This was clearly a public relations stunt. Why would the head of the world’s most powerful central bank lecture to 30 undergraduates? This was not quite the equivalent of George W. Bush reading “My Pet Goat” to third graders, but it was close. Think of it as “My Pet Peeve.” His first speech was an overview of central banking. He used PowerPoint to create slides. The presentation had 49 slides.

Any experienced lecture listener, had he known of this in advance, would have headed toward the exit. Here is the man whose verbal skills produce narcolepsy in normal people who have slept at least 10 hours. To this he added 49 slides. This violated Guy Kawasaki’s 10-20-30 rule: 10 slides, 20 minutes, 30-point font. The slides are here.

UNDERGROUND GOLD

In his speech, he introduced some of the classic arguments of the fiat money advocates. Warren Buffett has invoked it:

Gold gets dug out of the ground in Africa, or someplace. “Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

This was Buffett’s reply to his father’s policy of defending the gold standard in Congress in the late 1940s. His father had far greater understanding of the gold standard than he does.

The thought of all those itching Martian heads apparently bothers Bernanke, too. So, he repeated the argument.

“Now, unfortunately, gold standards are far from perfect monetary systems. One small problem which is not on the slides but I’ll just mention is that there’s an awful big waste of resources. I mean, what you have to do to have a gold standard is you have to go to South Africa or some place and dig up tons of gold and move it to New York and put it in the basement of the Federal Reserve Bank in New York, and, that’s a lot of effort and work and it’s a, you know, it’s a – Milton Friedman used to emphasize that that was a very serious cost of a gold standard that all this gold was being dug up and then put back into another hole. So there is some cost to having a gold standard.”

There is “some cost” to having a gold standard. This means that we must pay for services rendered. Will wonders never cease! There are costs in this life! I’m telling you, this fellow Bernanke is on the cutting edge of economic science.

It’s a shame that he did not have a slide for this, even though that would have meant 50 slides.
Back in 1969, I dealt with this argument. Bernanke was 15 at the time. He must have missed it.

I begin with his first statement: “Now, unfortunately, gold standards are far from perfect monetary systems.” So, let me assure you, is central banking.

****

We live in an imperfect universe. We are not perfect creatures, possessing omniscience, omnipotence, and perfect moral natures. We therefore find ourselves in a world in which some people will choose actions which will benefit them in the short run, but which may harm others in the long run. The gold miner, by diluting the purchasing power of the monetary unit, achieves short-run benefits. Those on fixed incomes are faced with a restricted supply of goods available for purchase at the older, less inflated, price levels. This is a fact of life.

Nevertheless, Professor Mises has defended gold as the great foundation of our liberties precisely because it is so difficult to mine. It is not a perfect mechanism, but its effects are far less deleterious than the power of a monopolistic state or licensed banking system to create money by fiat. The effects of gold are far more predictable, because they are more regular; geology acts as a greater barrier to inflation than can any man-made institutional arrangement. The booms will be smaller, the busts will be less devastating, and the redistribution involved in all inflation (or deflation, for that matter) can be more easily planned for.

Nature is niggardly; that is a blessing for us in the area of monetary policy, assuming we limit ourselves to a monetary system tied to specie metals. We would not need gold if, and only if, we could be guaranteed that the government or banks would not tamper with the supply of money in order to gain their own short-run benefits. So long as that temptation exists, gold (or silver, or platinum) will alone serve as a protection against policies of mass inflation. . . .

Money, it will be recalled, is useful only for exchange, and this is especially true of paper money (gold, at least, can be made into wedding rings, earrings, nose rings, and so forth). If there is no reason to mistrust the American government, the paper bills will probably be used by professional importers and exporters to facilitate the exchange of goods. The paper will circulate, and no one bothers with the gold. It just sits around in the vaults, gathering dust. So long as the governments of the world refuse to print more paper bills than they have gold to redeem them, their gold stays put. It would be wrong to say that gold has no economic function, however. It does, and the fact that we must forfeit storage space and payment for security systems testifies to that valuable function. It keeps governments from tampering with their domestic monetary systems.

****

I used paper money as my example. Of course, digital money is what we have today. Still, a major function of gold in the vault is that it tells us if the monetary authorities are cheating.
Once the gold standard is renounced, we know the monetary authorities are cheating.

IN DEFENSE OF CHEATING

Bernanke was forthright about this. He defended cheating.

“But there are some other more serious financial and economic concerns that practical experience showed were part of a gold standard. One of them was the effect of a gold standard on the money supply. Since the gold standard determines the money supply, there’s not much scope for the central bank to use monetary policy just to stabilize the economy.”

As the Head Cheater in Charge, the Prince of Greenness himself, he proclaimed the wisdom of legalized counterfeiting. Why? Because the gold standard produces high interest rates.
And in particular, under a gold standard, typically the money supply goes up and interest rates go down in periods of strong economic activity. So that’s the reverse of what a central bank would normally do today.

Excuse me? The money supply goes up under a gold standard? When did that happen, and for how long? When did this happen when it was not followed by a run on the nation’s gold supply? That is what the gold standard does. It gives holders of fiat money the power to force the central bank or treasury to cease inflating. The run on gold forces the monetary authorities to stop inflating.

FIXED EXCHANGE RATES

Then he offered this reason for not establishing a gold standard.

“There are other concerns also with the gold standard. Now, one of the things that a gold standard does is it creates a system of fixed exchange rates between the currencies of countries that are on the gold standard. So for example, in 1900, the value of a dollar was about 20 dollars per ounce of gold. At the same time, the British set their gold standard in saying, roughly, roughly 4 pounds, 4 British pounds per ounce of gold. So 20 dollars equals 1 ounce of gold, 4 pounds equals 1 ounce of gold, so 20 dollars equals 4 pounds. So what that’s saying is basically that a pound is 5 dollars. So essentially, if both countries are on the gold standard, the ratio of prices between the two exchange rates is fixed. There’s no variability as we see today when the Euro can go up and the Euro can go down. Now, again, some people would argue that’s beneficial, but there is at least one problem which is that if there are shocks or changes in the money supply in one country and perhaps even a bad set of policies, other countries that are tied to the currency of that country will also experience some of the effects of that.”

He argued that a bad policy in one nation forces the other nation to mimic the bad policy. This is Bernanke’s version of Gresham’s Law: bad policies drive out good policies.
How is it that a bad policy on a free market is so successful in spreading to other free markets? The traditional defense of free markets is that good policies prevail. Wise monetary policies triumph. But Bernanke does not believe this. Under a gold standard, such benign results turn malign. How, he did not say.

What is wrong with his argument? This. A bad economic policy in one nation produces inflows or outflows of gold. If a nation inflates, holders of its currency demand payment in gold. The gold flows out of the central bank or treasury. Soon, the authorities must change the policy.

Then there might be a policy of monetary deflation. The nation’s goods become cheaper. Residents in other nations turn in gold at the fixed rate and buy the deflationary nation’s currency. Why? To buy the nation’s cheaper goods. This raises the monetary base (gold) and reverses the monetary deflation.

Bernanke mistakes cause and effect. The fixed currency exchange rate system is not fixed by law under a gold standard. The currency exchange rates fluctuate in terms of domestic monetary policies and the currency speculators’ expectations. What is fixed is the price of gold as denominated in each domestic currency.

Currency exchange rates can and does fluctuate. But if one nation’s policies deviate from another nation’s policies, gold flows in or flows out. Good policies drive out bad policies, as is true under a free market. This is because Bernanke has this backwards. He is a Keynesian. He has economic cause and effect backwards across the board, not just in monetary theory.

The fixed exchange rate system was not a factor in the era of the international gold standard, 1815-1914. There were no exchange rate agreements. Fixed exchange rates set by governments began in 1922 at the Genoa Conference, where governments agreed to the phony gold standard known as the gold exchange standard. Here, fixed currency exchange rates by government agreement were substituted for gold coin redemption on demand, which had prevailed prior to World War I.

Fixed exchange rates among currencies have never existed. What existed from 1815 to 1914 was a system of fixed exchange rates between a national currency and the price of gold in that currency. The moderately fluctuating currency rates were an effect of the legally fixed exchange rate between gold and each national currency.

Bernanke does not understand the difference between legally fixed exchange rates among currencies and fixed exchange rates between a specific currency and gold, That is to say, he does not understand the 19th-century gold standard.

This seems inconceivable. But Keynesians do not understand prices and markets, so I suppose it should not be surprising that Bernanke does not understand the traditional gold standard that he adamantly rejects.

POWER TO THE PEOPLE – NOT!

Central bankers do not like their judgments called into question by the rabble – “rabble” being defined as people who hold a nation’s currency. These people may decide that central bankers are following policies that put their money at risk. So, they demand gold. This is an outrage. It must be stopped.

“Yet another issue with the gold standard has to do with speculative attack. Now normally, a central bank with a gold standard only keeps a fraction of the gold necessary to back the entire money supply. Indeed, the Bank of England was famous for keeping, as Keynes called it, a thin film of gold. The British Central Bank only kept a small amount of gold, and they relied on their credibility to stand by the gold standard under all circumstances to – so that nobody ever challenged them about that issue. But if for whatever reason, if markets lose confidence in your willingness and your commitment to maintaining that gold standard relationship, you can get a speculative attack. This is what happened in 1931 to the British. In 1931, for a lot of good reasons, speculators lost confidence that the British pound would stand gold, so just like a run on the bank, they all brought their pounds to the Bank of England and said, “Give me gold.” And it didn’t take very long before the Bank of England was out of gold cause they didn’t have all the gold they needed to support the money supply and then, there was essentially – they’ve essentially had to leave the gold standard, so there was a lot of financial volatility created by this attack on the gold standard.”

He did not mention that George Soros did this to the British pound and Malaysia’s currency, and this was long after the gold standard was scrapped. Currency speculators “pays their money and takes their chances.” They can break government monetary policies when central bankers tell really big lies. They can make fortunes, Soros has.

So, the complaint against the gold standard in this regard is a smoke screen.

STABLE PRICES

Then he conceded to gold’s defenders what they have always said.

“And finally, just one last word on the gold standard, one of the strengths that people cite for the gold standard is that it creates a stable value for the currency. It creates a stable inflation, and that’s true over very long periods. But over shorter periods, maybe up to 5 or 10 years, you can actually have a lot of inflation, rising prices, or deflation, falling prices, in a gold standard. And the reason is that in a gold standard, the amount of money in the economy varies according to things like gold strikes. So for example, if United States, if gold was discovered in California and the amount of gold in the economy goes up, that will cause an inflation, whereas if the economy is growing faster and there’s a shortage of gold, that will cause a deflation. So over shorter periods of time, you frequently had both inflations and deflations. Over very long periods of time, decades, prices were quite stable.”

The only case he offered was California, 1848-52. This has not happened since then.

In fact, a gold standard, when accompanied by rising output, produces falling prices: “More goods chasing a fixed quantity of money.” That is what happened in late 19th-century America.

CONCLUSION

Ben Bernanke has a pet peeve. It has to do with power – specifically, his. He does not like it when common people have the power to tell him and his Ph.D.-holding peers that they don’t know what they are doing. The common man can veto Bernanke and his peers by cashing in dollars for gold. He resents this.

The money supply should be supplied by the free market, under the laws of contract. The government should not be in the money business.

End the FED.

Regards,

Gary North

Bernanke’s Pet Peeve: The Gold Standard was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Nobody knows what the future will bring. I don’t know what will happen to the gold price in the next week, the next month or for the rest of this year. I don’t even know what 2013 will bring. But please remember, neither do all the ‘experts’ out there who are much less squeamish about giving investment advice than I am.

When you invest your wealth you are alone. You have to make up your own mind. And accept the consequences of your decisions.

Having said this, I can assure you that, personally, I remain a big fan of gold. I consider it the number one asset out there. It remains head-to-shoulder above anything else.

Gold has not been trading that well recently. Measured in the world’s number one paper money the precious metal reached an all-time high of slightly more than $1,900 per ounce in September of last year but then retreated and has mainly been trading sideways in a wide range since. Considering the ongoing tensions in European debt and banking markets and considering that the global financial system seems forever dependent on super-low policy rates, one could have reasonably expected gold to do better.

The reasons for the somewhat disappointing ‘price action’ of late are not quite clear but could be manifold. Maybe it is a bit of rally fatigue. Don’t forget, gold traded below $300 ten years ago and had just been through a decade-long, unprecedented bull run. In one of gold’s biggest markets – India – the government recently introduced new taxes and regulations to discourage investment in gold (surprise, surprise), and international central banks are not believed to match their healthy buying of recent years.

But the optimists will say it is something else: things are getting better so there is less need for a crisis-asset.

This is how the Wall Street Journal put it:

“Gold is still benefiting from the view the global economy is fragile, but the idea has been shaken by signs that conditions are stabilizing in the U.S.”

Naturally, the financial and political establishment is rejoicing at the prospect of gold losing its luster. After all, the phenomenal ten-year bull market was the equivalent of a raised middle finger in the face of the international paper money bureaucracy. Ben Bernanke, the money-printer-in-chief, famously answered Ron Paul’s question if gold was money by saying he thought it wasn’t…

“I think the reason people hold gold is as a protection against what we call ‘tail risk’ – really, really bad outcomes…To the extent that the last few years have made people more worried about the potential of a major crisis, then they have gold as a protection.”

–Ben “Helicopter” Bernanke

And this is precisely why the establishment hates gold so much. The modern policy elite, people like Bernanke and his fellow central bankers, are tasked with avoiding bad outcomes, and they have at their disposal a body of theories (in large part faulty) and an interventionist tool kit that did not exist through most of gold’s three-thousand year history as the entire world’s monetary asset of choice.

This tool kit, not least of which is the printing press, is supposed to enable the policy establishment to run the economy smoothly and efficiently and save us from depression and crisis. For the public to turn back to the “barbarous relic” of gold certainly means a major vote of no-confidence for the modern financial architecture and all its supposed safety-valves.

The brilliant Jim Grant calls our post-1971 unrestricted paper money system astutely the “PhD-Standard”: We are asked to no longer rely on the apolitical and disinterested firmness of a precious metal to anchor the monetary system and to thus prevent financial extravagance and excess. Instead we are to put our economic fate in the hands of a bunch of self-confident and proactive intellectuals and bureaucrats who learnt how the world works by shuffling academic papers in the MIT economics department.

Understandably, many people have more trust in gold.

(By the way, this explains why the Financial Times, which adores and celebrates the policy establishment like no other media outlet I know of, only writes about gold when it goes down, when the gold ‘bubble’ is once again ‘bursting’, providing the FT with another opportunity to remind you that gold does not pay a dividend.)

Funny how Bernanke puts it with his “really, really bad outcomes” and “tail risk”. He makes it sound as if you have to be a pessimist of biblical proportions to buy gold. Things must get “really, really bad” because for anything else we have the Federal Reserve. Relax!

Limited understanding meets unlimited power to print

But the problem runs deeper than Bernanke implies. Much deeper.

While Bernanke’s quote contains some truth it also reveals an embarrassing misunderstanding of the nature of the problem, a misunderstanding that he shares with the majority of his policy-buddies.

He implies that these “really, really bad outcomes” are just random and uncontrollable events, unquantifiable statistical outliers, freak occurrences that simply happen, that capitalism in its mysterious unpredictability occasionally throws at us. This is nonsense. But this distorted worldview also shone through clearly in Bernanke’s recent lecture series.

According to Bernanke, inflations, recessions, depressions, asset “bubbles” – all these things come over us like acts of God, like droughts and hailstorms, and Bernanke & Co. are charged with dealing with them on our behalf. The rising gold price is merely an indication that some folks fail to appreciate the establishment’s good work. Hell, can nobody get any respect any more?

No, the problem runs much deeper than Bernanke seems to grasp, and that is precisely why gold is such a great asset in this environment. His limited understanding coupled with his unlimited power to produce paper money is indeed the number one argument for owning gold.

The present crisis is not an accident of capitalism but the inevitable product of the fiat money system and the faulty theories and counterproductive policies of Bernanke & Co. The present crisis is not just another business cycle (and business cycles are, of course, also created by central banks) but the unavoidable consequence of the political decision to abandon a gold standard and to adopt a system (as of 1971) of unrestricted fiat money creation.

As I explain in detail in my book Paper Money Collapse – The Folly of Elastic Money and the Coming Monetary Breakdown such a system, while appearing stable for a long time, inevitably accumulates imbalances as it systematically distorts capital formation and asset pricing.

Though central bankers and their crony economists falsely deem moderate inflation to be good, the constant artificial cheapening of credit through ongoing money injection must culminate in the present horror show of bloated banks, inflated asset prices and an unsustainable debt load.

The really, really bad outcome is entirely home-made and the fully guaranteed by-product of decades of mild to medium inflationism, i.e. the modus operandi of modern central banking. The crisis is built into the system; it is part of the game.

Bernanke still believes that his ongoing money printing is saving the world when it is indeed the root cause of this entire disaster. While Mr. Bernanke poses confidently (and I believe sincerely) as a firefighter, he is really an arsonist. His “stimulus” is adding ever more fuel to the fire.

We should not buy gold because Bernanke’s policy (and that of other central bankers) is ineffectual but because it is so very effective. This policy preserves the accumulated imbalances. It sabotages their dissolution and liquidation, and it constantly funds new imbalances.

Bernanke’s policy is guaranteeing the never-ending crisis. Well, I should say almost never-ending, as it will end in a currency catastrophe when the public begins to shun his fiat money and when paper money becomes a hot potato.

We do not own gold because we fear that Bernanke may stop his policy of saving the government and Wall Street. We own gold because we think he won’t stop saving them.

Could Bernanke derail the gold bull market? Sure! But he would have to abandon his policy activism and become passive. Bernanke may want to look at how Paul Volcker successfully ended a gold rally (or, more accurately, put it to rest for 20 years). It wasn’t by by using the printing press to bail out the world a la Bernanke & Co.

Au contraire, Volcker did it by stopping the printing press altogether and allowing high real interest rates to cleanse the system of the imbalances from previous money production. That is what ended the last gold bull market and it is still the major threat to today’s bull market.

Bernanke, alas, is no Volcker, and stopping the printing presses today will create bigger challenges than in 1979.

The financial crisis is not the reason people seek safety in gold. It is central policy response to the crisis that they seek protection from.

If gold is retreating for now, it is because the investing public sees less need for it with monetary and fiscal stimulus presently sustaining the impression – the illusion, really – of stability and sustainability. So this is a great opportunity to buy gold.

In defense of “hoarding”

Let’s look at the logic of investing in gold. When doing so we immediately are confronted with widespread antipathy towards it founded on ignorance and misunderstanding: We gold bugs are not only pessimists who want to make money when the world goes to hell in a handbasket. We even remove our spending power from the markets for consumer and producer goods and invest our wealth in “barren” and “unproductive” monetary assets. Shame on us!

I use the term “monetary asset” as I do not want here to go into the debate about whether gold is presently money or not. I know that you cannot buy a bus ticket with a gold coin but that is not what we are discussing here.

For the purpose of this investigation gold is (almost) equivalent to physical paper money, i.e. to cash under the mattress. The person who invests in bullion does so for the same reason that somebody may hold a large pile of banknotes in a safe, namely to not commit this part of his wealth to consumer goods that may fulfill his present consumption needs or to producer goods that promise an investment return (dividends and interest).

He is holding money – that is, gold or physical cash- because he wants to conserve his purchasing power. He wants to retain the flexibility of spending that purchasing power on consumer and producer goods some time later but still at the drop of a hat (i.e. remain “liquid”).

Money is the most fungible good, the one that can most easily be traded for goods and services. People hold money because they value that flexibility and the maintenance of their purchasing power higher than what they can get for their money at present prices, including what they can get for it in terms of investment goods at present prices.

There are, of course, important differences between gold and cash. The latter is presently slightly more fungible. Remember the bus ticket. On the other hand, there is no limit to how much paper money central banks can produce today. For the paper money holder debasement is not only a risk it is almost a certainty as it is the declared goal of those in charge of the money franchise. (I come back to that later.)

Keynes had a keen eye for widespread prejudices (against the rentier class, against saving and against money hoarding) and was not above providing pseudo-scientific justifications for these prejudices. Thus, his silly “liquidity preference theory” in his General Theory (in particular chapter 15), according to which it is okay to hold money to be ready for immediate transactions but not okay to hold money because you simply want to sit on the sidelines and retain purchasing power.

This is, of course, complete nonsense. Money, like any other asset, is only an asset because it fulfils the needs of its owners. Consumer goods fulfil consumption needs, investment goods promise monetary return, and money provides flexibility and security (at least honest money does) in an uncertain world.

As Henry Hazlitt has pointed out so well in his critique of Keynesianism, the “hoarder” of money does not speculate in money, as Keynes alleges, but simply refuses to speculate in bonds and stocks and other assets at prevailing prices. He has absolutely nothing against investing in “productive assets”; he just does not want to buy them at the current inflated and artificial prices.

Concerns about the stability of the overall economy and the sustainability of high asset prices are most prevalent at the end of credit booms when cheap money has created a false sense of prosperity and economic vitality, and when the prices of bonds, stocks and real estate are elevated by years of easy credit.

In a system of inelastic money, such as a gold standard, growing demand for money at that late stage of the cycle will cause money’s purchasing power to rise and the money-prices of goods and services to fall (deflation). At the new and lower prices demand shifts back from money to other, non-monetary assets. “Hoarding” ends naturally; it is self-correcting. When money’s purchasing power rises, the opportunity costs of holding wealth in the form of money rise, and so does the attraction of spending that money on consumer or producer goods.

["Deflation" is also just money becoming more valuable...which happens naturally in an expanding economy when money is a real commodity whose supply doesn't grow at a central bankers whim. Prices fall over time and savings are rewarded. Ain't nothin' wrong with that.--Ed.]

That money is not an unproductive asset has been argued by W.H. Hutt in his seminal essay “The Yield from Money Held” from 1956. For an excellent exposition of this view see this speech by Hans-Hermann Hoppe on the same topic. Holding money – and in particular inelastic money proper – is a sensible, legitimate, rational and by no means destructive strategy.

We have had an “on-and-off” but mainly “on” fiat money boom for 40 years. Capital misallocations and asset price distortions have become massive as a result. How big they are and where precisely they are located, nobody can tell. We would have to stop printing money and let the market expose the dislocations and then liquidate them but that is the one thing that authorities do not want to let happen.

Be that as it may, the public’s desire to step back from inflated and systematically manipulated asset markets is understandable and entirely justified and naturally translates into demand for money. Not the “flexible” kind under control of the central planners, but the honest kind, i.e. gold.

But Bernanke & Co., just likes Keynes in his time, does not want you to disengage from speculation in bonds and stocks and real estate. Moving to the sidelines is strictly verboten. You have to keep playing – with your own hard earned savings.

The policy establishment believes that it can manipulate the economy by manipulating your desire for assets through the manipulation of interest rates via the printing of money. These manipulations have to be ever more blatant, direct and heavy-handed.

Manipulation used to be conducted in a roundabout way by just administratively easing the refinancing conditions for banks and then waiting for the ‘stimulus’ to play out in the wider capital markets and the economy. Now that this policy has brought us the aforementioned imbalances, the central banks have to manipulate asset prices openly and ever more directly via ‘quantitative easing’.

Here is Bernanke defending the practice in 2010:

“This approach (quantitative easing) eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

If you believe that this brazen manipulation by the paper money bureaucracy is going to work and that it will restore and then guarantee stability and prosperity, you can do without gold. Jump right back in. Put your savings at the mercy of the Great Manipulator! Good luck!

I would only feel comfortable participating in these asset markets if I were confident they were not rigged. It is not a good idea to invest in assets whose prices are artificially inflated for political reasons. The biggest danger, in my view, presently exists in bond markets, in particular in government bonds. As to equity markets, where would they trade without zero interest rates? Where will they trade when inflation picks up?

Sitting on the sidelines makes a lot of sense to me. I want to hold money but it cannot be paper money or bank deposits, as both represent state fiat money that the policy establishment will continue to create like confetti. Additionally, a bank deposit may be your asset…but it is equally the bank’s liability. And let me remind you that banks everywhere are on life-support. Therefore, you have to go back to the eternal and international form of money: gold, which is not anybody’s liability but just your asset.

What about other ‘real assets’, such as property or farmland? Well, I guess you have to have considerable wealth to invest meaningfully in farmland. Also, the yield on farmland in places like Europe is very low and often dependent on state subsidies. With governments everywhere going bankrupt you have to expect those subsidies to be cut at some point with potentially adverse consequences for the value of that land.

Be that as it may, I think it is generally a bad idea to invest in a way that makes you dependent on government spending. Additionally – and this is something that applies to all forms of real estate – you have to expect the level of property taxes to rise. This is low-hanging fruit for the taxman as things are getting desperate for him, too.

All major central banks are in pretty much the same sticky position. None of them have an exit strategy. The Fed has not expanded the monetary base since June of last year. That is not because monetary prudence has set in but because the steroids from the last round of QE are still working. Banks are doing the money creation themselves again. M1 has expanded by 14 percent since last summer, non-annualized. No deleveraging here. Additionally, the myth of Treasurys as safe assets is still alive and kicking, against all evidence to the contrary and probably thanks to the present fixation with Europe. When banks and sovereigns come under pressure again the monetary floodgates will be opened. Just look at the ECB and their recent €1 trillion-plus money injection.

“We’re on crack,” as John Hathaway, the manager of the Tocqueville Gold Fund put is so astutely in the Wall Street Journal. The financial community is completely addicted to cheap money and ongoing stimulus. Just wait for the withdrawal symptoms to set in and you can rely on another round from Bernanke & Co. Unless I see a Volcker-like figure emerging, the avenger of the paper standard, I am happy to sit with eternal money.

Regards,

Detlev Schlichter

Why Gold Is Still My Favorite Asset was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

“Sharp falls in the gold price have prompted some bears or pessimists to predict it will plunge below $1,000 (£625) an ounce.”

…

“Goldcore priced bullion at $1,721 or £1,079 per ounce this morning, compared to yesterday’s fix of $1,788 or £1,121 per ounce. A spokesman said: ‘The massacre is attributed to a host of different reasons — from month end book squaring to Bernanke’s suggestion that ultra loose monetary policies may soon come to an end.’“

…

“Brian Dennehy of independent financial advisers (IFAs) Dennehy Weller commented: “Yet again the ‘safe haven’ myth of gold has exploded. It went down during intraday trading by about $100.

“‘This doesn’t mean the bull market has ended. It just means that when you buy gold you must do so with your eyes open — it is a highly volatile fringe asset.

“‘Our technical analysis suggests one of two possibilities. That the bull run is over and the price will eventually work its way down into the $700 to $1,000 range — or one final high lies just ahead before that large correction towards $1,000 will begin.’”

Source: Telegraph

The only serious reason given for this recent volatility and rapid drop in the price of gold is that Fed Chairman Ben Bernanke promised he wouldn’t engage in more money printing. However, as is generally the case when discussing capital flows of hundreds of billions of dollars, things are just a bit more complicated than that.

It’s no secret that the gold markets are completely manipulated by large financial institutions and interested parties within our government that are intent on keeping the price as low and/or volatile as possible.

What better way to scare the masses away from true value than to create such extreme price swings in both directions that the misperception of risk and constant attacks by mainstream media experts diverts capital from one of the few true safe havens into the fabricated safety of, say, US dollar backed Treasury bonds? After all, unlike the US dollar which is backed by the full faith and credit of the United States, gold is backed by nothing!

For those paying attention, there is a distinct effort by high level public officials and influential financial leaders to marginalize the value of gold as a safe haven asset. Ben Bernanke, for example, in testimony before Congress last year, made it clear that he does not believe gold is money.

Yet, any time that US dollar hegemony is threatened anywhere in the world, be it because of gold or oil, the response by financial institutions and government alike is unmistakable and severe. Sadaam Hussein’s demise is a direct result of his unwillingness to cooperate. Bernard Von NotHaus was labeled a domestic terrorist and imprisoned by the Department of Justice for his attempts to introduce a purely precious metals based system of exchange in the US. And most recently the Pan Asian Gold Exchange, which promised to level the playing field and allow for fair global price discovery of precious metals, was curtailed before it ever had a chance to get off the ground because, as SGT Report details, it “posed an enormous threat to the existing fractional reserve bullion banks.”

We advised our readers to expect exactly these manipulations:

“It will be an extremely volatile ride going forward, perhaps to the point where you’ll hate your gold so much you’ll want to spit on it. But don’t sell unless you’re sure that global crisis has turned to recovery and growth.

“Gold will eventually become the ultimate bubble — you can bet on it!”

Via: You’ll Hate Your Gold So Much You’ll Want to Spit On It [July 2010]

So, while we will hear that the gold bubble has burst, and that gold is a relic of the past, and that the economies of the world are recovering, remember that we have been told nothing but lies for decades. Ben Bernanke’s promises to limit monetary intervention mean absolutely nothing. Remember when he told us that there was no risk of a bubble in real estate? Or when he said that the collapse of sub-prime mortgages was contained? Keep that in mind as you take in all of the expert opinions from or benevolent leaders.

Trillions of dollars are being stolen as we speak. Governments around the world are collapsing. Instability, not recovery, is the order of the day. Thus, when the experts make a promise about something, you can fully expect exactly the opposite.

Yes, there will be volatility in gold, especially if we see a collapse in Europe, or if the government is able to maintain the perception of recovery among the masses. But be assured that if gold collapses, it won’t be alone. Asset price volatility is one of the few predictions we can make as the global economic, financial and political systems seize up.

However, unlike most assets, gold and silver have stood the test of time, especially during economic and political climates such as that in which we find ourselves today.

Given that we’ve been forced by a debilitated and collapse-prone global environment to make the choice of where to invest our time-energy yield (i.e. money), we feel much more confident investing in commodities that carry no counter-party risk, as opposed to assets denominated in paper receipts and derivatives of those receipts.

Investments like precious metals, food, personal energy production, and individual skills development, are the few assets we’re willing to consider.

Yes, there’s always the possibility of ‘losing’ value in our investment, but at least those assets will NEVER go to zero.

Regards,

Mac Slavo

SHTFPlan

Analysts Predict Gold Will Plunge Below $1000 was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Just how committed should you be to holding gold (and silver)? Are you holding too much gold as it is…and not enough U.S. dollars?

Or should you be holding anything BUT gold (and silver)? Beyond the cash you need to pay your monthly living expenses, should you hold cash at all? Should every bit of your savings be held in ounces of precious metals? And every bit of your investments be in shares of the companies that drag those precious metals out of the ground?

It might have seemed like an extreme position a few years ago. Heck, it may seem extreme now! But Jeff Berwick is here to explain why it could be the most sensible, most conservative thing in the world to do…

The Fear of Gold

I was on a panel at the recent California Investment Conference in Palm Springs and the question was asked, “What percentage of your portfolio should be in gold bullion?”

The first panelist answered 20%. The second panelist said, up to 30%. Then it came to me.

“I have no problem with someone having 100% of their portfolio in gold,” I stated bluntly. Many in the crowd laughed. Their laughter confused me. What’s so funny about that, I thought?

I went on, “I think it’s weird that people find my answer weird.”

GOLD IS REAL MONEY

After all, we are talking about time tested and true money. The only money that has lasted for thousands of years and is still fully accepted worldwide as a store of wealth. Even Warren Buffet had to recently admit that “Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.”

And that from a man who hates gold the way Whitney Houston fans hate Bobby Brown. So, by stating that I have no problem with someone having 100% of their portfolio in gold I am making an ultra conservative statement. I am stating that I’d have no problem with someone having their entire portfolio in “cash”. In real money.

What would you rather hold “for eternity”? US dollars? A paper debt obligation of a bankrupt nation state?

The fact that so many found that to be a shocking statement says a lot about where we are in this current process of the collapse of the fiat currency system.

THE FEAR OF GOLD

There is such a “fear of gold” amongst most people that it must be due to statist indoctrination and propaganda. It makes no rational sense to have such a fear of such a time tested and true store of wealth.

The same people who fear gold seem to have no problem holding a significant amount of their assets in euros in a European bank as Europe burns around them, both figuratively and literally. The euro might not exist 12 months from now but no one seems too concerned. They act like its been around forever and always will be, but it only was dreamt up by globalists in 1999.

YOUR BROKER FEARS GOLD

Near the end of 2007 a good friend of mine who had been wanting to sell her house called me. I had been telling her for a few months to sell her house and buy gold because a big housing crash was coming.

She said she had received a good offer for her house and checked with me to make sure I was certain about her selling, buying gold with the proceeds, and renting for a few years. I told her, emphatically, yes.

So she sold her house. At the time gold was around $750 per ounce. We fell out of touch for a few years and she contacted me last year around when gold was near $2,000 per ounce. I smiled when she called, waiting for her to tell me about the fortune she made.

“So?” I asked, waiting for the exaltation.

“What?” she also asked, confused.

“How’d that trade work out for you?” I asked.

“Oh. Well I sold the house. And I put the funds into my brokerage account with my (government registered) financial advisor,” she responded.

My heart sank. I knew what she was going to say.

Her financial advisor had talked her out of it. He said putting all her assets into gold was far too risky. Where in the government training manuals does it tell you to even own any gold!

She got worried too and less than a year after selling, under pressure from her old Chinese parents, bought another house. It was a bit cheaper but after transaction and moving costs it was a loss.

GOLD IS IN A BUBBLE

Of course, now, with gold over $1,700, it is nearly impossible to get anyone from the general public to buy gold. It’s gone too high, they cry! CNBC says it was a bubble, they repeat like trained seals.

It’s gone from near $300 to nearly $2,000 in the last decade. Surely that is a bubble and if it hasn’t already popped it soon will, right?

No. That’s not right. This is the problem with watching the value of anything in terms of constantly depreciating US Federal Reserve Notes. In the following chart, when looking at the price of gold in nominal dollar terms it looks like an insane rocket ride of epic proportions. But, when adjusted by the US Government’s own, heavily massaged inflation statistic (the Consumer Price Index, or CPI), the price of gold has just finally reached nearly the same level it was at in 1980 and looks far less spectacular.

PORTFOLIO ALLOCATIONS

Getting back to the initial question posed on the panel as to what percentage we recommend people hold gold bullion as a percentage of their portfolio. While I stated I’d have no problem with 100%, we actually recommend to our subscribers is to hold 30% of their portfolio in bullion – both gold and silver.

We also recommend, at this time holding 20% of your portfolio in gold mining juniors and 15% in gold mining major stocks amongst other things. That’s because we are expecting all the monetary printing going on with abandon in the western world to foment a true bubble, not only in the price of gold but even moreso in the price of the mining shares, especially the juniors. We are expecting a mania for the ages in these stocks. And, how will we know when to sell? When I am asked what percentage of their portfolio should be held in gold bullion and I say 100% and no one laughs.

Best,

Jeff Berwick

The Dollar Vigilante

P.S. The tech bubble is dead. The housing bubble is dead. And the bubble in government debt is in its death throes. What will be the final bubble? It will be in gold and silver mining stocks.
But even if you are wisely invested in these stocks, are you sure that YOU really own “your” share?

It is one of the dirtiest little secrets in the brokerage business. And 99.9% of people have no idea it is even being done to them. It’s called “street name registration” and it’s how the brokerage where you hold your stocks “registers” your shares. To save money and time, and to allow your shares to be included as assets that THEY can use to do what they want with, your brokerage never actually registers you as an owner of the shares.

Street name registration allows your broker to lend your shares to short sellers, thereby driving down the price of your own stocks. Additionally, this method allows your broker to “re-hypothecate” your assets–meaning it allows your broker to borrow money against your shares and speculate in the derivatives market!

These hidden risks are planting the seeds of tomorrow’s ultimate collapse — In which there may be a system-wide collapse of broker dealers, taking down millions of investors, and ensuring permanent non-recoverable losses to an entire generation!

So how can we safely invest in gold and silver mining shares and avoid the collapse brought on by the coming broker dealer crisis?

There are two methods of owning stocks your broker-dealer will never tell you about. These two methods completely remove the broker dealer counter party risk attached to your shares — effectively removing them from “the system.”

These two methods deprive your broker dealer the abilities to sell your stocks short and to “re-hypothecate” them. Your broker dealer will never willingly tell you about these methods – because they make more money when your shares are in their hands – precisely where risks are greatest to you.

These methods are so safe, that even if your broker dealer collapsed tomorrow, and stole every penny from every client investment account you would be able to sleep safe and sound, knowing your stocks are far out of reach, and legally unavailable to access by your broker-dealer.

This means everyone — all brokers in the Unites States and Canada. If every broker collapsed tomorrow due to waves of bankruptcies, these ownership methods will protect you 100%. You will be able to sleep safe and sound at night, knowing your shares are carrying zero counter party risk.

We’ve put together a complete research paper outlining the process to register your shares and giving you all the info you need to know to do it easily, quickly and properly. We’ve spent hundreds of hours dealing with broker dealers, transfer agents, public companies, and the SIPC in researching and finding out all the details on how to get your shares outside of the system.

We’ve put all his research together into a Special Report called “BulletProof Shares”. To find out more… and to get your copy… just click here.

A Parting Shot:

We have a tale of woe similar to Jeff’s story about his home-buying friend…

We told both our mother and our sister to sell their homes back throughout 2005 and 2006.

“Sell your homes. Buy silver…please!” we urged. We might as well have been asking them

Mom ended up taking out a second mortgage on her existing home, while Sis and her boyfriend kept their old home to rent out even as they bought a bigger place.

Neither of those proved to be particular good ideas. Unless the intention was to lose as much money as possible.

The value of those homes is between a quarter and a half lower. Meanwhile silver multiplied in price. Even after tumbling from its 2011 highs, silver is still about five or six times as much in dollar terms than it was seven years ago.

And of course, our loved ones still won’t buy a single solitary ounce of silver. Even after seeing how much ignoring our advice cost them. They still impressively rationalize their staying in the Fed-goosed real estate market…and they somehow sleep well at night while continuing to ignore precious metals.

We are a little offended. It seems that they’d rather listen to the bobbleheads on news than listen to us and to our Austrian school friends about the dangers inherent in saving in the currency of a bankrupt empire.

Today we’d like to leave you with a few words from our friend Mac Slavo of SHTFPlan.com:

“Over the last half decade or so, as the price of gold and silver have steadily risen, financial experts, advisers and pundits have often argued that gold is a bubble. They said it in the spring of 2008, as gold approached $900 per ounce. Likewise, as gold surpassed its nominal 1980′s high and went above $1000, those same analysts were screaming sell recommendations. To this day, with gold nearing $2000, they are still all marching to the same tune.

“Headlines for the last three years have been heavily weighted against gold, with every price spike being met with bubble talk. When George Soros said in January of 2010 that gold was the ultimate bubble, the media pounced on it as evidence that precious metals were through. Of course, Soros had been acquiring millions of dollars worth of gold assets (and continues to do so today). His message was completely misconstrued. Gold, like any other asset that involves a buying frenzy, will eventually become a bubble. And given the reasons for why people buy gold — inflation protection and as a hedge against the loss of confidence in government stability — we can be fairly certain that gold and precious metals in general will eventually reach exorbitant levels and ‘pop.’

“But, as Daniel Ameduri of Future Money Trends points out in the following micro-documentary, we’re nowhere near bubble territory yet.

“It’s important to note that 1980 was the end of the gold run that started when Nixon closed the gold window in 1971. That was roughly a ten year run up in the price from $35 to over $800 per ounce.

“This, however, isn’t 1980. Our debt-to-GDP ratio [Tuesday] morning hit 101% and is going much higher. We’ve added more federal debt in the last 7 months of 2011 than all of the years from 1776 to 1980 combined. The policy of our government is not to curb inflation is it was in 1980, but rather, to stimulate it, as evidenced by 0% fed funds rates (in the 1980′s it was in the teens!) and the massive monetary printing over the last few years.

“1980, even though the end of the recessionary environment was still a couple years away, is when the people felt confident that crisis of the past decade was coming to a close.”

Back in 1980 Fed Chairman Paul Volcker’s actions curbed — and then killed — the rise in gold and silver prices. Today Ben Bernanke’s actions are just adding fuel to the rocket ship that will carry gold and silver prices to undreamed of highs…and the dollar to unspeakable lows.

While the best time to start buying gold would when it was under $300 (and silver back when it was under $6) just a few years ago, that doesn’t mean you shouldn’t be adding to your gold and silver holdings.

It also doesn’t mean that you’ve missed out on getting in at a great time to make gains from gold’s (and silver’s) rise…

The gold price still has much, much further to go. The price of silver may have even further to go! To see how much…and to set yourself up for even bigger gains based on the rise in precious metals… just click here.

Or don’t click. After all, you may believe the mainstream reports about gold being in a bubble. You may believe that the price of gold has nowhere to go but down. You may want to sell your gold and gold-related investments right now. As Mac continues…

“If you feel like our current economic, financial, monetary, and social crises are wrapping up, then by all means sell your gold.

“But we urge you to consider what Future Money Trends has to say about it before you do.

Micro Documentary: Gold 1980 Vs. Today

We hope you watch the video, good patron. And we hope you can agree with us — and with Mac on this one. Again Mac Slavo:

“Despite what the experts in the media and on television tell us, there is no bubble in gold — not yet, at least.

“You see, bubbles require emotionally driven buying (just like bubble pops require emotionally driven panic selling). When all of those family members, neighbors and acquaintances you know who still reject the notion that our economic and social paradigms are shifting; when they start buying gold and silver at rapidly rising premiums and prices (as opposed to their current selling of precious metals to rip off outfits that include ‘We Buy Gold’ shops) and when they all become experts on inflation, safe haven assets, and gold investing, then it’s a bubble.

“Look around. We’re not even close.

“Gold is going up so long as the governments of the world keep printing money and so long as the public’s confidence continue to deteriorate.”

From SHTFPLan

Regards,

Gary Gibson

Managing editor, Whiskey & Gunpowder

ggibsonagora@gmail.com

The Fear of Gold was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Let me make a secret confession right here. For years, the producer of my radio talk show and I would draw straws each January to see who would “have the high privilege and distinct honor” of watching the president’s State of the Union address.

Do I have to clarify that the loser had to watch?

In case the president said something important – which almost never happened – I felt an obligation to play some audio clips and talk about it on the show the next morning. But, personally, watching Republican and Democrat presidents recite their laundry list of promised giveaways for the year ahead was more than I could bear.

I learned early on that I could avoid all of the ovations and applause, save time, and still capture what substance there might have been in a written paragraph or two. Soon, I’ll give you such a written account, a perennial synopsis that will allow you to watch something else – like American Idol – and still have a handle on what the president says.

And you might even have time left over to keep an eye on the real news.

While We Were Watching…

The State of the Union is treated with utmost seriousness by the dominant news media. All four major TV networks and the cable news channels carry the event. My local newspaper devoted most of the front page and big chunks of the inside pages to its coverage: photos, accounts, sidebars, response, and analysis.

But it’s actually a spectacle that crowds out the real news. News about the impact American diplomacy is having on our future standard of living. News about the U.S. dollar’s reserve status winding down.

On the day of the State of the Union address, news flashed around the world – but not on your favorite network or in your morning paper – that India and Iran have agreed to end-run the U.S.-imposed sanctions on Iran.

They will use gold to do so.

Those [U.S.] sanctions, which have now been agreed to by the European Union as well, will ratchet up in July. Their enforcement means that banks and financial institutions involved in oil transactions with Iran will be barred from doing any business with financial institutions in the United States and Europe.

According DEBKAfile, a news source based in Israel, Iran has taken steps to bypass American and European banks and their currency desks altogether, agreeing instead to sell its oil to India for gold. China is expected to soon agree to use gold in buying oil from Iran as well. It’s a move that would leave the long-standing global dollar pricing of petroleum in tatters.

The gold-for-oil agreement means a three things:

1. It hastens the unwinding of the U.S. dollar’s global reserve currency status.

The rest of the world is actively developing alternatives to the U.S. dollar. Although it will mean a falling standard of living for the American people, U.S. policies and secretaries of state, like Condoleezza Rice and Hillary Clinton, have spurred what will become a stampede away from the dollar. DEBKAfile also reports that both China and Russia have secret mechanisms already in place to pay Iran in non-dollar currencies for its oil. And only a month ago, China and Japan, the world’s second- and third-largest economies, agreed to develop direct yen/yuan trading, forgoing the dollar as the reserve currency intermediary.

2. It accelerates the global monetization of gold.

Both China and India have been aggressively adding to their gold reserves. Other countries are following suit. The Keynesians, who have been in charge of American monetary policy, having destroyed the value of the dollar and enabled our ruinous debt, may actually believe that gold is a “barbarous relic.” But it is clear that their opinions have little functional value in the real world. The world is turning to gold more and more as U.S. debt continues to mount. Indeed, is there a better alternative monetary unit to be found? Certainly, it’s not the euro. Jim Grant of Grant’s Interest Rate Observer says gold is the only answer to the question, “if not the dollar, then what?”

3. It reveals the growing global impotence of the U.S.

Long able to enforce reluctant countries to adhere in its missions and embargoes around the world, the U.S. is finding its will frustrated. Nations that once had to weigh the favor of the U.S. against their own commercial and domestic political interests are increasingly ignoring the global dictates of the U.S. State Department. In 2003, Turkey, where the prospect of a U.S. invasion of Iraq was wildly unpopular, refused even bribes to allow the U.S. to stage the invasion from its soil. Today, the threat of a U.S. or Israeli strike on Iran is meeting with growing disapproval, especially from countries like China and India which rely heavily on Iranian oil.

Routine. Tired. Repetitive.

It may be that the State of the Union’s falling ratings – Obama’s speech the other night was down 12 percent from the year before, and was down 21 percent from 2010 – are a sign that people in large numbers have discovered there are better sources of important news than network television and Washington’s lapdog press.

Or, even better, maybe they’ve had about enough of the Washington party.

Or, maybe it’s simply because it’s all so routine, so tired, so repetitive. Even American Idol, entering its 11th season, has more surprises than the State of the Union. Consider:

Obama, who clearly doesn’t understand anything about markets, offered to have the government interfere with the real estate market in brand new ways in 2012. What could be more predictable than some president announcing a scheme to screw up the real estate market again in the new year?

It’s so routine. So tired. So repetitive.

And while the contestants on American Idol are fresh every year, the promises that make up the State of the Union are just reruns, season after season.

Now, if you’d like to be free to pay attention to the real news that actually affects your freedom and prosperity, let me provide you the following short, beginning-to-end account of this year’s State of the Union. You’ll be able to refer to it year after year, so that while you’ll still be informed about the president’s address, you can skip the show and save yourself time.

Time to follow the real news. Or to watch American Idol.

“Thank you so much. Thank you very much. Thank you. Thank you.”

The president agreed to do something for (to?) homeowners. He also has decided to help teachers. And students. And women. Workers, too. The president wants to help workers, for sure. And jobs galore. The president is all about creating jobs in 2012. And more jobs in energy. Oh, they’ll be clean ones for sure!

Plus, he’s going to reform regulations so that regulators will be able to regulate better. And he wants to get a handle on the bureaucracy. And he wants to reform education. And both make government more effective and still grow the economy. Did he forget men and women in uniform? The president most certainly did not!

“Thank you, God bless you, and may God bless the United States of America.”

Regards,

Charles Goyette

Source

The State of the Union, Just Another Reality Show was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

What happens to high-spending credit-dependent states when the market loses confidence in them has been evident in cases such as Ireland, Portugal and Greece? Among the big financial calamities of 2011 were notably government bond markets. Perversely, some of the big winners of 2011 were also government bond markets.

Market participants have so successfully been conditioned to believe in state bonds as safe assets that when some sovereigns go into fiscal meltdown it only serves as reason to buy even more bonds of the sovereigns that are still standing, even though their fiscal outlook isn’t much better. While the fate of Greek and Italian bonds should have cast serious doubt over the long-term prospect for Bunds, Gilts and Treasuries, it only propelled them to new all-time highs. Strange world.

All policy efforts are now directed toward keeping the overextended credit edifice from correcting. After decades of fiat money fuelled credit growth, the financial system is in large parts an overbuilt house of cards. The system cannot cope with higher yields and wider risk premiums. Those would accelerate the pressure toward deleveraging and debt deflation and default. “When they stop buying bonds, the game is over.”

They still bought bonds in 2011

2011 was another strong year for gold. Despite a brutal beating in the last month of the year, the precious metal produced again double-digit returns for the year as a whole if measured in paper dollars: up 10 percent. I believe that gold will continue to do well, as it remains the essential self-defense asset.

Amazingly, Treasuries did almost as well as gold (+9.6%) and TIPS (inflation-protected Treasuries) did even better. German Bunds benefited from the disaster in other euro bond markets. They pretty much matched Treasuries in terms of total return (currency-adjusted they did less well as the euro declined slightly versus the dollar). This is entirely unjustified because the EMU debt and banking woes will put considerable additional strain on Germany’s public finances. UK Gilts did better than gold and Treasuries, despite rising inflation in the UK, weak growth and a public debt load that is only ever going up.

This cannot go on for long. Bonds are fixed rate investments with finite maturities. The price gains of 2011 have lowered the yields to maturity, in some cases markedly so, and thus diminished the chance of additional gain. Does that mean reversal is imminent? No. Maybe the notion, or better the myth, that the bonds of the United States, the United Kingdom and Germany are risk-free assets can somehow be maintained. Maybe yields can decline even further. Who knows? Personally, I doubt it.

In the case of the US, the fiscal situation seems beyond repair. The Congressional Budget Office publishes its own projections on the long-term fiscal outlook. These are based on some overly rosy economic assumptions and still make for rather grim reading – hundreds of billions of dollars in deficits every year forever. The true path for the U.S.’s public accounts will certainly be much worse. The U.S. has now acquired a habit of running budget deficits to the tune of 10 percent of GDP year after year (more than $1.5 trillion in 2011) and there seems to be no end in sight. There is presently no deflation in the U.S. Neither does the TIPS market expect any. Yet, investors seem happy to hold U.S. government paper at what are certainly negative real yields. Investors are practically paying the U.S. government for the privilege of funding its out-of-control spending.

I have long maintained that government bonds are a bad investment because the endgame for them will either be outright default or inflation. In both cases, as a bondholder, you lose. The outcomes are either default or default. The idea that these debt loads could be elegantly inflated away is nonsense. They are already too big for that. So either you face outright default or, if authorities try to inflate, hyperinflation and currency disaster, and then default. In either case, you will not be repaid with anything of real value.

“Let them eat bonds!”

But are default or inflation and then default really inevitable? What if the present scenario continues forever? This seems to be the new “hope”. It is not a pretty scenario in that it involves the ongoing confiscation of wealth from bondholders but it seems to be less drastic than default or hyperinflation. Could we not work off the excessive stock of debt by suppressing bond yields below (moderate) inflation rates for an extended period of time? Of course, we cannot rely on the self-sacrifice of the bondholder, although he appears rather willing of sacrifice at present. So the government will have to use all its might to force bond-investors into accepting zero or negative returns for an extended period of time. After all, the state is the territorial monopolist of coercion and compulsion. It makes the laws. And controls the banks.

In a state fiat money systems banks must ultimately cease to be private, capitalist enterprises. Many banks have already been fully or partially nationalized. The remaining private ones are under tight, and ever tighter, regulation by the state. Should it not be easy for the state to force banks to invest more in government bonds, even at low or negative real returns? Should it not be possible to redirect whatever saving and credit there is from the private to the public sector?

Such a strategy has been outlined – not advocated- by Russell Napier of CLSA. He calls it ‘repression’. It ultimately involves rather draconian market intervention in order to continuously force the diversion of capital from private use to public use at artificially low levels of compensation. At some stage it will require capital controls.

But let’s face it: most of what we have experienced over the past three years in terms of government intervention would have been simply unimaginable only five years ago. We should therefore not be surprised if market intervention becomes ever more heavy-handed and is used increasingly to favour the funding of the public sector.

That such a policy will be implemented, and ever more boldly, I have no doubt. In fact, I predicted it in my book. See chapter 10 of Paper Money Collapse – The Folly of Elastic Money and the Coming Monetary Breakdown, in particular pages 226 -228. I called it ‘the nationalization of money and credit’. It is a phase in the crisis but it is not an endgame. Where I disagree with the above mentioned writers is the following: Repression, to the extent that it works, will not reduce government debt, and besides, it won’t work.

Consider the recent environment: Certain governments have been able to borrow directly from their central banks via quantitative easing and in the bond market at low or even negative real interest rates. Does that mean they have reduced the amount of outstanding debt? Are such hugely advantageous conditions used to cut back the debt load?

No. The opposite is the case. Access to cheap credit, whether that credit was provided by the printing press, obedient bond investors or hyper-regulated banks, has allowed states to run larger budget deficits and accumulate more debt. Remember, we are not talking here about the workout of a debt-situation resulting from a war, a natural disaster, or some other one-off event. We are talking about the modern welfare state with its ever-growing commitments and increasingly out-of-control spending. Only cutting off the state from cheap funding will ever constrain it, not giving it access to more resources more cheaply.

We do not live in Paul Krugman’s parallel universe of Keynesian fiscal stimulus, where every dollar spent by the government magically translates into 2 dollars of real GDP growth. Here, on planet Earth, the constant shift of resources from private markets to the state bureaucracy weakens the economy. Shrinking the private sector and growing the public sector kills economic growth. In the perverse logic of the modern welfare state. This then requires even more state spending in the next period. As the economy continues to struggle, public sector outlays will grow while tax receipts will shrink.

‘Repression’, to the extent that it succeeds in shifting resources from the private market to the state, makes the crisis worse. It must lead to more debt, more capital misallocation and a weaker economy. We will not save our economy by trampling on the remaining bits of functioning capitalism and by confiscating more resources from the private sector. ‘Repression’ is self-defeating.

Additionally, it won’t work. Private wealth-holders will not sit on their hands forever while their hard-earned savings are being confiscated by the state. If banks become mere tools to fund the state and thus provide zero or negative real returns to shareholders and depositors, shareholders and depositors will pull their money from the banks.

But there is no alternatives for the depositors, is there? Of course, there is: Gold.

As the enemies of gold in the establishment financial press never tire of reminding us, gold pays no interest and no dividend. Because of storage and insurance costs, it is a ‘negative carry asset’. But in an environment of ‘repression’, so are government bonds and bank deposits.

With zero or negative returns guaranteed on supposedly ‘safe’ government bonds and bank deposits, ever more investors, including small savers, will turn toward gold which has the additional advantage that its upside is practically unlimited – its price can double, triple or quadruple (all of which I expect) as long as paper money debasement continues (which I consider a near certainty).

Of course, a determined state will counter any evasion of controls with more controls. Maybe we will see taxes on gold investment or even restrictions on trading and owning gold. Via capital controls the country could be locked down. All of this is, of course, hugely destructive for the economy and ultimately self-defeating. I expect that we will see quite a bit of this stuff in coming years. Try and be prepared!

But this will not be part of the solution. It will make matters worse. And it means that the endgame is still either voluntary default or hyperinflation and default. ‘Repression’ or ‘nationalization of money and credit’ is a policy of desperation. It is not a solution. It won’t be the endgame.

Regards,

Detlev Schlicter

Paper Money Collapse

When the Bond Buying Stops, the Game Is Over was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The U.S. government holds it and reports it on their balance sheets. The International Monetary Fund, the European Central Bank, China, Germany, Russia, India — they all hold gold. Turkey bought about 41.3 tons of gold for official reserves in November. Goldman Sachs is expecting central banks to buy 600 tons this year. Look at the combined official holdings to date: 30,744 tons.

Why?

Contrary to public mythology, gold has no statutory role in the monetary system at all. The paper standard has ruled since 1973, though most people are still slow to figure that out. Sure, it is an asset but so are many things that governments and central banks own: computers, land, buildings, mortgage-back securities however toxic, and many other things. There is no special reason why gold should be reported, listed, touted, purchased in scary times, but not these other assets.

The truth is that gold does have a huge and continuing role to play. And it is more than purely psychological. It is deeply embedded in the history of money itself and in the development of the world economy as we know it. Governments destroyed the gold standard long ago but they know better than anyone that there is no surer means of financial security, proven over nearly all times and all places.

But here is an interesting question. What precisely are governments and central banks seeking to protect with their gold holdings and acquisitions? It is not you and me. It is about their system and their interests. As much as they love foisting the paper stuff on the population, risking even the destruction of the means by which we earn, save, and provide for ourselves, when it comes to government and central bank finance, gold serves serves them well. They deny it publicly but their actions speak more loudly than their press conferences.

This is one reason among a million that you can’t trust government to manage or even make the money that runs the economy. This should and could be the job of the private sector. The first time that I heard Murray Rothbard make this claim, I was amazed. Doesn’t everyone know that this is a primary function of government? But he was not only correct about this; fantastic research his book on this topic came out (What Has Government Done to Our Money?) has reinforced the point.

The leading historian of private coinage is George Selgin. His book Good Money is one of the most fascinating books on monetary history ever written. The country is England and the time is the Industrial Revolution. The official Mint was cranking out only large denomination coins suitable for old-world trade by large companies, but this was a time when the bourgeoisie was being born. Small manufacturers all over the country needed small denominations to pay their workers. They didn’t wait for the government to make the stuff. Button makers jumped at the chance to mint small denomination coins for factories to pay their workers.

What emerged from this event was a highly developed and extremely sophisticated system of private coinage at the very heart of England’s birth into the modern world. Selgin’s book tells the entire story in remarkable detail, and the publisher went all out with this book to provide a large section of beautiful color images of many of the private coins of the period, with even a comparison to the government’s unimaginative and often ugly coins. The free market picked up where government left off!

You can guess what happened. The result was the same as today when private traders have come up with digital currencies to compete with the government: the state shut them down. Don’t mint your own money; the government hates the competition! Selgin’s book covers the drama with energy and wit, revealing a slice of history that is hardly known by anyone.

Laissez-Faire Books is the only source for the hardbound version of this fascinating book, and there is a limited number still available. And this format is precisely what you want in a book of this importance: the format alone turns treatise to treasure. Never let anyone tell you that the private sector can’t be wholly in charge of the monetary system. Selgin has demonstrated otherwise.

This is the history but what about the future? In 1982, the Reagan administration pushed through a bill that created a U.S. Gold Commission to look into the question. It was the great missed opportunity, because — no surprise — the fix was in on what the commission would decide. Ron Paul and Lewis Lehrman were both on the committee, and they dissented from the majority opinion.

The dissenting opinion wasn’t just an opinion paper; it was a wonderful book on the past, present, and future of gold as a monetary unit. It ends with a detailed plan for restoring sound money and liberating us from the tyranny of paper. The book is out in a special edition of Laissez-Faire Books: The Case for Gold.

Can gold really be the money of the future? Nathan Lewis thinks so and he makes the case in Gold: The Once and Future Money. He points out that without a gold standard, with money that is sound and tied down to strict limits on production, the whole theoretical apparatus of government finance stops making any sense. What does it matter how much debt you run up if you can just print the money to pay for it? Perhaps this might have something to do with why government can’t seem to control its spending. And how can we even have a rational discussion of tax policy and its likely affect on revenue streams and the government deficit so long as any revenue shortfall can be made up for through the magical powers of the central bank?

The absence of gold, Lewis argues, has introduce irrationality and fiscal chaos into government finance. Nor has it served the population well. It is directly responsible for the creation of the boom and bust cycle — paper gives the central bank massive power to manipulate interest rates — as well as the relentless declines in the value of the dollar. The system has failed, he says, and if governments don’t repair the money, the private sector will respond, just as it did in the early years of the industrial revolution.

Growing economies are about change. Industries are born and industries die. Business come and go, and even seeming Goliaths are often slayed by start ups. The jobs we do change. The types of production that nations specialize in are constantly in motion. All this global enterprise changes the face of the earth every half century or so. Thanks goodness for change: without it, there would be no supporting the 7 billion people who inhabit this place.

There are very few things in this world that do not change, but one of them is the perception and reality that sound money is rooted in the gold standard. Powerful presidents could not kill it, though more than a dozen have tried. Elite economists have tried to wish its place in the world away but couldn’t do so. It is the ultimate immovable object in the world of economics. That gold as a monetary unit will outlive us all is one of history’s few sure bets.

Regards,

Jeffrey Tucker

The Monetary Metal That Won’t Die was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Now, with precious metals prices on the cusp of possibly the biggest price explosion in centuries, fake gold and silver products are becoming a booming industry say Global Piracy & Counterfeiting Consultants:

We have read about one Chinese counterfeiter openly bragging about producing 100,000 fake U.S. Silver Dollars per year, and that’s just one counterfeiter. At this point, we are telling all investors of gold, or silver coins and/or any type of precious metal bar to only buy from a reputable U.S. dealer, that has an established track record, and a money-back guarantee. We fear this Chinese counterfeit gold, or silver coins, or bars, could be a multibillion-dollar-a-year business, and we greatly fear many innocent investors could be taken to the cleaners…

Based on our research, some of the Chinese counterfeit coins are of such high quality, it is not uncommon for even experts to be deceived. We think its smart for every investor to have gold, or silver; our big worry is pretty simple: What if they invest 10% or 20% of their net worth in what are counterfeit precious metal coins that are basically worthless? We would call this a disaster for the investor, and our big fear is there are probably tens of thousands of investors in the United States who have been duped. Even worse, once again, for all intents and purposes, the U.S. federal government is a no-show — once again…”

The world needs to come to grips with the largest counterfeiter in the world, the fact that 10% of China’s GDP is a direct result of counterfeiting. If it’s not knockoff pharmaceuticals that can kill people, it’s high-tech smart phones, or electronics. Our new worry is pretty obvious related to Chinese counterfeiters bankrupting innocent precious metal or coin investors with what could be their life savings. At what point do consumers in the United States, Europe, Japan or the rest of the world say no thanks to any more Chinese products, given its uncaring attitude about flooding the global markets with counterfeits or fakes?”

Source: GPCC via prweb

Gold and silver remain one of the few alternative investment methods to preserve wealth during crisis scenarios like inflation or government instability, but taking extra precautions now is absolutely essential to ensuring your wealth is protected when it comes time to sell.

Don’t assume that the dealer you are working with is legitimate, and even if they are, it is possible that they themselves have been duped by a counterfeit.

Those investing in gold and silver assets, especially if you are committing a large percentage of your net worth, should consider some safeguards.

• Work with multiple dealers who have been in business for several years. Like any investment strategy, diversifying your eggs into multiple baskets will protect you if one of them happens to fall. In this case, buying different products from multiple dealers, all with solid reputations, will prevent you from losing your entire investment in the event one of the dealers was duped by counterfeiters. While not exactly ideal, it’s better to lose just a portion of your investment than all of it
• Trust, but verify. Buy from one dealer and get your investment appraised by another. If you’ve invested $5,000.00 into precious metals, paying an additional $100 to have another dealer (most will take a look for free) verify the quality of the assets you purchased is not a bad idea. If you were sold a fake, you can then take immediate action against the offending dealer (as opposed to waiting five years only to find out you’re holding a worthless metal)
• Understand dimensions and weight. One of the best ways to determine if your asset is legitimate is to know what dimensions it should have (circumference, thickness, weight). Every government-issued coin, and even privately issued rounds or bars, should have manufacturer dimensions available either online or by simply giving them a call (otherwise go with a different product). Get a digital scale and a caliper and take measurements. Even though fakes can come close to the real thing, the densities of gold and silver are unique, so if a particular bar or coin shows an inaccurate weight or dimension, you’re likely looking at a fake. It may cost you a couple hundred dollars to acquire the appropriate tools, but if you’re investing multiple thousands of dollars into these investment, then we’d consider the cost of doing business. Take the time to learn about your investments (it won’t take long) and you can save headache and heartache down the road
• Gold and Silver Acid Tests. Gold and silver have unique properties when mixed with certain chemicals. While not exactly ideal, because you’ll have to ‘damage’ a tiny portion of a particular bar or coin, an acid test can be one of the best tests to perform in order to ensure you have a legitimate precious metals product. You don’t necessarily have to go through and test every single one of your 1-ounce Silver Eagles, but testing a few coins out of each batch wouldn’t hurt.
• Try pre-1965 silver products. They call it junk silver. Chris Duane of Don’t Tread On Me refers to it as Constitutional Silver. Half dollars, quarters and dimes minted prior to 1965 contain 90% silver and are worth well more than their face value. While Chinese counterfeiters may be producing silver eagles, bars and other mints in mass quantities, they will likely shy away from U.S. coin products for a couple of reasons: 1) Why mint a fake quarter when you can mint a fake Silver Eagle worth significantly more? 2) Minting fake U.S. coins is a federal crime, and while the Chinese may not be worried to much about being investigated by Secret Service, pressure from the U.S. may force China to act against counterfeiting, something the Chinese knockoff artists would like to avoid. Pre-1965 silver coins, in our opinion, are the only option for those making purchases on auction sites.

Counterfeits will always be a concern when you’re dealing with assets worth as much as $2,000 an ounce, but you can take steps to protect yourself. Don’t let the fact that counterfeits are out there dissuade you from making a good investment decision. Just do your due diligence and don’t let emotion overcome logic.

Regards,

Mac Slavo

Fake Silver and Gold Flood Global Markets was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The whole European currency scheme was both brilliant and crazy. It was brilliant because Europe should have a united currency. In fact, the whole world should have a united currency. Once upon a time, it did. It was called the gold standard. National currencies were just another name for the same core thing — a nationalist spin on a global consensus. If some country had waved around an unbacked piece of paper and called it money, no one would have taken it seriously.

And the gold standard was internally policing. If one country debauched the currency, gold would flow out, the thing would lose credibility and capital would flee to places that took sound finance seriously. Governments were restrained, the hands of politicians were tied (they could only spend what they could overtly steal) and markets ruled the day. The politicians hated it, but markets were free, stable and growing.

So yes, there is a case for single currencies in regions, or even the entire world. Truly, why should people and multinational commercial institutions have to go through the ridiculous headache of changing currencies at the border? This is just pointless. Imagine if an inch meant something different in every country, and you had to come to a new understanding of its meaning in order to build on this, versus on that side of the border? Markets don’t like this kind of pointless exercise. The natural market tendency is toward unity in what matters (money) and disunity where it matters (competition and entrepreneurship).

So the European elites who cobbled together the euro after many decades of planning played to that sense, and developed a reasonable expectation of a wonderful Europe united with peace and free trade, all with a single currency. It seemed like a recreation of an older, freer, more-wonderful world. So why not?

Here’s why not: The gold standard no longer exists. It hasn’t existed since the politicians destroyed the last remnants of it in the early 1970s. And it was in 1970 that the idea of a single currency for Europe went from the dream stage to the planning stage. At the end of the gold standard, the idea should have been dropped, but it was not. The planning elites had it in their heads that this was the only way forward, and nothing would stop them.

A single currency seemed like a great idea to the relatively weak economies of Europe. The lira, peseta, escudo, franc and drachma would no longer suffer at the hands of traders who seemed to forever cling to the German mark. They could inflate without consequence. Knowing this to be a problem, the pro-euro planners cobbled together certain safeguards. There would be a single central bank, and sovereign countries would have to give up autonomous control over monetary policy. The same would apply to national finance: no more endless running of deficits, and no more free-spending legislatures.

As a condition of entering the currency union, countries would have to agree to all these terms and more, including harmonized regulatory systems. Governments would have to confess their prior sins and swear on a holy copy of the EU Constitution that they would be good from now on. Well, that didn’t happen, but the planners were so dead set on the notion of a single currency that they decided to look the other way. All these entered the union with debt and broken banking systems, all in a sort of collective hope that the whole could cover the sins of the parts.

Sure enough, the southern countries experienced a wonderful boon following the introduction of the euro. Interest rates on government bonds fell dramatically — not because their citizens were suddenly saving, and the banks were flush with capital. The reason was the new perception that the European Central Bank would operate as a guarantor of the debt of all eurozone countries. In other words, rates fell in Europe for the same reason they fell in the United States: The centralization was creating a moral hazard.

This set off a lovely economic boom that later led to bust, there just as here. The central bank, however, had already promised that it would not be involved in any bailout schemes, that it would only fight inflation. This was a strange repeat of history because this is precisely what the Fed had claimed when it was created too. Central banks always say this at the outset: We will sleep with the money, but we won’t actually do anything. We will resist every temptation!

The problems here are incredibly obvious. Countries had not actually given up all their fiscal authority. Most importantly, their banking systems still had control and, thanks to fractional reserve banking, they still could create money, and in a way that the central bank could not control. This too is a consequence of not being on a gold standard that automatically regulates and restrains the banking systems.

Now, each national banking system, and even each bank, ran its own discretionary policy, with the implicit (but never stated) guarantee from the central bank that it would never let the system fail. Worse, every country in Europe had to accept this money.

Economist Philipp Bagus of Juan Carlos in Madrid observes that the whole system embedded a kind of monetary imperialism from unsound economies to sound economies, dragging down economic structure and poisoning the whole system with the viruses of the worst states. If this story sounds familiar to Americans, it should. This is the same problem that gave rise to the crazy real estate boom in the U.S. and the subsequent meltdown. It’s our old friend Mr. Moral Hazard, but operating across the entire eurozone.

Hans-Hermann Hoppe, the economist who predicted this whole scenario in the early 1990s, observes that this centralization is the inevitable path of paper money regimes, as governments constantly seek higher and higher authorities to expiate their sins. With each step, the money gets qualitatively worse and the imposition of economic controls becomes ever more tyrannical.

What is the way out? Everyone is now talking about the restoration of national currencies, and while that is a better approach than standing by as the entire system collapses and the contagion spreads around the world, it is not as easy as it seems. Every country that wants to reassert its national currency will have to give up its debt addictions and clean up its fiscal house. The banking system will have to be deleveraged. Industries sustained by the euro subsidy will have to go belly up.

If this fantasy actually became true, it would be entirely possible for any one country (hint: Germany) to adopt an authentic gold standard, perhaps inspiring others to do the same. The end result — we are talking about a decade-long process here — could, in fact, be another single European currency, a sound currency rooted in reality and not the hallucinations of politicians and financial elites.

How much tolerance is there in the world today for such pain? You need only look at the U.S. situation to get an idea. The technocrats in charge today are completely unlike those of yesteryear. They will not permit wholesale deleveraging. They believe that they have to tools to prevent all pain, and the political systems of the world are structured to punish anyone who thinks about long-term gains over short-term pain. If you doubt that, take off an evening and watch the Republican presidential debates.

Regards,

Jeffrey Tucker

The Euro Crackup was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Mr. Wolf correctly identifies the problem: Most sovereign states are bust and so are the banks, which are today a protectorate of the state and have repaid the generosity of their protectors by lending excessively to them. Mr. Wolf is too skilled and sophisticated a writer to put it this bluntly, but if you read his article, that is what it boils down to:

“The emergence of doubt about the ability of sovereigns to manage their debt undermines the perceived soundness of the banks, both directly, because the latter hold much of the debt of the former, and indirectly, via the dwindling value of the sovereign insurance.”

And why are we in this mess? Because some time ago we adopted a system of limitless and constantly expanding fiat money. In such a system, the privileged money producers — the state and the banks — apparently never have to shrink and can conduct their financial affairs in the comforting knowledge of unlimited access to the printing press.

No credit contraction, no bank failures, no sovereign defaults. Whenever the money runs out, we simply lower interest rates, create more bank reserves out of nothing and off we go again. This has worked for 40 years.

Alas, no more.

The present problems, the unsustainable bank balance sheets, the out-of-control budget deficits and the mind-boggling levels of public debt, are inconceivable without a system of constant fiat money creation and extended periods of artificially low interest rates courtesy of the central banks.

Or to put it the other way ’round, a monetary system like ours, in which interest rates can be set administratively to encourage bank lending and to underwrite the constant growth of state and banks, must ultimately lead to a bloated public sector and a bloated banking industry. The fiat money system is feeding its own disintegration.

[Ed. note: Savers in the U.S. have seen the results of QE on their savings with rates less than 1%. And now it's a global money printing party... And investors and savers are stuck footing the bill.

The scam governments are perpetrating on their citizens seems to have no boundaries.

Chris Mayer has a report for you today that exposes their scam and shows you the simple steps you can take to plan for the coming tidal wave of cash. Click to get the story from Chris, here.]

Bail Me out Again, Sam

Mr. Wolf offers two solutions. Both are dangerously misguided, which means that both stand an excellent chance of becoming policy.

Apparently, Mr. Wolf does not want to deprive the banks and the states of their special status. They lent too much and they borrowed too much, but the laws of economics, the laws of gravity and the laws of logic are still not supposed to apply to them. They should be saved again.

Wolf says the banks should be “recapitalized.”

Wait a minute. These are failed corporations. They lent billions to corrupt Greek politicians. They put their chips on red and black came. They lost.

For capitalism to work it requires that the market be cleansed of failed corporations, not that these corporations get “recapitalized.” We are simply perpetuating the bad habits of our fundamentally flawed and anti-capitalist monetary system by shielding the banking industry from its mistakes and never allowing market forces to shrink it. This is not only a mistake for reasons of “moral hazard.” That is the least of it.

After a 40-year fiat money binge, the banking industry is too big. It is now sized for a never-ending credit boom when we have entered the credit bust. We should not be relying for our economic future on an ever more bizarrely propped-up banking sector.

But this “solution” begs another question: Who is going to pay for this? We just learned that the state is bust, too.

Well, while he is at it, Mr. Wolf also wants to save the state. How? Via a super-sized EFSF (European Financial Stability Facility) — a mega bailout fund. Mr. Wolf joins his buddy, Tim Geithner, in recommending “shock and awe” — not that this term conjures many positive memories.

In short, more money is needed. Much more.

“Given the funding needs of banks and sovereigns, this translates into well more than €1,000 billion, and, quite plausibly, several times that number.”

Bring Your bazooka

Several trillion? — Methinks that Mr. Wolf has been hanging out it in Washington too much. I am convinced that in the macho atmosphere of IMF and World Bank power banquets, you are now looked down upon as a policymaking lightweight if you are still content with assigning only billion-dollar price tags to your pathetic policy initiatives. “Trillion” is the new denomination for the grown-ups in the policy elite. Hey, Europeans, if you want to be players, you better add a few zeros!

But again, where does the money come from?

Here is Wolf again, warming to the military theme:

“The eurozone needs a much bigger bazooka. Apparently, five different plans are under discussion. These involve leveraging up the EFSF’s money, by issuing guarantees rather than loans, or borrowing from the European Central Bank or by borrowing in the markets. But if action needs to be immediate, as it does, the only entity able to supply the needed funds is the central bank.”

Ah, here we are. The central bank. Finally.

After all the elegant prose, the bureaucracy worship and the habitual name-dropping, the bottom-line is this: Turn on the printing press! Print more money! Print! Print!

This is madness, so I do think it is precisely what will happen. Mr. Wolf will get his way. Because the policy elite thinks just like he does. Default is not an option. Banks cannot be allowed to fail. States — at least if they are not called Greece, for which this comes too late — cannot be allowed to fail, either. We rather try to print our way out of this. Everybody gets bailed out — via the printing press.

Believe me, it will not work. It will lead to complete disaster. But it will be tried.

Mr. Wolf looks at it in hope. I look at it in horror. Once this gets implemented and the market realizes what is going on, it will dump government bonds, real yields will shoot up and confidence in state paper money will evaporate. What will the central banks do then? Print money faster, as the overstretched system cannot cope with higher real yields.

So what should you do to protect yourself? Well, I don’t want to give investment advice, so please treat this carefully — I could be wrong, so this may not work, but I think it wouldn’t be unreasonable to ditch government bonds, and while you are at it, ALL bonds, and man the lifeboats, which consist of gold and silver.

As my good friend, the Swiss-based bon vivant and intellectual, Tristan Geschex said to me, there are a couple of explanations for the drop in gold:

First, while gold remains, first and foremost, eternal money and is always the monetary asset of choice when paper money dies, it is also still an industrial commodity. I suspect that only a small portion of its present market value reflects compensation for industrial use, but when industrial commodities get hammered because of a weak economic outlook, that element of the gold price — even if it is a minor element — will get “adjusted,” as well.

Second, there are market dynamics. Gold is held alongside other assets in the diverse portfolios of hedge funds and other institutional investors. When those take a hit in some markets, they may also reduce positions in other markets, in particular those where they can still realize a profit, and investors most certainly could still take profits last week on their long gold positions.

Sharp sell-offs in equity markets initiate balance-sheet reductions and traditional derisking (i.e., returns to the paper dollar base) at financial firms and leveraged funds. These also tend to affect gold, at least in the short term. In the second half of 2008, gold famously took a big dive, although it then rallied sharply when the market woke up to what the policy response would be.

Third, the rehabilitation of paper money as a result of the Fed’s reluctance to print more money. This is the most serious threat to anybody who is holding gold as a monetary asset, as the ultimate self-defence in an economy characterized by weak banks, overburdened sovereigns and excessive debt loads, in which the printing press is already being used to postpone the inevitable.

Is the Fed now finally becoming reluctant to print more money? Sadly, I don’t think so. I think they should stop the printing press, but I don’t think they will.

Gold Wins — in Inflation and Deflation

There is no indication whatsoever that Bernanke and other central bankers have stopped believing in the power of monetary stimulus or in the need to avoid asset price corrections, slowdowns in money growth or deflation. There is no sign whatsoever that they now believe that the market should finally be allowed to set interest rates, determine asset prices and cleanse the system of never-to-be-repaid debt. After all, they still consider themselves to be the Lords of Finance.

[Ed note: They may consider themselves to be Lords of Finance, but we think "scam artists" is more accurate.

To see what the scam is, click here for this special report.

You can also learn what else you'll need to do besides stocking up on gold and silver. To find out what, just click here.]

But even if that were to happen and the printing presses were finally turned off, I would still see no reason to ditch gold. Given the size of present imbalances, this would unleash a massive deflationary correction. As Mr. Wolf has so elegantly explained in his article, this would mean banks and states would face default. The paper dollars and the paper euros in your pockets would then no longer be debased — their purchasing power would actually rise.

But how much wealth can be stored in paper cash? And in such a scenario, bank deposits and government bonds would certainly become highly dangerous assets, indeed — and gold would again be an important self-defence asset, even in a deflation.

I do believe that in both an inflationary and a deflationary crisis, gold is a lifeboat. But I am not being facetious if I say that Mr. Wolf has his finger on the pulse of the establishment. What he suggests for the eurozone — saving it via the printing press — also applies to the U.S. It is the position that the global policy bureaucracy will most easily drift toward. The logic on display in that article is the logic of the policy elite.

As to Mr. Napier’s assertion that practical limits to money printing exist — I think he is wrong. For a “determined” central bank, a leverage ratio of 50-to-1 is no hindrance whatsoever. Look at the balance sheet of the People’s Bank of China. Its leverage ratio is 1,200-to-1, which makes it undoubtedly the most heavily geared institution on the planet. That is where we’ll be going.

That must be what Mr. Wolf calls a proper bazooka.

In the meantime, the debasement of paper money continues.

Regards,

Detlev Schlichter

Faster, Pussycat! Print! Print! was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.