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.

The social and economic pathology of 19th century colonialism is well studied, but the monetary pathology of its successor, the neo-colonial reserve currency system of the dollar, is less transparent. In order to remedy this pathological defect, the United States must rid itself of its enormous Chinese financial colony, whose exports are subsidized by the undervalued yuan in return for Chinese financing of the U.S. twin deficits. Both China and the United States must also free themselves from the increasing malignancy of the dollar reserve currency system, the primary cause of inflation in both China and the United States.

In the end, only monetary reform, including an end to the reserve currency system, can permanently separate the dollar host from its yuan colony. Without monetary reform, the perverse effects of the dollar reserve currency system will surely metastasize into one financial and political crisis after another—even on the scale of the 2007–2009 crisis.

It is, of course, a counter intuitive fact that China has been financially colonized by the United States. But why is this a fact? Simply because China has chained itself to the world dollar standard at a pegged undervalued exchange rate, choosing therefore to hold the exchange value of its trade surplus—that is, its official national savings—in U.S. dollar securities. It is true that the dollar-yuan strategy of America’s Chinese colony has helped to finance a generation of extraordinary Chinese growth. But China now holds more than 3 trillion dollars of official reserves and more than a trillion dollars in U.S. government securities. These Chinese dollar reserves directly finance the deficits of the American colonial center. This arrangement clearly resembles the imperial system of the late 19th century. The value of a British colony’s reserves were often held in the currency of the imperial center, then invested in the London money market. Thus, the colony’s reserves were entirely dependent on the stability of the currency of the colonial center. While China is America’s largest financial colony, most other developing countries are also bound to neo-colonial status within the reserve currency hegemony of the dollarized world trading system.

China’s dollarized monetary system reminds us of nothing so much as the historic colonial financial arrangements imposed by the later British Empire on India before World War I—India actually remaining a financial colony of England long after its independence in 1947. How did the sterling financial empire work? The imperial colony of India, beginning in the late 19th century, held its official Indian currency reserves (savings) in British pounds deposited in the English money market; independent developed nations at that time, like France and Germany, held their reserves in gold. That is, France, Germany, and the United States settled their international payment imbalances in gold—a non-national, common, monetary standard—holding their official reserves, too, in gold. But the London-based reserves of colonial India were held not primarily in gold, but in British currency, helping to finance not only the imperial economic system, but also the imperial banking system, imperial debts, imperial wars, and British welfare programs. Eventually, as we know, both the debt-burdened British Empire and its official reserve currency system collapsed.

For more than a generation now, a similar process has been at work in China. China is America’s chief colonial appendage. The Chinese work hard and produce goods. Subsidized by an undervalued yuan, they export much of their surplus production to America. But, like the Indians who were paid in sterling, the exports of Chinese colonials are substantially paid in dollars, not yuan—because bilateral and world trade, and the world commodities market,

have been dollarized. And thus it may be said that the world financial system is today an unstable neocolonial appendage of the unstable dollar.

China, like its predecessor the British colony of India, has chosen to hold a significant fraction of what it is paid in the form of official dollar reserves (or savings). These dollars are promptly redeposited in the U.S. dollar market, where they are used to finance U.S. deficits. Every Thursday night, the Federal Reserve publishes its balance sheet, and there we now read that more than $2.5 trillion of U.S. government securities are held in custody for foreign monetary authorities, 40 percent of which is held for the account of America’s chief financial colony, Communist China. It is clear that without financial colonies to finance and sustain the immense U.S. balance of payments and budget deficits, the U.S. paper dollar standard and the growth of U.S. government spending would be unsustainable.

It is often overlooked that these enormous official dollar reserves held by China are a massive mortgage on the work and income of present and future American private citizens. This Chinese

mortgage on the American economy has grown rapidly since the suspension of dollar convertibility to gold in 1971. China—poor and undeveloped in 1971—was at that time very jealous of its sovereign independence, sufficiently so to reject its alliance with the Soviet Union—even earlier to attack U.S. armies on the Chinese border during the Korean War. In an

ironic twist of fate, China surrendered its former independence and, as a U.S. financial colony, joined the dollar-dominated world financial system. China’s monetary policy is anything but independent. It is determined primarily by the Federal Reserve Board in America, the pegged yuan-dollar exchange rate serving as the transmission mechanism of Fed-created excess dollars pouring into the Chinese economic system. Perennial U.S. balance of payments deficits

send the dollar flood not only into China but also into all emerging countries. The Chinese central bank buys up these excess dollars by issuing new yuan, thereby holding up the overvalued dollar, and holding down the undervalued yuan. Much of these Chinese official dollar purchases are then invested in U.S. government debt securities. So even though America exports excess dollars to China, China sends them back to finance the U.S. budget deficit—much like marionettes walking off one side of the stage, merely to reappear unchanged on the other side.

This is the little-understood arbitrage mechanism of the pegged exchange rate system by which Fed-created excess dollars are bought and held as reserves by the Chinese central bank, in exchange for which newly created yuan are issued, thereby supercharging inflation in China. The Chinese dollar reserves, which are reinvested in the United States, help to ignite inflation in the United States. It is clear that the workings of the official dollar reserve currency system cause purchasing power to be multiplied, or at least doubled, in both countries. But these central bank issues of new money are unassociated with the production of new goods and services during the same market period. Thus total spending, or purchasing power, exceeds the total value of goods and services at prevailing prices. When total demand exceeds total supply, the price level must rise.

But just as the subservient, colonial Indians were constrained not to sell their sterling reserves too quickly, so the Chinese are constrained—by politics, diplomacy, and self-interest—not to dump their depreciating American dollars. The Indians had to consult their imperial bankers, even though the English were debtors to their Indian colony, because the Indians did not wish to anger the colonial center, nor to precipitate a sterling crisis. From time immemorial, creditors with too large a stake in an over-sized debtor often beg leave of their debtor to get their money back.

China is frustrated by circumstances similar to those of a colony of imperial Britain. Hostility has arisen in the debtor—the United States. Fear of setting off a dollar slide haunts the hostile creditor, China. The difficulty of finding a suitable portfolio of alternatives for a trillion dollars in U.S. government debt annoys the outspoken Chinese financial colony, as it calls for a new world monetary system. But there seems to be no genuine alternative to the very liquid dollar market. De facto illiquidity of official Chinese dollar reserves is enforced by political sensitivities, not by market salability. The debtor, as the saying goes, is “too big to fail.” Thus arises an unstable stalemate, a yuan-dollar pegged exchange rate regime constantly on the edge of a crisis.

The “exorbitant privilege” of the dollar is matched by the insupportable burden of America’s overvalued reserve currency role, which has tended to deindustrialize the colonizer, gradually increasing social inequality by reducing the standard of living of lower- and middle-income American families. The reserve currency country then feels compelled, as the Fed does today, to depreciate the dollar in the vain hope of eliminating the trade deficit and the balance of payments deficit—by becoming more competitive abroad as it becomes poorer at home.

The perversity of the official reserve currency system is endless as China now endures high inflation engendered by its colonial status in the world dollar system.

The floating, pegged exchange rate system based on the dollar has been slowly decaying since the end of World War II. But the dollar-based reserve currency system, because of the unmatched scale and liquidity of the dollar markets, could last another generation. When it will collapse cannot be predicted. That it will collapse, without systemic reform, I think inevitable. Few predicted the timing of the collapse of the pegged dollar system of Bretton Woods. But it did collapse in August of 1971, followed by America’s worst decade since the Great Depression.

Ultimately America, the leader of the unstable world financial system, must choose bet ween two options.

1. The United States can wait for the eventual demise of the world dollar standard under chaotic

conditions, similar to the final sterling collapse and the subsequent collapse of Bretton Woods in 1971. This option is analogous to the intrepid daredevil who leaps from his 10th floor window, secure in the fact that he is still unhurt two floors from the street level.

2. Or, America could take the lead in reforming the official reserve currency system based on the dollar. Such a monetary reform program would entail a careful windup, by agreement, of the world dollar standard. At the same time America would reestablish by statute a dollar convertible to gold, i.e., a dollar defined in law as a weight unit of gold. Gold would replace the dollar as the world’s reserve currency.

The reform would, first and foremost, establish a tested, non-national, neutral monetary standard as the basis of a stable dollar—one which reasonable sovereign trading partners could accept. Gold would become the international settlements currency and thus would replace the dollar as the basis of world trade and finance. Inasmuch as monetary history shows that no unstable national currency can permanently serve as the crucial world reserve currency, it follows that neither can an unstable basket of national currencies, nor can a fiction such as the SDR—the reserve asset created by the International Monetary Fund to supplement member countries’reserves.

But we are left with the question: what does the evidence of American history suggest as the basis for a stable dollar?

The stability of the U.S. dollar has varied widely in its history. This variation is explained by two factors: the monetary standard chosen for the dollar, and whether other countries have simultaneously used cash and securities payable in dollars as their own reserves, even as their monetary standard itself (i.e., official reserve currencies in place of gold).

The United States has alternated between two kinds of standard money: inconvertible paper money and some precious metal (first silver, then gold). The dollar was an inconvertible paper money during and after the Revolutionary War (1776–92), the War of 1812 (1812–17), the Civil War and Reconstruction (1862–79), and again from 1971 to present. The dollar was effectively defined as a weight of silver (and gold) in 1792–1812 and 1817–34, and as a weight of gold in 1834–61 and 1879–1971. The minted gold eagle, set equal to 10 dollars, and subsidiaries thereof, was provided for in the Coinage Act of 1792. The dollar was not used by foreign monetary authorities as an official monetary reserve asset before 1913, but the dollar has been an official “reserve currency” for many countries since World War I (along with the pound sterling). The dollar has been the primary official reserve currency for most countries since 1944.

Applying two criteria divides the monetary history of the United States into distinct phases. We

can compare the stability of these monetary regimes by examining the variation in the Consumer Price Index (as reconstructed back to 1800) by two simple measures: long-term CPI stability (measured by the annual average change from beginning to end of the period of each monetary standard) and short-term CPI volatility (measured by the standard deviation of annual CPI changes during the period).

Weighting these criteria equally, the classical gold standard from 1879–1914 was the most stable of all U.S. monetary regimes (as the table shows).

After the failures of several generations of unhinged paper currencies, pegged and floating exchange rates, America should embrace a stable monetary system tested in the laboratory of human history—the cornerstone of which the elites have rejected for a century. It is now time to restore that cornerstone—the true gold standard, shorn of the economic pathology of official reserve currencies. Now is the time to restore the American monetary standard authorized by the Founders in the Constitution—Article I, Sections 8 and 10. Now is the historical moment for America to take the lead and again give the world a real money, the Founders’ gold dollar of the Coinage Act of 1792. What the Founders learned from the paper money inflation of the Revolution, the recent past has taught us again. America and the world need a monetary standard which, unlike the paper-credit dollar, cannot be created at zero marginal cost with which to dispossess the  prudent and to subsidize the U.S. government and insolvent financial institutions at near zero interest rates.

For America to establish the gold standard would provide the least imperfect monetary solution to the problems of a century of financial disorder—engendered over and over by central bank-manipulated paper money, official reserve currencies, and floating pegged exchange rates. Only a stable dollar, a dollar defined by statute as a weight unit of gold, can pin down the long-term price level, restoring the incentive to save and ruling out extreme inflation and deflation. Such a dollar convertible to gold would reopen the road to confidence in the long-term value of the U.S. monetary standard. This is the durable road to economic growth and prosperity—financed by increased long-term savings, increased long-term investment, and rising demand for labor at rising real wages.

China: American Financial Colony or Mercantilist Predator? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

No one I spoke to would venture a guess as to how high gold would rise before it hit its peak. But most stressed that people forgot that gold’s value was driven by sentiment.

“Gold doesn’t have any intrinsic value,” said Larry M. Elkin, president of the Palisades Hudson Financial Group in Scarsdale, N.Y. “It’s this era’s wampum. At one point you could buy Manhattan for beads.”

(Mr. Elkin said what bothered him the most about investing in gold was how irrational it was, unlike buying a blue-chip stock whose value rises and falls based on what the company produces.)

That said, having gold in a portfolio is still a good buffer against swings in other markets. Mr. Fisher calculated that over a 43-year period ending in June 2011, the average annual increase for gold, accounting for inflation, was 3.82 percent compared with 4.92 percent for the Standard & Poor’s 500-stock index. Gold, however, was 28 percent more volatile.

“The smoother the ride, the more likely the investor is going to stay in his strategy,” Mr. Fisher said. “That produces a better result.”

He said that from the perspectives of both return and volatility, a better strategy would have been to put 10 percent in gold and split the rest 60-40 between stocks and five-year Treasury bonds. Rebalancing the portfolio to maintain those ratios would have meant an average annual return of 4.66 percent, with more than half of the volatility of gold alone.

For those who fled to gold and Treasuries, the hardest part will be deciding when to get back into other securities. The best way in uncertain markets may be to go slowly in small chunks — a practice known as dollar-cost averaging.

They might have asked us. We have lots to say on the matter!

First, gold isn’t supposed to “do” anything. That’s why we like it and why it has been used for money for as long as there’s been the need for money. It is a store of value, not a value-creating business or a head of cattle or an acre of fertile land

And during times when the government and central bank have been doing plenty…running unpayble deficits, artificially inflating asset values by means of interest rate manipulation and by expanding debt and the currency supply…you want something that will “do” nothing.

Second, gold buying based on sentiment? And irrationality? Yet lending money to the government or buying overpriced stocks are both reasonable acts?

Lending money to the U.S. government to protect your savings is like running to an armed assailant for comfort. The government is doing everything in its power to make sure you are paid back in dollars that are worth less than the ones you lent…at an interest rate that doesn’t begin to make up for the rate at which your purchasing power is being destroyed.

Stocks meanwhile may represent ownership in productive businesses…but the costs of those earnings are currently too dear. They are not a good buy. Eventually those earnings will be on sale again. If you buy now, that means you are almost certain to lose money.

It’s about more than smoothing out volatility. It’s about recognizing what’s happening now. It’s about giving the Fed’s actions their due respect and a wide berth.

You have to understand that the very existence of a central bank is the problem. Minus a central bank and government propaganda, gold and silver are very naturally perceived as money, while economic growth is based on savings that aren’t discouraged in the first place by inflation.

With a central bank mucking around with the price and supply of both currency (we hesitate to call it money) and credit, you’re bound to get booms with the busts baked in and all the attendant distortions. You get bubbles moving through asset classes: through the currency, then stocks, then real estate, then commodities and precious metals.

This makes the advice about a having a “balanced portfolio” a bit of a joke. That’s like telling you to inject yourself with both steroids and Ebola and hoping the two will balance each other out. When you have a busybody central bank creating serial bubbles, you need to move from one investment class to the next.

You should have been trading your rising stocks for sleeping gold for the past decade. You should have been selling off your real estate and buying silver too.

We’re going to keep trumpeting the “do nothing” metal and its more industrious companion silver. Especially as the New York Times quotes experts who scratch their heads at this gold thing.

Gold has gone from under $300 to nearly $2000 in the last decade. What has the Dow done? It was around 10,000 ten years ago. It’s around 11,000 now. Yet these guys are still rolling their eyes at the people who were “all in” with gold, the price of which is now around sixfold more.

Sure there were a couple of dips in the Dow in the past ten years. You might have made a little money if you bought and sold at just the right time.

Gold took a lot less timing and a lot less effort. Those recommending gold were begging people to take advantage of gold’s years of dormancy. They begged them to keep accumulating while gold was cheap.

The price of gold is more than mere “sentiment”. That price is trying to communicate something. Gold’s price is declaring that fiscal policy stinks, that government deficits are no laughing matter, and that the stock market on the whole is a sucker’s game right now.

Regards,

Gary Gibson
Managing editor, Whiskey & Gunpowder

Gold Still A Better Idea Than Mainstream Asset Allocation was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Having thus be-clowned themselves, they went on to elaborate: gold prices are volatile, gold doesn’t pay a yield, it depends on a “greater fool” for capital gains, central banks are net sellers, it doesn’t beat inflation, Warren Buffett hates (and does not understand) it, and you can’t eat it.

Oh dear. The gold price in dollars is volatile because the US dollar is volatile. An ounce of gold has almost always bought you a nice suit at any time in history. The volatility in the gold/dollar exchange rate is all on the dollar’s end. And that’s because the supply of dollars is always increasing. Also, the futures exchanges have been pretty active boosting margin requirements on gold contracts. That’s made for some larger-than-normal price moves. But the value? Rock steady over time, baby.

And that’s the point. Gold isn’t really an investment. It’s money. And it’s money that holds value well over time. You only worry about capital gains if you’re investing in gold. If you’re buying money, you’re more focused on preserving purchasing power.

Gold doesn’t have a yield? Someone should tell the boys at Wells Fargo that 10-year US Treasury yields went negative in real terms this week. Investors are so terrified of the debt super volcano upon which asset prices are built, they are paying rent to Uncle Sam in order to park their money in bonds.

By the way, this willingness to lose some of your capital in exchange for the illusion of safety and liquidity, in the short term, is probably going to be the catalyst for a violent stock market rally. All that money will come out of bonds and into stocks. After all, you have to beat inflation somehow, don’t you? This is how artificially low interest rates destroy savings (negative real yields) and encourage speculation in equities.

The claim that central banks have been net sellers “in recent years” isn’t backed up by any facts. But in any case, the Bank of England sold all its gold in May of 1999, near the bottom of a 20-year bear market in gold. Peter Costello, who was Australian Treasurer at the time, beat Brown to the punch when he sold two-thirds of Australia’s gold reserves in 1997 for the handsome price of $306.60 an ounce.

This was at the height of political efforts to eliminate gold’s role in the financial system. Costello said as much. He said gold, “no longer plays a significant role in the international financial system.”

You’d expect politicians to say that. You’d expect them to want it to be true. A gold standard was the only check on the permanent expansion of government debt in the early 20th century. That’s why it was abandoned. With a gold standard, the Warfare State and the Welfare State are not possible. Get rid of the gold standard and discredit gold as money and you can expand the role of the State to your heart’s delight.

Central banks are the largest holders of gold bullion in the world. Politicians sold gold because they’re stupid, ignorant of monetary history, and think only in terms of election cycles. Most central bankers, Ben Bernanke notwithstanding, recognise that gold is money. Its role in the world’s financial system is growing, not shrinking.

Warren Buffett doesn’t like gold? So what. Buffett is an investor. Gold is money.

You can’t eat gold? Is that so? Well, you can’t eat dollar bills either. You can always sell gold and silver for local currency and buy food, which you can eat. Being a medium of exchange is only one property of money. Just because you can’t yet use gold coins to buy a Big Mac doesn’t mean gold isn’t money or isn’t useful. Claims to the contrary are ignorant.

We asked Diggers and Drillers editor Dr. Alex Cowie what he thought of the Wells Fargo report. He wrote back:

“They forgot that you can sell gold and buy a room, a hot meal, or an ‘efficient’ jacket, hat and gloves with the proceeds.

“Their mixed salad of an argument was full of holes, and didn’t mention the epic growth in Chinese gold demand that is completely reshaping the market. China is the biggest importer of gold now, and these imports are about to double.

“The reason China and the rest of the world is buying gold is that the financial system is corrupted with debt, bailouts and defaults.

“And who is Wells Fargo’s number one share holder?

“None other than Mr Warren Buffett: the world’s biggest gold hater. Interesting that the bank’s analysts are now quoting him, like lovesick schoolgirls.

‘Do something for me,’ and [the gold] says, ‘I don’t do anything. I just stand here and look pretty.’

“Damn right. It does look pretty.

“It also does something that Wells Fargo hasn’t done too well in the past. It preserves wealth.

“There’s no one to stuff things up with gold. No bungling bankers, no corrupt politicians, no bail outs. And this is why it doesn’t need to pay interest – there’s no counter-party risk to compensate for.

“As the Octogenarian of Omaha points out – there is very little gold in the world. It would in fact fit into a couple of full size swimming pools. This scarcity is exactly what makes it valuable.

“So as the European and US debt crises continue to unravel in the coming months and years, and more and more Euros and Dollars are printed to plug the shortfalls, gold’s scarcity will be more and more valuable.

“So next time you are saving money up to buy some ‘shelter, food or efficient clothing’, buy some gold to do it with.

The Wells report concludes that:

“Gold is a commodity that should be held as a part of a larger, diversified allocation to commodities that is frequently rebalanced. We do not believe that gold should be utilised as a cash-equivalent, no matter how enticing the price returns have been in recent months.”

It’s clear Wells thinks gold is an investment speculation. That’s why they think it’s in a bubble. If the Wells’ bankers treated gold like money, not a financial asset, perhaps they’d allocate a lot more of their cash to it. But oh well.

In fact, that’s part of the problem. The idea that you can build wealth in a balanced way through a uniform asset allocation strategy is crazy. A sound portfolio would rebalance assets annually. That’s a nod to the fact that none of us can predict the future and you don’t want to have all of your wealth concentrated in one asset class, or in one risk.

But what assets should you really have in your portfolio if we’re entering a credit depression? Will stocks generate the same returns over the next 20 years as they have for the last 20 years? You’d think not, given that global credit is due to contract in the years ahead, not expand like it did for the last 20. Stay tuned…

Regards,

Dan Denning
Daily Reckoning Australia

You Can’t Eat Asset Allocation Either was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

We are kidding, of course, good patrons. There’s been some pretty big news.

The  S&P was forced to admit what we fringe pundits and kibitzers have been saying for years: U.S. debt is not quite as sound as the official ratings agencies would like you to believe.

The S&P 500, Dow and Nasdaq all took the official admission pretty hard. The S&P and Nasdaq are down 5%, the Dow nearly 4%.

Gold meanwhile is all smiles and back-slapping. We pulled up the charts this morning and due to our ingrained bias we immediately looked at silver. Nothing much going on there…

We usually don’t even bother looking at the gold price. Silver is where the big moves usually happen. Whatsoever gold does, silver often does twice as much…

And silver is what we’re counting on to increase our purchasing power as gold does little better than protect it…

But it was gold that made the big boy moves today! Up over $1700. We check our records. And our pulse. As near as we can tell this is a first.

As we put the finishing touches on today’s little ditty gold is at an all-time high of $1718. Gold is almost as expensive as platinum right now.

Silver meanwhile is feeling lethargic. It can’t seem to be bothered to get out of bed even as gold is circling the block a second time on its morning run. Silver remains just below $40 again today, and only a dollar above its Friday close around $38.

Gold’s Friday close was about $1650. That’s a 4.2% gain against the Dow’s 3.8% loss (again, as of this writing)…

None of this should come as any surprise, however. Things are happening as they ought.

Adjusted for inflation, gold is still nowhere near its 1980 high of a nominal $850, or about $2400 in today’s dollars.

Securities meanwhile are inflated in value, pumped up for at least a generation by the actions of the central bank. These actions have been eroding the value of the dollar, long cut free from its golden moorings. Gold’s price has failed to reflect this reality for longer than you’d think was possible.

But now stocks can’t keep up despite the dollar’s sacrifice. The dollar’s decay, however, lends gold renewed strength.

The Dow and gold are seeking each other out, planning a rendezvous at price parity somewhere. Their meeting point might have been 3000 before the Fed opened the spigot. It point may be 5000 as things stand right now. It could be 10,000 or more if the Fed keeps easing.

Of course at that point, anyone holding U.S. dollar or U.S. debt or corporate shares won’t be happy.

And of course gold is hitting new highs. World leaders have pledged to do “whatever it takes to restore confidence.”

We tremble as we copy those words from the headlines. It takes a shot of whiskey and a lingering glance at our gold coins to calm us down…

It’s government borrowing and central bank easing that created this situation in the first palce. More of the same “help” will just forestall the day of reckoning…and make it that much worse when it finally arrives.

Gold is a very present help in times of government debt and currency troubles. More and more people are waking up to that fact…which is why the price of gold is rising inexorably higher.

Personally, however, we’ve always been a much bigger fan of silver than gold. In our opinion silver was the Trade of the Decade. You could have gotten the stuff for under $4.90 per ounce ten years ago during 2001 and for as low as $4.10. You could have sold it for as much as $49 at its peak this year. Even now you can get nearly $40 for an ounce of silver.

Gold was meandering along between $250 and $300 when silver was under $5. Even with its solo surge today to an all time high over $1700, gold has not quite gone up sevenfold in price from its low 10 years ago. The silver price meanwhile has multiplied over ten times its 2001 low and even now is eight times its 2001 prices.

Silver has proven itself to be more energetic than gold. Though its price is also partly merely a reflection of the dollar’s decay, silver is increasing in purchasing power faster than gold is.

The gold and silver gap has increased, a minor and expected blip on the long-term trend that will see that gap narrow and get closer to historical norms (though there is no guarantee we will ever actually reach the historical ratio again…but you never know…).

The gold-to-silver ratio got nearly as low as 30 in late April during silver’s surge. Now with gold over $1700 the ratio is over 40 again. Silver is currently on sale relative to gold.

So not to take the wind out of gold’s sails…but this strikes us an awfully good time to pick up some more silver.

Gary Gibson
for Whiskey & Gunpowder

With Gold At New Highs It’s Time To Stock Up On Silver was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.