May 2010


Here’s the last bell ring from the old sage of the markets, the venerable Richard Russell:

“..Do your friends a favor. Tell them to “batten down the hatches” because there’s a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don’t need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won’t recognize the country. They’ll retort, “How the dickens does Russell know — who told him?” Tell them the stock market told him. That’s pretty intense!

Update: By popular demand, here’s more on what he sees in the market. The gist is that the markets recent gyrations are telling him that the economy is in trouble:

And I ask myself, “Am I seeing things? The April 26 high for the Dow was 11205.03. The Dow is selling as write at 10557 down 648 points from its April high. If business is even better than expected, then why is the Dow down over 600 points? And why, if there were 674 new highs on the NYSE on April 26, were there only 20 new highs on Friday, May 14? And if my PTI was 6133 on April 26, why is it down 17 points since its April high?

The fact is that I’ve been seeing deterioration in the stock market ever since early-April, and this in the face of improving business news. The D-J Industrial Average is composed of 30 internationally known top-quality blue-chip stocks. These are 30 of “America’s biggest companies.” If Barron’s is so bullish on the future of America’s biggest companies, then why isn’t the Dow advancing to new highs?

Clearly something is wrong. But what could it be? Much as I love Barron’s, I trust the stock market more. If I read the stock market correctly, it’s telling me that there is a surprise ahead. And that surprise will be a reversal to the downside for the economy, plus a collection of other troubles ahead.

About Dow Theory — First, we saw the recent April highs in the Averages. Then we saw a plunge in both Averages to their May 7 lows — Industrials to 10380.43, Transports to 4298.12, next a short rally. If ahead, the two Averages turn down and violate their May 7 lows, that would be the clincher. Such action would signal the certain resumption of the primary bear market.

Just as for years I asked, cajoled, insisted, threatened, demanded, that my subscribers buy gold, I am now insisting, demanding, begging my subscribers to get OUT of stocks (including C and BYD, but not including golds) and get into cash or gold (bullion if possible). If the two Averages violate their May 7 lows, I see a major crash as the outcome.
Pul – leeze, get out of stocks now, and I don’t give a damn whether you have paper losses or paper profits!..”

….what more is there to say?

ALEA IACTA EST

by Egon von Greyerz – Matterhorn Asset Management
Yes this is it! We have crossed the Rubicon and events in the world economy are now likely to unfold in a totally uncontrollable fashion. Clueless governments still don’t understand that it is their ruinous actions that have created a credit infested and bankrupt world. They will continue to prescribe the same remedy that caused the problem in the first place, namely more credit and more printed money. The consequences are clear; we will have hyperinflation, economic and human misery as well as social unrest.
When will the world finally begin to understand that we have reached the point of no return and that “the voyage of their life is bound in shallows and in miseries” (Shakespeare, Julius Caesar).  Sadly, we are probably not very far from that point. It is already starting to happen in many countries.
The latest EU and IMF package of $ 1 TRILLION (Euro 750 billion) is yet another futile attempt by governments to abolish poverty by printing paper. Let’s be absolutely clear, this money does not exist and the EU governments are hoping by declaring such a large amount that they can con the Wolfpack speculators. At this point the EU has just picked a large round figure of out the air. But when their bluff is called by the Wolfpack and the next attack happens, EU governments will after initial huffing and puffing start printing unlimited amounts of paper.
So the world is now on its road to ruin and there is no action, no leader and no new amount of printed money that can save the world or prevent a hyperinflationary depression.
Never in history has the world been in a situation when virtually all industrialised countries are bankrupt. Therefore there is no precedent for what will happen in the next few years. What we can be quite certain about is that events will happen in a seemingly random pattern and that it will be impossible to forecast where the next crises will start.
But although we will not be able to predict in what order events will take place, we can expect much of what is outlined below to happen.

Wolfpack attacks

Already back in 2007 we warned about the very high risk of the CDS (credit default swap) market. This is now one of the primary instruments used by the Wolfpack (expression coined by the Swedish Finance Minister Borg). The Wolfpack, speculators with enormous fire power such as hedge funds and investment banks, use the CDS market to attack any weak financial sector, be it a country, a bank or a company. The combination of the leverage of the CDSs and the massive capital available to the Wolfpack makes it possible for them to bring down or badly maul whatever they attack. It was not the Wolfpack that caused the problem in for example Greece but they can bring down a weak victim quickly and profit immensely and immorally from it.
There are so many weak potential victims that the Wolfpack can attack and they will start with the most vulnerable ones like, Portugal, Spain and Ireland etc. But when the time is right they will also attack the US and the UK.
So in the coming year we will see country after country coming under attack from the Wolfback which will lead to acceleration in money printing and higher interest rates.

Iceland – Ireland – Greece – Who is next?

The EU support package of $ 1 trillion is supposed to be sufficient to protect the rest of Europe from another Greek tragedy. The dilemma with such a massive EU commitment is that no government expects to have to pay the money out. If they did the voters in the respective EU countries would throw out their government. Why should the German people, who are also having hard times, pay for the Greeks, Portuguese or the Spaniards, especially since these loans will never be paid back.
Greece is bankrupt but is still taking on additional EU loans of € 140 billion. In addition, their austerity measures are supposed to bring the deficit down from 12% of GDP today to 3% in a few years time. But who can be so stupid as to lend to a bankrupt nation which will sink into the Ionian and Aegean Seas in the next few years. With massive cuts in government expenditure, with major falls in output, with unemployment rising fast, with tax revenues collapsing how can Greece possibly be expected to improve the economy and pay a high interest rate on their exploding debt?  In addition, as long as they have the Euro they will be totally uncompetitive. So if they couldn’t manage their economy in the so called good times, it is absolutely guaranteed that they have no chance of surviving in bad times. So Greece will default and so will Portugal, Spain, Italy, France, the UK, the US and many more. But before that there will be the most colossal worldwide money printing exercise which would have used up most of the trees in the world but for electronic fiat money.
So, if virtually bankrupt nations don’t cut their deficits, they will definitively go under and if they try to cut, they will also go under due to collapsing output and tax revenues and colossal debts. Thus whatever actions governments take or don’t take, they are damned.
The table below shows debt as a percentage of GDP for various OECD countries. The official debts (in red) are massive and unlikely to ever be repaid in real money. Total debts (grey bars) include unfunded liabilities such as pensions and health care. Spain has the lowest total debt to GDP of 250%. Germany and the UK have around 400%, the US over 500% and Greece over 800% debt to GDP. These figures are absolutely astronomical and prove that most governments in the world will be totally incapable of repaying their debts or funding the pensions or medical care which they have committed to. It doesn’t matter however much governments cut expenditure or raise taxes, all these countries are insolvent and nothing can save them.
[1]

The world must permanently readjust

Most governments still believe that deficit spending and money printing is the solution to all their problems. Because the world economy’s expansion in the last 100 years and particularly in the last 40 years has been primarily based on credit and not real growth, governments live under the false impression that money printing will work this time too. But we have reached the point when investors will no longer buy worthless government debt that will never be repaid with real money. We will first go through a period when governments issue and buy their own debt thus monetising the debt or print money.  This will be the hyperinflationary phase. Thereafter the world will realise that none of the government debt and very little of the bank debt will ever be repaid. Credit will then implode and so will also the assets financed by credit. Eventually there will be a new monetary and financial system and the world will start afresh. The adjustment period will be very long and will involve economic and human misery, leading to social unrest and major political change. It will be a horrible experience for the world during this extended period of adjustment. But it will be like a forest fire that clears out the deadwood and creates the conditions for  strong new growth. Once the new era starts it will therefore be from a very much lower level and individuals will be rewarded for hard work with  little or no social security safety net. Credit will only be granted for sound capital investment projects, not for consumption or speculation. Ethical and moral values will return and the golden calf will not be worshipped. But before that, the period of readjustment will be very long and extremely difficult for the whole world.

Hyperinflation

For several years we have predicted that hyperinflation is the most likely outcome of the economic predicament that the world is in. But it is unlikely to be a straightforward hyperinflationary period. Precious metals will be the primary beneficiaries of hyperinflation. Certain commodities, especially food and energy, will also go up in price.  But most assets that have been financed by the credit boom will go down in real terms. This includes property, stocks and bonds. In hyperinflationary money these assets could still go up in price. If someone who earned $ 50,000 per annum in real money now earns $ 5 million in newly printed money, his house will probably also go up in nominal terms. But in real terms property prices will decline massively. There will be no credit available and interest rates will be very high, probably at least 15-20% so very few people will be able to buy a house.
Hyperinflation will destroy many currencies so paper money will definitely reach its intrinsic value which is zero. Gold and silver will virtually be the only assets that will protect investors fully against the destruction of money.
[2]

The next leg of the debt crisis is here

In our February newsletter “Sovereign Alchemy will Fail” we discussed the Sovereign Time Bomb and we are now experiencing the initial small explosions with Greece as the first victim. The $1 trillion EU/IMF rescue package was never intended to be more than a headline figure. EU governments were hoping that this would frighten the Wolfpack away. But so far this has failed. The Euro went up 4 cents when the package was announced but is now down to new lows again. How can anyone take a massive rescue package seriously when most of the countries making the commitments are bankrupt themselves? Spain and Italy have committed tens of billions each. And they are the ones that will be attacked by the Wolfpack next.This is the bankrupt saving the bankrupt. The IMF has no money but is dependent on its members of which the US is the biggest contributor. And they are bankrupt too. The UK, which is not in the Euro Zone and which has a worse budget deficit than Greece, contributed £15 billion. The new UK government is planning to cut a massive £ 6 billion of costs out of its next year’s budget which will bring major hardship. But as a last act, the outgoing labour government committed £15 billion which if paid out will never be repaid. The whole thing is a total farce. Governments commit trillions to rescue banks and sovereign states but cannot even make budget cuts of a few billion in their own countries. This shows that the world economy and the world financial system is being run by morons who only have their own self interest in mind and do not understand the consequences of their ruinous actions.
When the $1 trillion EU rescue package was announced, the US simultaneously offered European banks dollar Swap facilities (dollar loans) of a minimum $500 billion but probably much more. In addition the US Fed also injected at least $500 billion into the US banking system. These actions make it clear the banking system is under tremendous strain similar to 2008. But this is just the beginning. Things will get a lot worse.

Gold

In 2002 we advised investors to put up to 50% of their liquid assets into gold when the price was $300. To us it was crystal clear that the mountain of debts and derivatives would never be repaid with normal money but would be inflated away by money printing and this is what is now happening. The media are now talking about a bubble in gold and comparing to the 1980 top at $850. Let us be very clear, although gold has gone up 5 times since the 1999 bottom at $250,  it is nowhere near its peak. Adjusted for real inflation (as per shadowstats.com) the 1980 gold peak in today’s prices corresponds to around $7,200 today. So gold could easily go up 6 times from the current price of $1,220 and still be within normal parameters.
[3]
There are many factors that will contribute to gold’s rise from here (in addition to money printing):
  1. Gold production is going down.
  2. Neither Comex (the futures exchange), nor the bullion banks would be able to deliver more than a fraction of the physical gold for which they have outstanding commitments.
  3. Central banks and the IMF probably don’t hold even half of the 30,000 tons that they claim they have. Most likely, at least 15,000 tons (6 years gold production) have been sold to suppress the gold price.
  4. The precarious financial system will lead to a total distrust of paper gold including most of the ETFs which have no physical gold.
The four factors above will lead to the most massive surge in the gold price. There will be nowhere near sufficient gold to satisfy demand at current prices. We had been expecting gold to start its acceleration in March 2010 and this is exactly what is happening. We expect the move to be relentless during most of this year with very few major corrections but with high volatility. Moves of $100 in one day could easily happen.
So gold is likely to make a top in the next few years between $5,000 and $10,000. But if we get hyperinflation the price could go exponentially higher like in the Weimar Republic when gold reached DM 100 trillion per ounce in 1923. Will gold experience the same type of correction when is has peaked as happened after the 1980 peak? Probably not, because gold is likely to be a part of a new monetary system that will be created when the current one has collapsed.
The table below illustrates the total destruction of paper money against gold in the last 100 years and shows how many ounces of gold that $1,000 bought at various times. In 1910, $1,000 bought 40 oz of gold at $25 per oz. Today in 2010, $1,000 buys 0.80 oz of gold at $1,230 per oz. This is a massive decline of 98% in the value of the dollar measured in real terms in the last 100 years. The next significant year is 1971 when Nixon abolished the convertibility of dollars to gold. It was this disastrous decision that opened the floodgates for the credit and money creation that we are experiencing currently. The dollar is down 97% since then. But even if we take more recent years, the purchasing power of the dollar measured in gold has declined catastrophically. Since the 1999 gold low, the dollar has declined by 80% against gold and since 2002 (when Matterhorn Asset Management recommended major gold investments) by 76%.
[4]
Virtually all currencies show similar declines in value against gold in the last 100 years. This is the clearest evidence of governments and central banks defrauding their people of their hard earned money. Where will it end? It will end when the dollar and many other currencies reach their intrinsic value of ZERO. That time is not far away.

Matterhorn Asset Management AG
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CH 8001 ZURICH
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matterhornassetmanagement.com

Within a half hour of each other today the leading business television networks in North America reported doubts that gold exchange-traded funds either have the gold they claim to have or can get enough real gold to meet likely demand.
The first doubt was expressed on CNBC in the United States, where market analyst Rick Santelli comments at 5:30 into this segment:
http://www.cnbc.com/id/15840232?video=1494145732&play=1
The second doubt was expressed on BNN in Canada, where reporter Niall McGee commented at length:
http://watch.bnn.ca/#clip302139
There seems to be growing consensus in favor of what GATA long has been urging gold and silver investors to do: to take possession of their metal or make certain that any custodian has got it in allocated and audited form, especially since the custodians of the largest gold and silver ETFs are also the biggest gold and silver shorts, a grotesque and unacknowledged conflict of interest:
http://www.gata.org/node/8600
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

What follows is tantamount to a historical manifesto that could signal a new era for world economics and modern society as a whole. It is Professor Fekete’s proclamation of a truly viable way out of today’s global economic impasse a.k.a. “The Greatest Depression“.

Please read it carefully…


THE NEW AUSTRIAN SCHOOL OF ECONOMICS
Antal E. Fekete
aefekete@hotmail.com
**
The Hungarian Connection
The Austrian School of Economics dates its beginnings back to the publication in 1871 of a slender volume: The Principles of Economics (Grundsätze der Volkwirtschaftslehre) by Carl Menger. The adjective “Austrian” was meant to be derogatory, introduced by economists of German school of historicism to ridicule Menger’s idea of basing economic science on axiomatic foundations, on the pattern of logic and mathematics. The root of the word “Austrian” is “East”, so the connotation of “Austrian economics” is “oriental economics” – a kind of voodoo economics.
German economists could just as well have said “Austrian-Hungarian economics”, since Hungary lies even further East than Austria, plus the fact that in 1871 Austria-Hungary was a dual monarchy, the two countries sharing not only a monarch but also many important political, economic, scientific, cultural institutions and traditions.
The Hungarian connection is dramatically revived by an unfortunate split in the rank and file of Austrian economists that took place in the 21st century. I have run conferences at the Martineum Academy in Szombathely, Hungary in the Austrian tradition and in the spirit of Carl Menger. I published course outlines under the aegis of the now defunct Gold Standard University on my website www.professorfekete.com. For my efforts I have been roundly denounced by parochial “American Austrians” at the Ludwig von Mises Institute in Auburn, Alabama. I consider this split most unfortunate at the most critical time, when the international monetary system shows signs of advanced senile dementia as well as of physical disintegration. This could have been a most opportune time for students of the gold standard to close ranks, join forces, and demand a return to the only monetary system that makes for economic stability, for peace and prosperity. They should have put their quibbles aside and offer a common platform and blueprint showing the world how it could be done. It was not meant to be.
Because of the urgency of the moment I have decided to make a fresh start and to establish a new school, proudly naming it the New Austrian School of Economics in Budapest, Hungary, where I live. My first act in doing so is to extend a sincere offer of cooperation to the American Austrians as soon as they are ready to look at Adam Smith’s Real Bills Doctrine as a valid theory which is very much in the spirit of Menger.
The Quantity Theory of Money
It is a great pity that as a young man Ludwig von Mises embraced the Quantity Theory of Money, and has never during his long life been able to extricate himself from its clutches. For this reason he was alienated from Adam Smith’s Real Bills Doctrine, the latter being an implicit refutation of the former. In spite of this flaw I still consider him the greatest economist of the 20th century. But the mortmain of Mises cannot be allowed to guide us in the 21st century when the Quantity Theory of Money is so spectacularly self-destructing, as witnessed by the Second Great Depression that started 80 years after the first, in 2009.
Cleansing of the Temple
The Real Bills Doctrine of Adam Smith states, in essence, that short-maturity bills of exchange drawn on goods in most urgent demand and moving fast enough to the ultimate gold-paying consumer, are capable of spontaneous monetary circulation, without any impetus or props from the governments or the banks. Indeed, bill circulation is possible in the absence of any banks at all. Such a system of financing production and trade sans banques could rise from the ashes of the regime of irredeemable currency before our very eyes. In the first decade of our century the governments and the banks have totally discredited themselves in the public’s view as they have run the ship of the world’s monetary system onto the rocks. Should the bankers have the temerity to show up after the shipwreck in order to set up shop, people will rise and chase them out – just as Jesus chased out the money changers in the famous scene “Cleansing of the Temple” (Mark 11:15-19; Matthew 21:12-17; Luke 19:45-48; John 2:12-25).
The scriptural teaching, confirmed by all four evangelists, is clear. Social cooperation is still possible in the absence of banks. It was a fatal mistake to ban the spontaneous circulation of bills maturing into gold from financing world trade – thereby promoting the bankers’ dishonored promises to pay, and their never maturing but ever burgeoning debt, to the status of money.
Victors disallowing real bill circulation in 1918
The international gold standard did not collapse during the 1930’s because of its inner contradictions – as schools inculcate the idea into all students. The truth is that the victorious powers inadvertently caused the collapse of the gold standard (with a 13-year lag) by disallowing its clearing system, the international bill market, to reopen for business after the cessation of hostilities in 1918.
The victors did not want to abolish the gold standard per se. After all, Britain returned to a gold bullion standard at the original parity of the pound sterling in 1925. The victorious allies acted vindictively. They just wanted to punish Germany over and above the provisions of the peace treaty. They forced the world into the straitjacket of bilateral trade, essentially a barter system that had evolved during the war. They refused to entertain Germany’s post-war revival, given the benefits of multilateral world trade, epitomized by the international bill market as it operated before 1914. In effect, the victors wanted to perpetuate the wartime blockade of Germany in peacetime. Never mind that this also punished their own people. In their opinion it was a small price to pay for security. Little did the victorious powers realize that they were sounding the death knell for the gold standard. In a complex trading world such as that of the twentieth century the gold standard could hardly survive if it is castrated by cutting off its clearing system, bill circulation. The idea that the world could be coerced to embrace a system barring multilateral trade is akin to the idea that people could be forced back to barter by abolishing money.
History has borne out the truth of this observation. During a period of five years, from September 1, 1931, when Britain, to September 27, 1936, when Switzerland reneged on their domestic and international gold obligations, all other governments have similarly defaulted on their solemn promises to pay their creditors in the form of a fixed quantity and quality of gold. In some countries, so in the United States, draconian regulations were put into effect making the possession of gold a criminal offence in 1933. Such extreme measures had only one explanation: vindictiveness – even to the extent of hurting your own citizens and violating your own Constitution in the execution of an insane monetary policy. Government economists, university professors, financial writers and journalists have “forgotten” to raise the question whether such extreme and vindictive interference with the world’s production and distribution of goods and services would ultimately have some untoward effects, even war, as a repercussion. Not one of them thought of suggesting that the legal tender status of bank notes should be declared unconstitutional through an international treaty – as the paramount measure to secure the preservation of world peace.
A Century of Legal Tender
The “forgotten questions” are belatedly being asked now. The present great financial crisis is not the outcome of some recent errors of commission or omission. Its ultimate cause goes back 100 years, to 1909. That was the year when France and Germany, in short succession after one another, enacted legal tender legislation making the note issue of the Bank of France and the Reichsbank legal tender in their respective jurisdictions. Without legal tender bank notes an all-out war could scarcely be fought. Members of the officer corps and procurers of munitions would demand remuneration in the gold coin of the realm. That could have put a speedy end to the war that started in 1914.
The real cause of the great financial crisis that started in 2009 is the inadvertent destruction of the gold standard a hundred years ago through the introduction of legal tender bank notes before World War I, and the vengeful decision to bar the international bill market after. It was these measures that have given rise to the corrosive regime of irredeemable currency, floating exchange rates, gyrating interest rates, and forever growing perpetual debt – a monetary arrangement never before globally embraced.
100 percent Gold Standard (so called)
I am an old man, two years shy of four score. I was looking forward to enjoying the quiet pleasures of retirement. However, the present world crisis calls me out of retirement. I feel it is my duty to do what I can to prevent a disaster, to wit, the establishment of the 100 percent gold standard (so called) and letting it run as the fall guy in a mission that is condemned to fail, as Britain’s return to the gold standard was in 1925.
Britain’s gold standard of 1925 failed because it did not have a clearing system and so it utterly lacked elasticity that only self-liquidating credit, embodied by real bill circulation could impart to the monetary system. It was doomed to failure from start. The 100 percent gold standard (so called) would repeat the mistake the British made in 1925. Another failure of the gold standard would set the world back another hundred years. In the meantime there would be trade wars, most likely leading to another world war. Our civilization would be put in harm’s way.
The Theory of Discount
The 100 percent gold standard (so called) would also deprive the world of the benefits of the discount rate, this sophisticated and versatile instrument to regulate the economy. The economic triumph of the one hundred-year period from 1815 through 1914 is the triumph not only of the gold standard, but also of self-liquidating credit, the bill market, and the discount rate (as distinct from the rate of interest). During that triumphant period such economic maladies as chronic trade imbalance, structural unemployment, foreign exchange crises, unbridled increases in public and private debt were quite unknown. The world economy was on an even keel, delicately balanced by self-correction through the mechanism of the discount rate.
In the 19th century no sharp distinction could be made between “surplus” and “deficit” countries due to the self-correcting mechanism of the discount rate. It would have been unthinkable that balances of pound sterling would keep piling up in one country (as dollar balances do now in China), causing great disruptions in world trade, and leading to the dismantling of whole industries in the deficit countries.
Instead, surplus countries would experience an automatic fall, deficit countries an automatic rise in the discount rate. This would immediately induce a flow of short-term capital from the surplus countries to the deficit countries in the form of consumer goods in the most urgent demand. There is no better way, known to man, to satisfy the world’s multifarious and fast-changing needs using the world’s scarce resources most economically and efficiently, to the best advantage of all. This great mechanism of economic adjustment, capable of preventing structural unemployment and chronic imbalances in the world economy, the discount rate, was thoughtlessly thrown away by the victorious allies when they decided not to allow the reorganization of the international bill market for reasons of vindictiveness in 1918.
Open the Mint to Gold!
The secret of solution to the great financial crisis of our day is that governments should open the Mint to gold. This means restoring the individuals’ right to convert their gold at the Mint, without limit, into the gold coin of the realm free of seigniorage charges. They should also have the right to melt down, hoard or export the gold coin of the realm as they see fit.
The significance of the opening of the Mint to gold is that it would convert idled gold into “gold on the go”. Circulating gold coins would revive world trade as nothing else could. Gold locked up in government and private vaults is a curse putting the world economy in a bind (in addition to being a stupid economic waste of a unique scarce resource that has no substitute).
The Most Misunderstood of Metals
Gold is the most misunderstood metal in human history, because of the economists’ failure to distinguish between its dynamic and static aspects in representing values. Economists have blithely assumed all along that the value of gold is the same whether it flows freely from one hand to the next, or whether the movement of gold is obstructed, in the worst case arrested, by the government (soon to be aped by banks and individuals). Yet the truth of the matter is that “gold on the go” is far more valuable than “gold locked up”. Golden Ages of history were periods characterized by “gold on the go”. Man trusted man, and men trusted their governments. Promises to pay gold were routinely made and kept. Gold was paid out without hesitation because men and governments were confident that they can get it back on the same terms any time of their own choosing. Above all, during the Golden Ages of history there was peace because goods and services could be more readily obtained through trade than through theft or conquest.
By contrast, under our present system wherein gold is concentrated in government and private hoards, there prevails a great distrust and widespread misery. Above all, there is perpetual war as goods and services could be more readily obtained through theft and conquest than through voluntary trade.
In rejecting gold our statesmen have rejected reason. Their guilty conscience is shown by their neurotic fear of an open debate on the gold question, and by the fact that they deny academic appointments to solid gold standard men, treating them as if they were cranks. Politicians are wont to erase the very thought of gold from the public consciousness.
The Best Unemployment Insurance Known to Man
The combination of a gold standard with bill trading would produce an economic miracle in the world far greater than the economic miracle of Ludwig Erhardt’s Germany in 1949. The curse of trade deficits would disappear. Even if a country suffered a great natural disaster, say, the total loss of its annual crop, trade deficit would not necessarily follow. The discount rate would immediately shoot up in the stricken country. That country would be the best place in the world on which to draw bills. This would instantaneously generate a flow of short-term capital in the form of consumer goods in most urgent demand. No country would ever need to go to other governments begging for charity. Surplus countries would be prompted to expel gold in response to greater demand as demonstrated by the higher discount rate abroad.
Structural unemployment would disappear as it would be prevented before it became chronic by the higher discount rate in areas of falling employment. The higher local discount rate would generate an influx of finished and semi-finished goods from the surrounding areas. The processing and the distribution of these goods would create as many new jobs as necessary. The best “unemployment insurance” known to man is “gold standard plus bill trading”. This is how the world economy worked before 1914; this is how it would have worked after 1918 had the victorious powers had the intelligence to allow multilateral trade and real bill circulation to make a comeback.
Hands-off Treasury Bills
All the government needs to do is to open the Mint to gold and to protect real bill trading against fraud. Funds raised through the bill market are public funds that must be protected against misuse just as other forms of public funds must. Let me mention just three types of misuse: (1) drawing more than one bill on the same consignment of merchandise; (2) drawing a new bill upon the expiry of the old on the same unsold merchandise; (3) financing stores of goods in the expectation of a rise in price by drawing bills.
Bills of exchange drawn on goods in most urgent demand and moving fast enough to the ultimate gold-paying consumer are capable of monetary circulation on their own wings and under their own steam, regardless whether or not banks are standing by, ready to monetize them. But if they are, legislation should prohibit banks from borrowing short in order to lend long. In practice this means that the banks would be prohibited from rolling over short term commercial credit at maturity. Commercial banks must also be prohibited from conspiring with the drawer of the bill. Withholding stocks from trade in expectation of a rise in price must be financed by an investment bank, never by a commercial bank. The two types of banks should be strictly separated by law. Commercial banks must also be prohibited from investing in brick and mortar. In practice this means that mortgages are “hands-off “.
Treasury bills are also “hands-off”, except on capital account. We know that people will want to eat and to keep themselves clad and shod tomorrow. That’s what makes bills the safest earning asset. We also know that people will pay their taxes only after they have eaten, clad and shod themselves. That’s why real bills as an earning asset are superior to Treasury bills.
The Curse of Senescence
The demand for gold has a component that is unknown to our generation, although it was ubiquitous a hundred years ago: the demand for yield on gold in gold. Gold used to wear two hats: if you wanted, gold was wealth; but if you wanted, gold was income. Moreover, the switch between the two was as simple as one-two-three, through the agency of the bill market. The possibility of making gold yield an income in gold is missing from the world today. The reason is the neurotic approach to gold promoted by the media and academia.
The discount earned by holding real bills to maturity is the safest way to generate an income in gold. Likewise, the safest way to convert that income back into gold is by selling real bills from portfolio.
But why is switching between gold as wealth and gold as income so important? Well, God created man and made him mortal. Also he made us subject to curse of senescence. Our capacity to generate an income is the lowest just when our need to rely on it is the greatest: when we grow old and frail. This seems unjust; but God has also given us a marvelous tool as a compensation: gold. The young man can hoard gold, maybe to adorn his wife with gold jewelry, thus converting income into wealth, so that they can turn this wealth back into income by dishoarding gold when he grows old and his surplus of income has turned into a deficit. Thus gold is man’s tool to convert income into wealth and wealth into income safely. Gold is the catalyst in solving the problem of senescence. That indeed is gold’s main excellence.
Exchanging income for wealth and wealth for income
The trouble is that hoarding and dishoarding gold is a laborious and time-consuming process, raising the problem of efficiency and safety. It is important for us to see that the efficiency of converting income into wealth and wealth into income can be greatly enhanced, and the time-consuming process can be telescoped into instant action, if we pass from direct to indirectconversion of income and wealth. That is to say, we pass from hoarding and dishoarding to the exchange of income for wealth and wealth for income.
The Theory of Interest
This leads us to the concept of interest. The interest rate is just the marginal efficiency of exchanging income and wealth (over the zero efficiency of direct conversion: hoarding and dishoarding). We can shape the theory of the origin of interest so as to describe the evolution of direct conversion of income into wealth or wealth into income through the agency of themost hoardable good, gold, resulting in the far more efficient indirect conversion: the exchange of wealth and income.
This closely follows Menger’s familiar theory of the origin of money as the evolution of direct exchange (barter) resulting in the far more efficient indirect exchange through the agency of themost marketable good, gold.
Given the possibility of indirect conversion, that is, the exchange of income and wealth, the young man with a surplus of income but a deficit of wealth, who wants to go into business, no longer has to waste his best years to hoard gold in order to raise capital. He will seek out a congenial elderly man who has a surplus of wealth but a deficit of income. The two can go into partnership in exchanging the surplus income of the junior partner for the surplus wealth of the senior. But they can do it safely only if the God-ordained institution of the gold standard and the instrument of the gold bond have not been corrupted by do-gooder politicians, as they in fact have in inflicting the coercive regime of irredeemable currency upon the world.
Today no exchange of income and wealth is safe because we no longer have a reliable unit measuring value. This is a formidable obstruction in the way of forming new capital at a time when great capital destruction is taking place due to fluctuating interest rates. The problem of providing adequate capital for business cannot be solved satisfactorily while assuming the regime of irredeemable currency, under which the central bank can suppress the rate of interest all the way to zero – the main cause of capital destruction in the world today. It can be solved only under the regime of a gold standard, where the rate of interest is naturally stable, as shown by the stable price of the gold bond.
This is a new theory of interest that starts from the concept of the hoardability of gold and from the natural need of man to save for his old age. It enables us to see that old age security can be furnished far more efficiently through the voluntary efforts of individuals than through the coercive schemes of the government.
My Message to the Young
I have established the New Austrian School of Economics in order to spread these unorthodox ideas which are very much in the spirit of Carl Menger. Time has come to go beyond rehashing old truths: we must come up with new ideas on our own.
I hereby invite all young people who feel that regurgitating platitudes is not enough. Come to Budapest and enroll at the New School of Austrian Economics! Let’s raise the torch and carry on the great work of enlightenment together! This is no time for cultism or for parochial quibblings. We must forge ahead past the stale criticism of the existing order. Armed with new ideas we are ready to act. I want to lead you and, then, I want you to lead the world!
There is no place anywhere else in the world where you can study the gold standard as it interacts with its clearing system, the bill market, and with the mechanism of the discount rate; where you can learn that legal tender legislation and the elimination of bill trading is invitation to war (first trade war, followed by shooting war); where you can learn that the starting point of the theory of interest must be gold, the most hordable commodity – except here, in Budapest, at the New School of Austrian Economics. The powers that be have expunged gold standard studies from the curriculum. As a consequence the charlatans of at our universities will never be able to come to grips with the theory of interest. There is no way to understand interest without understanding gold first. We shall recreate gold standard studies and advance it together.
See you in August when I shall deliver my first lecture series on the subject of Disorder and Coordination in Economics – Has the world reached the ultimate economic and monetary disorder?
May 12, 2010
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Calendar of Events
European Bankers Symposium, 9-10 June 2010, Hall, Tyrol, Austria. Professor Fekete will be a keynote speaker on June 9, at 13:30. The title of his talk is: (Gold) Architecture for a New World Finance System. For more information, please see www.financetrainer.com.
ANNOUNCING THE ESTABLISHMENT OF THE AUSTRIAN SCHOOL OF ECONOMICS IN BUDAPEST. The first ten-day, 20-lecture course offered is entitled: Disorder and Coordination in Economics – Has the world reached the ultimate economic and monetary disorder? The lecturer is Professor Fekete, with the cooperation of Mr. Rudy Fritsch (Canada), Peter van Coppenolle (Belgium), and Mr. Sandeep Jaitly (United Kingdom). It will be held in Budapest, Hungary, from August 9-20, 2010. Participation is limited, early registration is advisable. For more information and registration, contact Dr. Judith Szepesvari, the wife of Prof. Fekete at: szepesvari17@gmail.com. Inexpensive dorm-type accommodation is available for students (shared bathroom, shared kitchen); a three-star hotel is next door. Extra-curricular consulting with Professor Fekete can be arranged for an extra fee.
The school is meant for all students (including beginners) interested in the Austrian theory of money, credit, and banking. Its program plans to cover the whole spectrum of Austrian economics, with special emphasis on developments that took place after the death of the greatest 20th century economist, Ludwig von Mises, including the Real Bills doctrine and social circulating capital; the theory of money, credit and banking; and the theory of interest and discount.
Completion of this course will earn participants one credit towards a four-course, four-credit program that has been submitted for accreditation to the Adult Education Accreditation Board of Hungary. Participants will receive a certificate signed by Professor Fekete. The follow-up credit courses will cover these areas:
Adam Smith’s Real Bills Doctrine and Social Circulating Capital.

The Austrian Theory of Interest and Discount.

The Austrian Theory of Money, Credit, and Banking.
Some of the follow-up courses may be offered at Martineum Academy in Szombathely, Hungary, where we have had four successful conferences already in the past. A special cordial invitation is extended to all Martineum alumni and their family members and friends!
It is not well-known that Budapest is one of the foremost spas in Central Europe with a dozen or so medicinal thermal springs. Participants of the course could stay on afterwards and savor the superb spa and cultural offerings in the city. Make it a family holiday! Bring the children! Eating and shopping facilities, as well as a swimming pool are nearby. Spectacular excursions can be arranged in the surrounding hills, and boat trips on the River Danube.
www.professorfekete.com
Michael Snyder, editor of The Economic Collapse blog, writes this week:
“Anyone who follows the gold market knows that big financial institutions regularly work to suppress the price of gold. In fact, one industry insider recently decided to be a whistleblower and came forward with ‘smoking gun’ evidence of price manipulation in the precious metals markets, but the CFTC didn’t do a thing about it.
“Fortunately, the overwhelming demand for gold is now pushing the price up despite efforts to suppress it.
“In addition, once it becomes apparent that most of the “gold” that is traded in the world is not backed by the actual metal itself, the price of gold will go even higher.
“For years, almost everyone has assumed that the London Bullion Market Association (LBMA), the world’s largest gold market, had actual gold to back up the massive ‘gold deposits’ at the major LBMA banks.
“But that is just not the case.
“People are now starting to realize that there is very little actual gold in the LBMA system.
“When most people think they are buying ‘gold,’ what they are actually buying are just pieces of paper that say they own gold.
“Egon von Greyerz of Matterhorn Asset Management in Switzerland recently elaborated on this point. He says that ‘a lot of people who have studied it closely are convinced that there is a major shortage in physical gold at LBMA. LBMA trades around 700 tons net of gold daily. That is 25 percent of world annual production and around $6 trillion annually. To back that amount of trading on a 100-percent reserve ratio basis, it would need several years’ production of physical gold, which they definitively haven’t got.'”
Snyder’s commentary is headlined “Has Gold Become a New Reserve Currency?” and you can find it at the Economic Collapse Blog HERE
Breaking Interview: 
On a day when the DOW closed down 430 points after falling 1,000 points and gold closed up $33 to roughly $1,210, Jim Sinclair was kind enough to spend some time making sense out of what is happening in the gold and equity markets for King World News listeners.

Legendary Jim Sinclair known as Mr. Gold for his remarkably accurate timing regarding the gold bull market of the 70’s is the Founder of jsmineset.com and Chairman of Tanzanian Royalty Exploration.
Please click HERE for the interview
At the urging of GATA and Sprott Asset Management CEO Eric Sprott, Business Insider reporter Vince Veneziani recently put to the International Monetary Fund five specific questions about the IMF’s supposed gold reserves, questions similar to those put to the IMF by GATA’s Chris Powell in April 2008. (See http://www.gata.org/node/6242.)
Business Insider’s two most important questions may have been:
1) Exactly where is the IMF’s supposed gold? and
2) When the IMF sells gold, does any real gold change hands or are such sales essentially just bookkeeping transactions among central banks?
Tonight Veneziani reports that IMF spokesman Alistair Thomson replied to Business Insider’s five questions as follows: “I looked through your message; we don’t have anything more for you on this.
How’s that for accountability from an international governmental organization?
Veneziani concludes: “Certainly this unwillingness is only fodder for skeptical gold folks out there.”
Indeed, the IMF’s refusal to answer Business Insider is more evidence that the gold it has been threatening the gold market with for years is an illusion — that the IMF has no gold at all but only a tenuous claim on the gold reserves of its member nations, nations that, the ever-more-valuable CPM Group reports today, seem not at all inclined to part with it anymore:
http://www.reuters.com/article/idUSN2746801820100427?type=marketsNews
Thus Veneziani and Business Insider have accomplished something apparently not yet accomplished by any major news organization in the world: They have put important, critical, inconvenient, and direct questions to a central banking institution. Further, Veneziani and Business Insider have been treated with contempt for doing so and have publicized the refusal to answer.
Not even The New York Times, Financial Times, and The Wall Street Journal have yet dared attempt such ordinary journalism in regard to central banking.
The Business Insider report is headlined “Five Questions About Gold the IMF Refuses to Answer” and you can find it HERE