competitor of bonds. Once the competitor is forcibly removed from the scene, bond prices start rising or, what is the same to say, interest rates start falling. Linkage between falling interest rates and falling prices did the rest.)

J’accuse — the government of the United States under president Nixon reneged on the international gold obligations of the U.S. thereby globalizing the monetary crisis in 1971

J’accuse — cringing academia failed to point out the consequences of trying to oust gold from the monetary system: price spiral of marketable commodities world-wide; roller-coaster ride of long-term interest rates, up to 16 percent per annum and down to 4 percent per annum or lower and back up again; and, last but not least, the fact that interest rates may take prices along for the ride

J’accuse — foreign governments accepted Nixon’s breach of faith without demur, apparently because in exchange for their compliance they were given the freedom to inflate their own money supply with abandon on the coattails of dollar inflation

J’accuse — the banks have embraced the regime of irredeemable currency with gusto and greatly profited from it, instead of protesting that under such a regime it was impossible to discharge the bank’s sacred duty to act as the guardian of the savings of the people, and to protect the value of the estate of widows and orphans

J’accuse — the accounting profession for their compliance in accepting grieviously compromised accounting standards that allows the conversion of liabilities into assets in the balance sheets of the government and the Federal Reserve.

J’accuse — Ben Bernanke is lying to the people in stating that he has the authority to print and air dop FR notes in order to fight deflation; the notes must be collateralized

J’accuse — the financial press is lying to the people in parroting the propaganda line that gold has been demonetized; gold is still used as collateral for FR notes

* * *

In the words of Chief Justice Reynolds, in delivering the dissenting minority opinion on the 1935 Supreme Court decision that upheld president Roosevelt’s confiscation of the people’s gold:

Loss of reputation for honorable dealing will bring us unending humiliation. The impending legal and moral chaos is appalling.”

No less appalling, we may add, is the impending financial and economic chaos.


Alf Field, Gear Today, Gone Tomorrow,, September 6, 2006

The Times of London today picked up Metal Bulletin’s recent story about the inability of Bank of England gold to meet the “good delivery” standards of the London Bullion Market Association. But the basic details about the quality and disposition of the gold remain unclear, even as the bank easily could clarify them, just as the disposition of U.S. gold reserves remains unclear and those reserves have not been audited in a half century.

There is a reason for all this unnecessary mystery, and it is that the British and U.S. governments simply do not want their citizens and the world to know what is really being done with the gold.

Now even Citigroup has conceded that this gold is being used for the surreptitious manipulation of markets.

Having just acknowledged one part of the gold story, maybe The Times will move on to the next.

The newspaper’s story on the defective quality of the Bank of England’s gold is appended.

All that Glisters May Not Be Gold

By Patrick Hosking
The Times, London
Saturday, September 29, 2007


It has long been the plaything of kings, the spoil of conquerors, and supposedly the safest investment that money can buy. But for the people of Britain, our national nest-egg may not quite be what it appears.

Hidden away in vaults under the City of London, Britain’s hoard of gold bullion, regarded as the best insurance against any turmoil in global money markets, is beginning to crumble. The deterioration, some experts claim, may suggest that it is not pure gold.

The Bank of England, guardian of the 320-tonne stash under Threadneedle Street, admitted yesterday that cracks and fissures had appeared in some of its gold.

Questions put to the Bank, made under the Freedom of Information Act, revealed that this deterioration would temporarily reduce the gold’s L4 billion value and make it more difficult to sell.

The discovery is a further embarrasment for the beleaguered Bank, coming only days after it was blamed in part for the Northern Rock crisis. But it said that most of the hoard remained in mint condition. It denied suggestions by some experts that the deterioration was evidence that the gold may have been adulterated with base metal.

“This is not about purity; this is about physical appearance,” the Bank insisted, saying that its bars were 99.9 per cent pure gold. The problem was due to the age of the bars, many of which were imported from the US in the 1930s and 1940s.

Although the gold carries assay marks, a guarantee from the refiner of its purity, there are no accompanying assay certificates, now regarded as essential by gold traders.

The Bank holds the gold on behalf of the Treasury, mainly in bars, but also in ingots and coins. Most of the hoard is thought to be stored in bars weighing between 10.9kg (24lb) and 13.4kg, and each worth between $258,000 (L123,000) and $317,000.

Revelations about its physical deterioration were secured by the trade journal Metal Bulletin, which has been trying to ascertain the truth since May. Rumours that the Bank’s gold was not in tiptop condition have circulated in the gold market for years, but Stuart Allen, the Bank’s deputy secretary, has now confirmed there is an issue.

To be traded, gold bars have to meet so-called London Good Delivery (LGD) standards, as laid down by the London Bullion Market Association. Mr Allen wrote to the journal: “There is some uncertainty about the status of LGD standards in respect of certain categories of gold bars that have been held in deep storage for many years.”

The Bank was in discussions with the association to clarify how much of its gold was in substandard condition, Mr Allen added.

A Bank spokesman insisted it was not a big problem. The gold could easily be sent off to a refiner to be melted down and turned into new bars, he said. According to market observers questioned by Metal Bulletin, cracks and fissures suggested that the bars may not be pure gold. The gold in coin form may also be contaminated with base metal.

If 100 percent pure, the gold would be worth just over L4 billion at the current price of $738 an ounce.

The Government keeps reserves of gold and foreign currency to use to prop up sterling in times of adversity. In theory, in times of war, reserves could be used to finance emergency imports.

Britain’s reserves have already been more than halved in recent years after Gordon Brown’s controversial decision to sell 395 tonnes of gold between 1999 and 2002, when he was Chancellor. The soaring price since then has left critics questioning the decision and its timing.

Peter Ryan, an analyst at the consultant Gold Field Mineral Services, said: “I would guess that it would only be a small proportion that doesn’t conform to standards and it would only be an issue if they needed to sell the gold. Some of this gold was acquired 30 or 40 years ago and standards do vary, but it is not difficult to fix.” The gold price has been soaring recently as investors seek a hedge against the falling dollar and inflation worries. Strong demand from India, the biggest gold-consuming country in the world, has also boosted prices. There, gold jewellery, ingots and coins are a favourite wedding and festival gift.

Analysts suggested that the Bank, which declined to say how much tonnage was affected, would not be alone with its deteriorating bars. Many other central banks with reserves going back centuries could face similar problems.

Governments of Australia, Switzerland, the Netherlands, Argentina, and Belgium, as well as Britain, have sold gold reserves in recent years. Britain argued that gold represented too large and risky a proportion of its total reserves. But the fashion for selling reserves appears to have faded as the price has risen. Net government sales were only 328 tonnes worldwide last year, down 51 per cent, according to Gold Fields Mineral Services.

* * *

A major New York investment house, Citigroup, this week acknowledged that central banks have been colluding to suppress the price of gold.

The acknowledgement came in a long report on the prospects for the metals and mining industry, “Gold: Riding the Reflationary Rescue.” It was written by Citigroup analysts John H. Hill and Graham Wark, who, in a section titled “Central Banks: Capitulating on Gold?,” write:

Official sales ran hot in 2007, offset by rapid de-hedging. Gold undoubtedly faced headwinds this year from resurgent central bank selling, which was clearly timed to cap the gold price. Our sense is that central banks have been forced to choose between global recession or sacrificing control of gold, and have chosen the perceived lesser of two evils. This reflationary dynamic also seems to be playing out in oil markets.”

You can read Citigroup’s acknowledgement of the central bank scheme to suppress gold on Page 7 HERE

Gold Money’s editor James Turk has a simple -yet powerful- message derived from Four Important Charts.
You can check’em out at Gold Money web site by clicking HERE.

by Hugo Salinas Price
President, Mexican Civic Association Pro Silver
September 21, 2007

Turmoil prevails. Lots of writing on financial and economic themes by worried people. All about “money”.

What no one mentions is that what the world is using as money in these times, is not really money at all. What is called money today is only a means of exchange, and the transfer of this so-called “money” does not constitute payment. “Money” today, is NOT a means of payment, which is one of the essential functions of money.

Money has been defined as having three functions:

1. A means of exchange.

2. A means of payment.

3. A store of value.

Of these three functions, only ONE remains: a means of exchange.

Today’s money is not a means of payment; ever since mankind used barter – before money existed – there did exist payment: each trader handed over something in exchange for something. That was PAYMENT. Payment is the delivery of some thing, in exchange for some thing.

Today, handing over a dollar, or a yen, or a euro – whatever – is not handing over something, nor even a claim on some thing. Therefore, handing over a dollar – or any so-called money today – is not really payment. It is not the delivery of any thing, nor of a claim on any thing. We are not “paying” in truth, because we do not deliver any thing. We do not use money, only a means of exchange.

World central bank reserves are neither a thing nor a claim on anything at all. Therefore, they are not a store of value; the falling exchange value of the dollar is a verification of this: that no money today can be a store of value. A non-thing cannot store value.

The Central Bankers of the world do not know what to do about their ever-increasing reserves; if any of them thought five minutes about money, they would understand that they are being very silly and playing games. If the CB reserves were gold – as they used to be – there would be no worry at all. Because gold is a tangible thing, but a dollar or a pound or a euro or a yen, or any other “monetary unit” is not a thing, it is only an abstract unit, a number.

Christian Noyer, on the ECB economic council and head of the Banque de France, does well to advise against “excessive accumulation of reserves”! Of course, it is always adviseable not to accumulate too much of nothing. “You got plenty o’nuthin’ “, Christi ole boy! (And nuthin’s plenty for you?)

Big shots and prestigious writers are talking and talking, and worrying and writing about “money”, when what we are using all over the world, is not money! The best and brightest brains WILL NOT see that the world is not using money at all.

This blindness that prevails in the world is of vast philosophical importance. We are living in a deluded world and the outcome of this delusion is going to be nothing less than apocalyptic in its overwhelming, destructive consequences for mankind.

By Michael Kosares
Centennial Precious Metals, Denver
Sunday, September 23, 2007

Who is at risk in Alan Greenspan’s “Age of Turbulence? (And we should not doubt for a minute that we do indeed live in an age of unprecedented turbulence.)

Is it the Federal Reserve?

No, the Fed suffers no ramifications for any of its actions or pronouncements.

Is it the commercial banks?

No, the Fed will bail them out no matter what it takes all the while proclaiming that it would never do such a thing.

Is it the hedge funds?

No, they will be bailed out by their counterparties, the major commercial banks, which will be bailed out by the Fed.

Is it the investor in the hedge funds?

No, he will be bailed out by the hedge funds when they reposition themselves to meet the criteria of the commercial banks (after they get their much-needed credit-line extension).

Is it the holder of the shaky mortgage drawn into this hapless affair by signing on the dotted line at a sucker rate of interest?

No, he will be bailed out through one government machination or another by the politicians who know that their cushy jobs in the Beltway depend on the good will of all those who believe that their fate hangs perilouslously close to that of their less fortunate brethren.

So who is truly at risk?

It is those of you who have worked hard, saved, invested judiciously, and find yourselves in a position where you don’t really have to ask anything of anyone. In other words, the individual who has been able to build up a little in the way of ASSETS.

Yes, you, my friends — for if they cannot get it from you, in the form of taxes and inflation, they cannot get it at all!

What is the way out? The way around it?

Buy the metal (or in the case of those who already own gold, own more and subtract your fate from the designs of the plotters and planners — the wide swath of those looking for someone to pay the huge bill that is coming due.

How are investors going to react when they discover that there are not many truly safe havens?

What if you were one of those people waiting in line at at one of the branches of Northern Rock in Britain?

First, investing in any kind of currency-based asset — like stocks, bonds, bank deposits, and money markets — is all basically the same thing. Your stock adviser might tell you that it would be a good idea in these perilous times to diversify between stocks and bonds and then to ladder the risk in each category.

What your stock adviser isn’t going to tell you is that since all these assets are denominated in the local currency, you aren’t really diversified at all.

One of the first questions that popped into my mind when the photographs of the queues outside Northern Rock branches were published was: What are these people going to do once they do get their money out of Northern Rock? Deposit it in another risky bank or money-market fund? Buy British gilts? Take it across borders to a different but equally precarious banking system? Buy U.S. Treasuries? Or believe the CNBC-style hype and put it into the stock market?

Ownership of any of these things represents only a lateral transfer, not a diversification, from the problem represented so tellingly by Northern Rock.

Gold’s opponents realized early that the only real escape was hard, yellow metal and that’s why they tried to knock down the price and cut gold off as an avenue of escape. They now seem to understand that it isn’t going to work. Not even all the propaganda in the world can diminish the fundamental truth that gold is an asset that is not simultaneously someone else’s liability. That is what makes gold a sound alternative in the context of recent events. All the other assets mentioned above rely on someone else’s performance or ability to pay. As Alan Greenspan put it long ago, gold is the only primary asset that does not require endorsement.

(I am not advocating 100-percent conversion of your assets to physical gold, only a sensible proportion to hedge against monetary crises, bank runs, etc.)

So the next question is: What happens if a good segment of the investing public comes to the realization about gold at about the same time?

I really don’t want to think about it. Do we on the gold side of the fence really want gold to become a mainstream alternative? If you can truthfully answer “yes” to that question, you are one of the lucky few who has positioned himself for what appears to be coming down the road. From this perspective it is more a negative than a positive that gold was featured favorably in The New York Times on Sunday. That’s quite a statement from someone such as myself who has spent the past decade — since 1997 when went up on the Internet — taking on the mainstream press and its negative attitude toward gold.

My, how things change. I would much rather see gold sit in the background and act as a repository for those who truly understand its uses than to see the mainstream press admit those uses and promote them to the public.

Second, and this has more to do with future market effects than it does with a course of action for individual investors, what are the chances that the Fed’s attempt to lower interest rates is going to be overcome by Treasury paper sellers trying to escape the falling dollar?

When Greenspan’s attempt to raise interest rates collided with the interests of the export-driven economies to find a place for their dollar reserves, interest rates did not rise to the degree the Fed had hoped. This is what Alan Greenspan referred to as “the conundrum.” Now we shall see if Ben Bernanke will find himself in the opposite position. (Bernanke’s conundrum?)

We saw signs of what might happen along these lines earlier in the year when bond values fell mysteriously just as Congress was attempting to pressure China over yuan policy. Some thought China was selling Treasuries as a warning. In any case interest rates began to move up on their own once again, contrary to Fed policy.

Strangely, the Fed could find itself operating under an odd set of circumstances. By proving its ability to govern interest rates and monetary policy, it could very well destroy itself and the dollar — the proverbial dragon eating its tail.

For several years now I have been talking about the Fed losing control of interest rates and monetary policy. This isn’t just interesting (or boring) economic discussion. This goes to the heart of the current monetary order and how policy-makers are going to deal with the array of problems affecting all of us, not just the banks or the traders in New York.

If the Fed no longer has control of monetary policy, what good is it? What is its purpose? What is the economic function of the Federal Reserve? What is its social purpose?

Over the weekend the Financial Times published an editorial that addressed the problem. “A decline in the dollar,” the FT said, “would be welcome if it was slow, but if foreign investors anticipate inflation and start to dump some of their $12,000 billion in U.S. debt, it could turn into a rout. In the worst case the Fed could lose control of monetary policy.”

Obviously, the one function it will sustain is the one for which it was created: lender of last resort. Perhaps that will be enough, but it also could mean an inflationary spiral unlike anything we have ever seen as the Fed attempts to gun the monetary engines to compensate for foreign-based Treasury sales or lack of interest in financing the still-growing U.S. debt.

The response in most places will be the local central bank’s gunning of the engines in its own right. Already there is a battle in Europe between the politicians and central bankers over fiscal responsibility and looseness or tightness in monetary policy.

It is interesting that Greenspan concentrates now on this same question of fiscal madness at the federal government. I look forward to reading his book to see if he has anything to offer in the way of solutions. For years I have advocated resurrecting the concept of a U.S. budget required by law to be balanced. Most state government operate quite effectively under that burden. Why can’t the federal government? I also like Greenspan’s response when asked by Newsweek magazine if he had a favorite in the presidential campaign: “Is one of the choices leaving the office open?”

At a time when America is preoccupied with the possibility of an economic breakdown, not one presidential candidate has been able to make anything close to an intelligent comment. That speaks volumes.

First comes perspective. Then proportion. Then peace of mind.

Michael Kosares is president and founder of Centennial Precious Metals in Denver and host of its Internet bulletin board, the Forum.

* * *


by Adrian Ash
September 21, 2007

“…Are you looking to buy gold? Have you thought about why? What’s in it for you…?”

IF YOU’RE LOOKING to buy gold today, please let me stop you and advise a cold bath.

I mean, have you thought about why? It’s just a lump of metal. Why would anyone ever want to buy gold at today’s prices?

After all, gold doesn’t pay you an income. So it can only compete with cash-in-the-bank (provided its safe) or government bonds (provided they pay) when inflation rises faster than interest rates. That’s what happened when gold rose eight-fold for US citizens in the late 1970s. It doubled in price when this happened again – and inflation beat interest rates – in 2003-2006.

Nor can gold compete with stock-market shares when the economy is growing and real revenues rise. It remains the most unproductive of assets, an inert metal with few industrial uses.

That means gold has no future profits to promise you. But for the very same reason, it also means gold doesn’t rely on consumer spending, new business investment or clever balancesheet gimmicks for its value. Gold is simply a rare, precious metal that people all over the world have used to store wealth for more than 5,000 years.

And right now, that simplicity is gold’s unique appeal.

Buying gold is as far as you can get from today’s complex and exotic debt markets. They’re making headlines for all the worst reasons today, as banking stocks plunge, mortgage-bonds slip into default, and losses pile up at hedge funds.

Gold, on the other hand, is recording near three-decade highs, and it still doesn’t owe anything to anyone. In our current financial marketplace, that makes gold rarer still.

Gold’s lack of “default risk” also sets it apart from the mountain of debt built up by Western consumers and their governments. The big picture?

* The average British household now owes nearly £9,000 (almost $18,000) even before you account for their record mortgage debts;

* The US government has run up $9 trillion in debt, much of it owed to fast-growing Asian economies like China and all of it waiting for US taxpayers to make the repayments;

* Even in Europe, the single currency Eurozone now faces a housing-debt slump in Ireland and Spain. Italy may have to pull out of the Euro. Greece’s high-spending government should have pulled out five years ago.

Compared to this epidemic of debt, very few people own gold. Fewer still own it outright, in their name alone. Whereas the global derivatives market of financial promises has doubled in three years to stand above $415 trillion. That’s more than eight times the value of the entire world economy!

Last month, it was mortgage-backed bonds and the complex contracts they’ve spawned that froze the interbank lending markets completely. Much of the betting has turned out to be worthless, and the fear remains that the worst losses have yet to show up. Of course, gold might also lose value. But unlike a mortgage-backed bond it can never go to zero, not according to 5,000 years of world history. And so far in this global credit crunch, the gold market’s response shows that its “safe haven” status has only grown stronger.

In a nutshell, that’s why the gold price has now shot to a 27-year high. But is today, right at the top of the chart, the right time for you to buy gold?

Six weeks ago would have been better; gold has risen 10% since then against the Dollar, Pound Sterling and Euro. Buying gold six years ago would have been better still. Early gold buyers spotted trouble ahead, and they have been rewarded for taking a risk on this no-income asset.

Since 2001 gold has very nearly doubled against the world’s five major currencies. For Japanese gold buyers it’s risen three-fold in terms of the Yen. But very few early investors appear to be selling just yet, and many respected analysts agree with their logic – that the real trouble in world finance has barely begun.

Think of the current “credit crunch” as a major sporting event, says Jon Markman for MSN Money. After speaking to Satyajit Das – “one of the world’s leading experts on credit derivatives, author of a 4,200-page reference work on the subject, and developer and marketer of the exotic instruments himself over the past 30 years” – he now believes we’re just hearing the national anthem played before the game really begins.

“It won’t end well for the global economy,” says Das, actually laughing! Buying gold now could prove a wise decision if this crisis gets worse before the world’s debt problem is cured.

Buying gold does not come without risks, however. The gold market remains highly volatile over short-term periods of time, twice as volatile as US stock markets in fact. And even if the bull market starting in early 2000 runs for another seven years from here, you must expect sharp and severe pullbacks in the meantime.

“Gold rose 600% in the 1970s,” as Jim Rogers, world-famous commodities trader and best-selling author of Adventure Capitalist, put it recently. “Then gold went down nearly every month for two years. Most people gave up.”

You can’t blame investors who quit the gold market between 1975 and 1977 for putting their money elsewhere. The gold price fell very nearly in half!

But that’s simply “what happens in bull markets,” as Jim Rogers says, and between 1977 and 1980, “gold went up another 850%.”

Fast forward to gold’s current bull market, and it enjoyed another huge surge before May 2006, rising by $230 per ounce in only six months. That spring, and for the first time in more than two decades, gold began making headlines at last – and the price promptly slumped by one fifth.

There’s no reason to think a sharp pullback won’t happen again. There’s every reason to wish that you’d bought back at $575 per ounce in October last year, rather than $730 today. Ask your financial advisor, and he (or perhaps she, but it’s distinctly “men only” work here in London) should would warn you that, after six years, gold’s bull market could soon burn itself out.

Your advisor should then point to the 1980s and ’90s, and show you how gold just kept sinking, year upon year upon year. Any US investor or saver who bought gold in Jan. 1980 suffered a 70% loss over the next 20 years. They still won’t be even today!

So don’t think it can’t happen. Be sure to accept responsiblity for your decision if you do choose to buy gold. That way, you’ll sleep better at night – which is the No.1 reason people ever buy gold in the first place.

To buy peace of mind, a defense against the bad things that happen when credit and money start to crumble.

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