After going back through some of the musings of the last fifteen years, that I’ve been following this slow motion car-crash of a world economy, I came across a couple of pieces that deserve to be read again, by the wider public.
The two items: one by Chris Mayer, and the other by non other than Alan Greenspan, former Federal Reserve Chairman.
Yes, THAT Alan Greenspan.
Chris Mayer examines the ideas of Jacques Rueff, the
eminent French economist and former minister of finance
to Charles de Gaulle.
THE POET OF FINANCE
by Chris Mayer
Jacques Rueff was accused of being a perennial prophet of doom – a doom that never seemed to arrive.
Rueff first began to voice his concerns in 1961, alerting the world to the dangers inherent in the world’s monetary system, then operating under the Bretton Woods agreement. It would take ten years before Rueff’s view was fully vindicated.
The international community must have shivered as Reuff evoked the haunting memories of the Great Depression. He compared the years 1958-61 to the years 1926-29, which many could still chillingly recall as the prelude to an economic disaster none wished to see again. As Rueff notes, “there was the same accumulation of Anglo-Saxon currencies in the monetary reserves of European countries, in particular France, and the same inflation in creditor countries.”
In the 1920s, the world had the gold-exchange standard; in the 1960s we had Bretton Woods. Both systems were monetary jalopies, jerry-rigged contraptions that could not hold together for long. The two convertible currencies, dollars and pounds, became reserve currencies, effectively held by European banks as reserves instead of gold.
Rueff uses the example of the years after WWI, when a large influx of US and British capital flowed to Germany and France. The new liquid funds entered these recipient countries and were held as reserves, since they could theoretically be converted to gold. In the previous Gold Standard days, these dollars and pounds would find their way back to the banks of issue and be redeemed for gold.
In this way the debt was settled. Gold was the money accepted as final payment; not dollars or pounds, which were essentially notes – promises to pay the holder in gold, which was real, as opposed to printed paper, which was not.
But in the booming Twenties this was not the case. So, France and Germany held dollars and pounds, and issued more of their currency and credit against these dollars and pounds. In the gold-exchange standard of the Twenties, only dollars and pounds were redeemable in gold – all other currencies were redeemable in pounds, which were in turn redeemable in dollars. Very confusing, I know. Why the Genoa experts recommended this is another sorry episode of political expediency, compromise and historical accident, which we will skip here or I may never get to my conclusion.
Such a system, only loosely tethered to gold, allowed considerable inflation. As Rueff noted, it was “probably one cause for the long duration of the substantial credit inflation that preceded the 1929 crisis in the United States.”
The ensuing collapse of this pyramid scheme was to figure prominently, in Rueff’s estimation, in explaining the birth of the Great Depression.
Anyway, the point of the comparison with the 1920s was that Rueff thought that, mutatis mutandis, the same thing was happening again in 1960. He noted how the international community held tremendous reserves of dollars against an ever-smaller base of gold reserves.
As in the 1920s, the US was able to expand its supply of dollars skirting the old discipline that would have shackled it under a gold standard. No final payment was required; dollars – lots and lots of printed dollars – were accepted as final payment. Again, this allowed considerable inflation of dollars.
Here Rueff gives us one of his most famous sayings, when he called this situation circa 1960 and the situation in the 1920s as creating a “deficit without tears”. He wrote that, “it allowed the countries in possession of a currency benefiting from international prestige to give without taking, to lend without borrowing, and to acquire without paying.” Rueff does not lay all this at the feet of the US. After all, these other creditor countries willingly accepted US notes in lieu of gold. Rather, Rueff calls it an “unbelievable collective mistake”.
The holding of vast dollar reserves by foreign creditors puts the credit structure of the US on notice. In the days of the Gold Standard, and even in the gold-exchange and Bretton Woods eras, this was more acutely felt because the gold stock of a country was visible, could be counted and was routinely reported. In the Sixties, Rueff noted that an uncomfortable gap was growing between the dollars outstanding and gold in stock that backed it.
Writing in 1960, Rueff felt that if foreigners “requested payment in gold for a substantial part of their dollar holdings, they could really bring about a collapse of the credit structure in the US.” Rueff called for a return to the old Gold Standard.
This article – in Le Monde – caused a stir. A rash of criticism followed, in which Rueff was chided as an old-timer, applying a quaint antique analysis to a modern problem. The Gold Standard was a thing of the past, one author noted at the time, like sailing ships and oil lamps.
The new iterations of money, though, did not represent an advance in man’s understanding of money. On the contrary, each new monetary wrinkle, each new invention, each creative expedient only cheapened it.
We will skip ahead a bit in Rueff’s chronology to 1965. By this time, Rueff had continued his attempts to persuade the monetary authorities to alter their course.
On 4 February 1965, Rueff would gain something of a public victory when General de Gaulle made his now famous speech on the need for gold as a basis for international monetary cooperation. Rueff finally had the ear of an important head of state; he had the ear of de Gaulle, who would eventually refer to Rueff as the “poet of finance”.
After giving a brief history of the international monetary scene beginning with the Genoa Conference, de Gaulle noted how the acceptance of dollars to offset balance of payments deficits with the US lead to a situation where the US was heavily in debt without having to pay. He correctly observed how the dollar was a credit instrument and recommended that the system be changed.
“We consider that international exchanges must be established,” proclaimed de Gaulle, “as was the case before the great worldwide disasters, on an unquestionable monetary basis that does not bear the mark of any individual country.”
“What basis?” continued the French head of state, “Actually, it is difficult to envision, in this regard, any other criterion or any other standard than gold. Yes, gold, which does not change in nature, which can be made either into bars, ingots, or coins, which has no nationality, which is considered, in all places and at all times, the immutable and fiduciary value par excellence.”
Rueff pressed on with renewed vigour and the US monetary situation continued to deteriorate with accelerating gold losses. Yet, negotiations continued, as Rueff says, “at a snail’s pace on a volcano, which may erupt all of the sudden.” While the experts dallied, the volcano belched and smoked all around them. That a crisis was brewing was now obvious even to the sceptics.
European nations that had been accumulating dollars at a pace of $1-2 billion per year began liquidating them – more than $2 billion were liquidated inside the twelve months of 1965 alone. By 1970, there was $45 billion in dollars held by foreigners against only $11 billion in gold stock.
At this point, the ending was inevitable. Though there were some changes made to the monetary structure in the waning days of dollar convertibility, it would finally expire in the summer of 1971 when Nixon brought the Bretton Woods agreement to an end by taking the US entirely off any kind of Gold Standard.
I think there are many ways in which Rueff’s criticisms to the monetary systems of the ’20s and the ’60s apply to the monetary world of today. There are many observations that we can take from this tale and apply to our current situation.
For one thing, note that the inflation of money and credit was able to continue for a long time after Rueff’s initial diagnosis that a crisis was brewing. Like any bubble, the pin is hard to find. Though he could not point to when the crisis would break, he thought that any number of events could trigger it – a continued weakening of the balance of payments deficit, some banking or financial incident, some political event, a mere shift in opinion.
Any of these could effect the “subservience of dollar holders and induce them to request conversion of their dollar holdings in whole or in part, even at the risk of antagonising the Washington authorities.”
In the end, the maths simply became too stark to ignore.
According to reports, the demand for silver from retail investors is driving the refiners to produce 24/7. The price has been slammed down by those behind the scenes in the derivatives markets, but according to the CEO of Sunshine Mint – Tom Power, he’s running at full capacity, and has already turned out 75 million ounces in 2015 so far, three times the level demanded in the last shortage year of 2008.
This has been exacerbated by “a major mechanical production issue” at the Royal Canadian Mint, who contracted with Sunshine, to produce the RCM 10oz silver bars.
Also according to reports, the Fund Manager Dave Kranzler, of Investment Research Dynamics Inc., has speculated that the U.S. Mint, is diverting output to both China and India, to satisfy massive demand there too.
BUT, also the Sunshine Mint, has already sold forward its entire productive capacity for the rest of 2015, and is now not accepting further orders.
Does this mean the price rise is imminent, that I have speculated about in several posts?
Perhaps it has already started, as the price has rebounded slightly, reaching $16.00 several times in recent weeks, and bullion dealers are already charging premiums as high as 30% over spot on bulk orders for less than 1,000 ounces, and even $4.75 per ounce for orders over 5,000 ounces…
Of course this might be coin dealers taking advantage of a short-term rise in demand, having bought silver slightly higher up in price, to get coins out to retail buyers without selling at either a loss, or a lower profit margin than they want, (or need?).
However, the Managing Director of the IMF, Madame Lagarde, has intimated that before 2017, we are likely to have another recession. She has avoided blaming China, which suffered its own slowdown in recent months, for the expected downturn, and the financial commentators have also supported this, partly because India is growing at a robust clip,which according to the Times of India, is forecast to grow at 8% p.a.
To be honest, I have long felt that the rise in precious metals of which I have often spoken, is unlikely to occur before the demographic timebomb that reaches its crescendo in the period 2017-2023, has begun falling. Then all that money that has been pushed into the system, will begin leaking into the economy in circa 2018-19.
However, it could also be the start of the third stage of this precious metals Bull-market, that I have been waiting patiently for ever since I began watching this financial crisis back in 2001. That happened to coincide with my being made redundant, for the third time within 28months, as the Software Company I worked for was wound down, post the Tech fallout in the March of 2000, and the parent Company went from having $4billion in cash reserves, to having the equivalent in debt as the companies they’d bought in the height of the tech-boom failed to realise the income that some thought they would and valuations collapsed.
It was then that Alan Greenspan, began juicing the economy, lowering interest rates to 1%. It was Greenspan’s reference to “irrational exuberance” in 1996, that meant the good chairman raised interest rates to their peak of 6.5% in May 2000, before the economy stalled, and starting January 2001, over the next two years interest rates were lowered in 12 baby steps to June 2003. This provoked the housing boom, as baby-boomers saving for their retirements bought buy-to-let property pushing up an already over-heating market due to the shadow boomers – the children of the baby-boomers – who began moving into starter homes, and trading up in their droves.
Of course the Banks, played along on this wild ride providing “Liar Loans” on the back of dubious proof of income – what did they care if people wanted to borrow 6,8,10 times their income, pushing up property prices still further, into the realms of fantasy. By 2006, prices at the high end were reaching the stratosphere.
And then, when the banks, having loaned out this toxic debt, packaged it up into parcels, bribed the ratings agencies to give it a “Triple A” rating, and then sold it on to unsuspecting pensions companies as Collaterised Debt Obligations – CDOs, but knowing it was bound to fail, then shorted the market to make a killing on Mortgage Backed Securites (MBSs) as they did so.
Hank Paulson, who went on to become Treasury Secretary, after he’d made his millions with his Bank Bonuses after serving as Chairman and CEO of Goldman Sachs until 2006, then begged the President and Federal Reserve Chairman, to bail his sorry ass out, and rescue the banks, post Bear Sterns, and after the weekend when it was decided to let Lehman Brothers fail and the Credit Crunch got under way.
In all, eight major U.S. financial institutions failed – Bear Stearns, IndyMac, Fannie Mae, Freddie Mac, Lehman Brothers, AIG, Washington Mutual, and Wachovia — six of them in September alone, yet not one of the senior excutives of any major financial institution, has been charged with malfeasance of any sort. Of course this side of the pond, Northern Rock went under, and Lloyds-TSB, and RBS (Royal Bank of Scotland) along with other major financial institutions across the continent, were supported by government’s access to the nation’s credit card.
Were the actions of these banks’ loans officers not monitored by their supervisors? Were the supervisors not monitored by their managers? Were the managers not monitored by their executives? And finally, were the Banks not monitored by the regulators?
Whose heads then should roll?
After $4 trillion was pumped into the American Financial system, with the Troubled Asset Relief Programme (TARP) and then QE1, QE2, Operation Twist, and lastly QE3, which put $85 Billion a month in for nigh on 18months. But not forgetting the $15 Trillion, that was pushed through to Europe’s Banks and Financial Institutions via the Federal Reserve of New York, and RBS., or the heavy hand of the Federal Reserve, when the BLICS – Belgium, Luxembourg, Ireland, Cayman Islands and Switzerland, mysteriously bought Treasurys as the QE programme came to an ignominious end after the taper tantrums, raising their Bond holdings from $151Billion, to $818 Billion. (Source: Treasury (TIC) Federal Reserve)
And through currency swaps, these nations are helping the Federal Reserve export QE. Yet, as Madames Yellen and Lagarde admitted this week another recession looms on the horizon, and so does QE4 according to Bloomberg.
When that does happen, I wonder what that will do for Silver and Gold purchases? Or the value of crypto-currencies such as Bitcoin.
For those still not sure what crypto is all about, here’s a couple of videos.
– Bitcoin, the fundamentals
– Why Bitcoin worries the Bankers.
As many of those contributors to the above videos say, part of the reason for the rise of Bitcoin, is because of overly regulated markets, and governments increasing involvement in markets via central banks.
As government involvement has increased, so has the volatility, as decisions are poured over, by the markets as soon as announcements are made. And volatility threatens markets, because it frightens people away. They can’t make investments, when their lives are guided by making a living, and investing the excess (savings). People need relative stability.
One of the strengths of the free market is that each purchase and sale decision sends a signal to the markets. Is the deal price above or below other prices for similar products, thus sending a signal to other participants in the market. This leads to relative stability. Increases in prices, sends a signal to entrepreneurs to produce more of something, whilst a fall in price sends the reverse signal.
When governments and central bankers get involved, their heavy hand pushes markets this way and that, and those on the inside get the information before the rest of the market meaning they get to benefit. That’s why Bankers’ power has risen exponentially since the dawn of the Federal Reserve in 1913.
For those of you concerned about your privacy, there are tools that can limit the capability of the industrial recording of your on-line inter-actions.
Whilst we don’t advocate nefarious activity, we also believe in the Magna Carta principles enshrined in law in 1215AD, that required a “Writ” to be produced, making an accusation of wrongdoing, “Habeus-Corpus” and for a conviction to be made, there had to be undeniable proof laid before 12 of the wrongdoer’s peers, the basis of our jury system.
Without the government services trawling the internet and recording everything. You should be innocent until proven guilty, and mass surveillance serves no-one’s interests, least of all the wider public.
In a world where almost every activity can have political overtones, theoretically, any action could be used against you in the future.
You have been warned.
The following link, leads to a free download page, of a browser, that allows privacy. Yes there are restrictions, but it is a lot better then having nothing.
And for those who wish to go down the rabbit hole, and disappear from view, there’s a whole new operating system, that can be booted from a DVD or Flash-drive.
We receive no compensation for this service, but we’d appreciate it if you like us, or link to us.
– whatever you feel we are worth.
After posting this, I came across this link, which shows the extent of the government largesse on behalf of the taxpayers of the U.S….
As governments have used their ammunition in fighting to retain power for their Fiat currencies, the price of Gold and the Exchange Traded Product (ETP) or Exchange Traded Fund as it is more commonly called for Gold – the GLD has fallen.
But there comes a time in every charlatan’s performance when those watching no longer believe in the power of the magician pulling the strings behind the scenes.
In this case the arm of power behind the throne – the Central Banks – have sold or leased much of their Gold to Bullion Banks, who have sold this gold on the markets as their futures contracts came to an end, and the buyers took delivery, rather than as might have happened previously – settled in cash – it is increasingly obvious that as the number of contracts increase and more and more gold heads east to China and India, and north to Russia, and to numerous other central banks worried about their gold held in U.S. vaults, and have begun to increase their holdings, and repatriate their gold from overseas vaults, that it couldn’t go on forever.
And then this piece caught my eye…
So what will happen when the gold does really run out?
Initially, I suspect Bankers will settle for cash, but probably have to pay a premium to do so, as those who own the metals contracts extract their pound of flesh. This will probably be under the radar, at first, but it will eventually leak out, and as more and more people have to settle for cash, the premiums will rise. This will feed through into the published prices, as the disconnect between the paper price and the settle price increasingly becomes obvious.
According to figures I’ve seen there are between 100 and 200 contracted ounces, for every real ounce in existence. This is how the Bankers came to dominate the world and its economies. The left hand not letting the right hand know the truth or what it was upto.
Fractional Reserve Lending meant lending out upto 10times the amount held on deposit. Of course this assumes they hold ten per-cent in reserve. BUT in the last ten years, those same bankers have had as little as 3 per-cent and that means they were lending out in excess of 30x their reserves. And that is the reason for the boom, and the bust when we had our Bear Sterns and Lehman moments.
If the Bankers persist in this lending and futures contracts binge, then it will end in disaster for the banks (and us) but at that point, the price of gold – both official and unofficial, will explode to the upside.
Of course in the meantime, as Harry Dent has stated on several occasions, the price may fall in the meantime, as first deflation due to demographics, and his convergence waves take hold, but as has been mooted on Bloomberg today, perhaps QE4 is but a printing press away?
And if it happens, when all that money leaks into the economy?
Can you say Boom?
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