November 2009


Interviewed by the “Russia Today” channel about problems in the world financial system, international journalist Max Keiser remarked that the Dubai crisis could create an avalanche -or rather a sandstorm- of defaults across the board.
Furthermore, Max’s sources at Germany’s central bank, the Bundesbank, have told him that the “Buba” is about to join other central banks in announcing gold purchases
Appended is Bob Landis‘s erudite and memorable speech at the Nov. 17 Zurich Gold Conference, titled “Viva la Restoration


… It is an honor and a pleasure to be here among so many good friends and great minds. I feel a special affinity for Zurich. It was the home of my friend and inspiration Ferdi Lips. It is the home of other friends like Tony Deden. It was also the ancestral home of the Landis family.

In fact, this ancestral tie makes me a little nervous at the prospect of a question and answer session. The last time a Landis preaching a dissident message was questioned in Zurich, it was while he was stretched out on the rack. His answers irritated his questioners. So they cut off his head.

Hans Landis was a radical Protestant who denied the authority of the Pope and preached strict fundamentalism. In the passions of the early 1600’s, that was like being a gold bug who denies the legitimacy of the central bank and preaches sound money.

And so, as I stand before you this evening, I sincerely hope that over the course of the last four hundred years, Zurich has mellowed out.
Tonight I’m going to approach the subject of gold from a somewhat oblique angle. Please bear with me as I circle in on it.
*
«My personal favorite, the ABCPMMFLF
Just over a year ago, the United States underwent a seemingly radical change, seemingly overnight. Its financial system had been revealed as insolvent under the weight of huge liabilities and worthless assets. The government refused to allow all the bankrupt institutions to fail, and thus permit the market to do its job of purging the rot from the system.
Instead, the authorities saved their favorites, effectively merging bank with state. They did so under cover of a witches’ brew of subsidies, guarantees and quasi-nationalizations bearing bizarre acronyms like TARP; PDCF; TAF; TSLF; and my personal favorite, the ABCPMMFLF, otherwise known as the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility.
And those were just the visible programs. The Fed, our central bank, dropped interest rates to zero and monetized additional trillions of dollars worth of problem assets, away from prying eyes. The nature and source of these assets remain matters of speculation, because the Fed to this day refuses to tell us what it bought and from whom.
*
«The events were taking us from freedom to fascism
When the smoke cleared, we Americans found ourselves the subjects of a gangster state, in thrall to a clutch of greedy, corrupt and incompetent banks which only days before had failed. We were now the guarantors of trillions of dollars in worthless assets that had generated billions in profits for those same banks in recent years. Their gains remained their gains; but their losses were now our losses. Our money, the reserve currency of the world, was now backed by toxic waste.
The events of last fall were, to all appearances, a bloodless coup, taking us from freedom to fascism virtually overnight. And all without a shot fired, or even, with few exceptions, an authoritative voice raised in protest.
How was such a thing possible in the United States, the supposed bastion of free market capitalism? The nation that had led the free world in the defeat of fascism some sixty years earlier, and in the defeat of Marxism-Leninism less than 20 years earlier?
And more importantly, how do we get out of this mess?
To understand how we got here, we must first understand that what seemed like major change, was actually just the illumination of existing reality. Bank and state had been a unitary phenomenon for many years. And what seemed abrupt, was actually the outcome of a gradual, accretive process.
*
«Ideas have consequences, bad ideas have bad consequences
What happened last fall can be seen as the aftermath of a war of ideas fought long ago, in which the wrong side won, decisively.
The vanquished were the heirs of a noble intellectual tradition, the English empiricist philosophers who developed in the modern era the concepts of private property and voluntary exchange. This tradition, which informed, among other things, the United States Constitution, was reinvigorated in the late nineteenth century by a remarkable succession of economists originally based in Vienna, hence the term «Austrian School» of economics. The Austrians, whose greatest exponent was Ludwig von Mises, and whose American voice was Murray Rothbard, developed a theory of economics based entirely on individual choice.
The victors were the heirs of a far less noble tradition, a long line of intellectual quacks and panderers to power. The line began with a Scotsman, John Law, reached a vigorous maturity in an Englishman, John Maynard Keynes, and entered a final, flamboyant decrepitude in the policies, if not the public posturing, of former Fed Chairman Alan Greenspan. In this tradition, the relevant analytic units are aggregates, broad abstractions. The individual scarcely warrants mention. Public power, not private property, is the heart of this tradition.
Keynesian economics is just a modern mutation of inflationism, a stealth tax levied by powerful insiders on ordinary people who can’t see it happening until it is too late. It is music to the ears of interventionist governments, because it ratifies what, if unchecked, they will do anyway, and it preys on the greed and gullibility of its victims, who are more than willing to believe you can get something for nothing.
*
«The quacks had the field to themselves
Now I must concede, as a matter of historical fact, I’ve overdrawn the point. It wasn’t much of a fight, much less a war. The quacks had the field to themselves. They told powerful people what they wanted to hear, validating the intervention and deficit spending that was already occurring. They also had a head start of some 20 years, since it was not until relatively late in the day when the Austrians’ theories were even translated into English.
Nevertheless, I believe the events of last fall, and the road ahead, can best be understood in terms of the interplay between these two schools of economic thought.
Now, a detailed comparison of the two schools is just a bit beyond us this evening. But there are two contrasting theories that I’d like to mention briefly.
The first such contrast is the theory of depressions. In Austrian teaching, so-called business cycles are caused by official interference with money and credit creation. This interference – for example, setting interest rates below market – fools individual actors into overproducing, creating supply that exceeds actual demand. A depression is merely the process of clearing the resulting imbalance. It is inevitable, and it is necessary. Left to itself, the market will clear the excess of supply over demand through price adjustments. Government at this point has no role to play; it has done quite enough already.
In Keynesian teaching, by contrast, government is blameless in the business cycle, which just occurs naturally. In a depression, markets can’t be trusted to clear themselves through price adjustment. The government must step in and stimulate additional demand by means of deficit spending, more money creation, and more credit expansion.
*
«Why do we tolerate unaccountable power in government
The policy responses of last fall illustrate perfectly Keynesian doctrine in action. Our authorities refused to let the markets clear. Instead, they panicked, and attempted to prop up prices, reignite the credit expansion, and stimulate demand. All this is obvious to anyone who follows the news.
What is less obvious is how the crisis came about. Keynesians treat it like an act of God. Virtually no one in authority saw it coming. Applying Austrian theory, we see that the crisis was caused by Government intervention, decades of relentless credit expansion. It was entirely predictable. And, indeed, it was predicted. The nature and timing of the inevitable crash were endlessly debated for years all over the Internet by ordinary people unburdened by false doctrine.
A more important question, however, is why we tolerate unaccountable power in government. Why do we find it acceptable that government has the power to intervene so massively in the market that it can cause such a crisis in the first place? And why do we now tolerate more of the same, a putative cure that is doing even more damage?
This brings us to the other contrasting theory, the concept of money itself.
In Austrian teaching, money originates in the market: …all money has originated, and must originate, in a useful commodity chosen by the free market as a medium of exchange. The unit of money is basically just a unit of weight of the monetary commodity – usually a metal, such as gold or silver. Government has no role in the definition or selection of money, let alone its creation, price or quantity. That is the market’s function.
*
«Keynes was so delighted with the State Theory of Money..
In Keynesian theory, by contrast, money originates in the state. Government has a total monopoly on money, starting with its very definition. It is not chosen in free exchange, it is imposed by force.
Keynes got his idea for state control of the means of exchange in the writings of a Prussian academic named Friedrich Knapp. Herr Knapp was the author of a book entitled the State Theory of Money, published in 1905.
According to Knapp’s theory, money is a creature of law, of state power. Money is whatever the state is willing to accept as payment for its taxes. It derives its value exclusively from the state.
Keynes was so delighted with the State Theory of Money that in 1924 he sponsored its first translation into English. In 1930, he adopted it explicitly in his Treatise on Money.
Now, it is a measure of the success of the Keynesian indoctrination to which we have all been subjected that this insidious theory strikes most people, even some who fancy themselves free market in orientation, as unobjectionable. They prefer to concentrate on other fallacies of Keynesian doctrine. Many of us are so used to hearing that the state properly has a monopoly on money that we have come to think it natural.
In fact, the State Theory was already defunct long before Keynes appropriated it. It had been demolished in theory as early as 1912 by Mises in his classic Theory of Money and Credit. It had been discredited in practice by its association with the German hyperinflation of the 1920’s. But inconvenient truth did not deter Lord Keynes. The State Theory was quietly incorporated into Keynesian dogma without further ado.
And there it sits, to this day, malignant and unexamined, a false theoretical postulate at the foundation of the entire corrupt edifice of inflationist theory and practice.
*
«How do we get out of this mess?»
So why is this bit of intellectual history relevant?
Because bad ideas have bad consequences.
The State Theory of money, the obscure foundation of modern inflationism, left us intellectually defenseless against our government’s incremental shift to fiat money and away from any practical limitations on its power.
It left us defenseless against the depredations of our central bank, whose grotesque mispricing of money and credit over the years led in a straight line to the catastrophic serial bubbles in assets and credit whose threatened collapse triggered the open interventions of last fall.
And, unless we drag it out into the open and drive a stake through its heart, the State Theory will leave us defenseless still as we grope for a way out. If our assumptions are so flawed that we cannot properly articulate the conceptual problem, we will never understand, let alone fix, the institutional and behavioral problems.
Or, more to the point, defend ourselves against the next wave of monetary swindles by powerful insiders.
And so we come to the second question: how do we get out of this mess?
The short answer is, we don’t. There is no saving the dollar or the monetary system now based upon it.
Not that we should want to. Absolute power, Lord Acton famously observed, corrupts absolutely. The power to print a reserve currency out of thin air is the greatest power on Earth. Its very existence attracts and empowers people who wish to control other people. It corrupts all who enjoy it.
*
«As a society, we Americans have reached a dead end
You have had direct exposure to the truth of this observation. Consider the relentless attacks on your gold by our authorities, and the relentless attacks on your bank secrecy laws by nearly everybody. The very same laws, ironically, that were developed in the 1930’s for the express purpose of protecting clients who were nationals of fascist states.
I believe it fair to say that as a society, we Americans have reached a dead end. We are bankrupt, and not just financially. Our leading institutions are corrupt and discredited. Our leadership class has betrayed its trust, openly and repeatedly.
Our financial and economic crisis will in due course lead to an intellectual and cultural crisis. We may yet avoid the fury and violence that have attended other paradigm shifts, other imperial collapses. But we will need to be very lucky indeed. That’s because on the one hand, this is about power which will not be voluntarily relinquished, and on the other, there is no reasoning with an angry mob.
So I believe it is a waste of time to talk about reform of the existing monetary system. There is no historical precedent for a fiat money surviving more than a brief span of years; and, in any event, the experience of the Soviet Union teaches that an economic system built upon a false dogma cannot survive.
*
«In the meantime, what keeps the current system going?»
We should instead focus on regeneration, the task of rebuilding out of the wreckage on the other side of that final monetary collapse. At that time, and not before, we will have the opportunity, however brief, to drive out these disastrous ideas along with those who used them to control and impoverish us. Only then will we have an opportunity, however long the odds, to restore our Constitutional republic.
In the meantime, what keeps the current system going?
You do.
You, meaning foreign investors, still lend us your savings. This just enables us to prolong the process, defer the resolution, and increase its ultimate cost.
When will it end?
Wherever you cut us off.
At some point, foreign holders will sell our debt in earnest, and buy gold with a conviction resembling panic.
*
«It’s impossible to understand gold without understanding its political dimension
And so, finally, I come to gold. This is, after all, a gold conference. Why then do I talk so much about politics?
Because I think it’s impossible to understand gold without understanding its political dimension. Gold is permanent, natural money, the antithesis of money made from nothing, money backed by force alone. It is a potent symbol of private property; of voluntary exchange taking place outside the control of the state; of limits on state power; and of resistance to the runaway state.
Left to its own devices, gold is the ultimate barometer of public confidence in government. It is also the ultimate means for ordinary citizens to opt-out of an oppressive, fraudulent system.
That is why gangsters who wield power in the name of the “people” always make ownership of gold a crime. So it was in France during the Revolution, in Germany during the Nazi era, in Russia during the Soviet era, in China during Mao’s rule, and in the United States from 1933 through 1974. It is why, even during periods when the ownership of gold is not outlawed, its price is ‘governed’, as one commentator puts it, or officially manipulated, as others of us put it.
It’s often hard for practical men of affairs to understand the vehemence of those of us who assert, seemingly ad nauseam, that gold is money. The truth is, our passion has more to do with the concept of liberty than with that of money. We know from history and experience that once the free market has lost control over the definition and creation of money, individuals have lost their liberty.
*
«Money must be real, tangible, circulating.»
That’s why neither a central bank nor fiat money find support in the Constitution of the United States, and why our monetary system, which has these two elements as its very foundation, is unconstitutional on its face.
It’s also why, as we rebuild our institutions from the wreckage of the final monetary collapse, control over money must at all costs be kept away from government. It is not enough that gold return as money; government must keep its hands off.
Money must be real, tangible, circulating. As Mises wrote when considering the subject of monetary reform back in the 1950’s, «Everybody must see gold coins changing hands, must be used to having gold coins in his pockets, to receiving gold coins when he cashes his paycheck, and to spending gold coins when he buys in a store.» And I’m sure he would have added an approving reference to digital gold had the technology then existed.
Now, just to be clear, people must be free to choose whatever they want to use as money. We believe they will choose gold, given a chance, simply because people have already done so over thousands of years, and for very good reasons.
But creating the conditions within which an informed choice can be made, even – or perhaps especially – after the collapse of the system and the discrediting of its false ideology, will be extremely difficult.
We are beset by propaganda, falsehood and spin from all sides. Truth is of no consequence; the Fed has bought and paid for virtually the entire economics profession in the United States.
*
«I hope that we will see a new initiative in the very near future
Our universities are riddled with apparatchiks who at the very least must toe the party line to advance in their careers, and in many cases are directly dependent on Fed largesse.
The financial press, now concentrated in ever fewer hands, is captive to the same false dogma, and is little more than an apologist for the current monetary regime.
We desperately need credible new sources of information on money if we are going to have any shot at a sustainable regeneration.
In this connection, I have reason to hope that from the talent assembled here this evening, we will see a new initiative in the very near future. Stay tuned.
Thank you. “
***

 

Robert Landis is a private investor and a member of «Golden Sextant Advisors», commentators on the gold market. He is Chairman of Amarillo Gold Corporation.
He was a founder and former President of Northern Lights Investors, a private investment company operating in Poland, and a former Managing Director of Schooner Capital International, a Boston-based investment company operating in Poland and the Former Soviet Union.
From January 1984 through June 1994, Mr. Landis held a variety of positions within Merrill Lynch & Co.’s Investment Banking Group, most recently as a Director in the Financial Institutions/M&A Department.
Before joining Merrill Lynch, Mr. Landis was an attorney with the New York firm of Simpson Thacher & Bartlett, where he practiced corporate and securities law in New York and London. Mr. Landis is a graduate of Princeton University and Harvard Law School, and is a member of the New York Bar.
Here’s a very enlightening excerpt from Enrico Orlandini’s weekly missive, “Dow Theory Analysis”, regarding the credit crisis:
“..For those of you who haven’t figured it out yet, the credit crisis and resulting bail outs had nothing to do with concern for the general public.
Two ex-Goldman Sachs men, the Treasury Secretary Henry Paulson and then President of the New York Federal Reserve Bank Timmy Geithner, got together and figured out a way to consolidate Goldman’s power and rid them of the competition at the same time.
They waited until early March of this year when things looked dismal and, in a blaze of cell phone calls between Geithner and Goldman (twenty-one in one day) it was decided that Lehman Brothers and Merrill would disappear, and Goldman would take over the lucrative parts of their business. Bear Stearns was already gone, so Goldman would be the power house and Morgan would get a bone or two thrown its way.
The failure of Lehman was the key though, as it forced Congress to commit to TARP money that would eventually fill Goldman’s coffers. Lehman drew the short stick even though they all were more or less equally leveraged.
Both the Fed and Treasury now clear everything through Goldman, allowing them to make trading profits on 89 out of 92 days in the third quarter, a phenomenal accomplishment to say the least. You, of course, paid for all of this, you have little or no knowledge of it, and you’re not going to receive a single benefit. Your taxes will be raised, you may lose your job, the currency you earn is worth less every day, and they may come and foreclose on your house. How do you like them apples?..”
View this document on Scribd
By Ambrose Evans-Pritchard
The Telegraph, London
Wednesday, November 18, 2009

http://www.telegraph.co.uk/finance/economics/6599281/Societe-Generale-tells-clients-how-to-prepare-for-global-collapse.html

Societe Generale has advised clients to be ready for a possible “global economic collapse” over the next two years, mapping a strategy of defensive investments to avoid wealth destruction.

In a report entitled “Worst-Case Debt Scenario,” the bank’s asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems.

Overall debt is still far too high in almost all rich economies as a share of GDP (350 percent in the US), whether public or private. It must be reduced by the hard slog of “deleveraging.” for years.

“As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse,” said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.

Under the French bank’s “Bear Case” scenario, the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.

Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105 percent of GDP in the UK, 125 percent in the US and the eurozone, and 270 percent in Japan. Worldwide state debt would reach $45 trillion, up 2 1/2 times in a decade.

(UK figures look low because debt started from a low base. Mr Ferman said the UK would converge with Europe at 130 percent of GDP by 2015 under the bear case).

The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Aging populations will make it harder to erode debt through growth. “High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt,” the report said.

Inflating debt away might be seen by some governments as a lesser of evils.

If so, gold would go “up, and up, and up” as the only safe haven from fiat paper money. Private debt is also crippling. Even if the US savings rate stabilises at 7 percent and all of it is used to pay down debt, it will still take nine years for households to reduce debt/income ratios to the safe levels of the 1980s.

The bank said the current crisis displays “compelling similarities” with Japan during its Lost Decade (or two), with a big difference: Japan was able to stay afloat by exporting into a robust global economy and by letting the yen fall. It is not possible for half the world to pursue this strategy at the same time.

SocGen advises bears to sell the dollar and to “short” cyclical equities such as technology, auto, and travel to avoid being caught in the “inherent deflationary spiral.” Emerging markets would not be spared. Paradoxically, they are more leveraged to the US growth than Wall Street itself. Farm commodities would hold up well, led by sugar.

Mr Fermon said junk bonds would lose 31 percent of their value in 2010 alone. However, sovereign bonds would “generate turbo-charged returns” mimicking the secular slide in yields seen in Japan as the slump ground on. At one point Japan’s 10-year yield dropped to 0.40 percent. The Fed would hold down yields by purchasing more bonds. The European Central Bank would do less, for political reasons.

SocGen’s case for buying sovereign bonds is controversial. A number of funds doubt whether the Japan scenario will be repeated, not least because Tokyo itself may be on the cusp of a debt compound crisis.

Mr Fermon said his report had electrified clients on both sides of the Atlantic. “Everybody wants to know what the impact will be. A lot of hedge funds and bankers are worried,” he said.

* * *

It has been speculated by many people over the past decade that once we are in the heat of the fire the US Treasury’s gold will be employed in defense of the dollar.
Perhaps this was what some of the Giants were counting on. Before 1971 the dollar was considered to be “good as gold”.
Since then it was considered to be “hard currency” amongst a world full of soft currencies. Perhaps now it will be considered to be “Good as Tungsten“?
I wonder how this will affect the next move from the People’s Republic of China. Hmm….”
Read all about the dark art of tungsten alchemy at FOFOA’s blog HERE

Robert Kiyosaki, along with friend, and author of the Rich Dad Advisor Book, Guide to Investing in Gold and Silver, Mike Maloney, explains why gold and silver are vital investments for todays economy.

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