- The world is returning to a gold standard officially or not. Don’t let people tell you that gold is risky investment. Gold is real money and had been so until 1971 when Nixon delinked the USD from gold. Before that all currencies were considered gold certificates. Now, fiat currencies are backed by the ‘full faith and credit of governments’ ie. nothing at all. It is just a CONfidence JOB. The smart money realizes this and are fleeing to hard assets: commodities and precious metals! (See also: At Least 10 States Have Introduced Gold Coins-As-Currency Bills)
There Is No Getting Around Gold
Money has lacked a golden anchor for 40 years. It has proved a stupendous failure.
Earlier this week Thomas Hoenig, president of the Kansas City Federal Reserve, went out of his way to call the gold standard a “very legitimate monetary system.” In November, World Bank President Robert Zoellick and Indiana Republican Congressman Mike Pence both called for a serious look at using gold as the centerpiece of international monetary reform.
The fact that a Fed leader, the highest-ranking American official in international economics, and a potential presidential candidate are talking up the gold standard indicates that floating money is running out of political cover, and that the obstacles to gold replacing it are narrowing.
The first confirmation of this was the reaction of certain economic elites who, instead of responding with a straightforward defense of the status quo, lobbed ad hominem attacks on those who dared to mention gold. “I think [Zoellick] is living in the past,” Edwin Truman of the Peterson Institute for International Economics told the Financial Times. Gold is “minor and really irrelevant,” echoed Peterson Institute Director Fred Bergsten in the same article.
The most common practical objection to the international gold standard is political: that the slight deflationary bias it gives off would not be tolerated by people today. Yet this conclusion overlooks the serial price crashes that the economy has endured since gold was demonetized in 1971.
At different times and most recently all at once, the values of homes, stocks and other investment assets have collapsed and traumatized the lives of ordinary Americans. Think upheaval over monetary policy was a thing of the 19th century? In 1982 a mob of tractor-driving farmers blockaded the Fed headquarters in Washington in protest over high interest rates, leading Chairman Paul Volcker to hold public forums around the country to try and explain his prolonged and painful effort to squeeze inflation out of the economy.
The busts of the post-Bretton Woods era have been the downsides of the bubbles. Taken together they represent the chronic problem of modern capitalism: the excess credit that at its high point decouples capitalist virtues from prosperity and at its low point pins ordinary people under acute economic distress. This is the distinguishing feature of the debt-based monetary system the world inherited by going off gold.
U.S. dollars, the world’s main reserve money supply, are pieces of paper with no independent value. It is no wonder that government, corporate, and household debt levels have soared under this arrangement and muddled the difference between the genuine article of economic ingenuity and the next conduit for hot money.
The international gold standard worked as well as it did because it automated domestic monetary decisions according to the ability of citizens and foreign trading partners to convert currencies into gold. The price-specie-flow mechanism, devised by David Hume to discredit mercantilism in the 18th century, guaranteed that countries with international payments deficits lost buying power and were brought back into balance with the world economy through competitive price adjustments initiated by redemptions for gold. This system, which the U.S. was wedded to from 1879 to 1914, outperformed all other American monetary regimes in terms of overall price stability according to John Mueller’s statistical analysis in his new book Redeeming Economics.
Various proposals to repair the paper dollar system have been fashioned to avoid using gold, ranging from an inflation target rule as employed by the European Central Bank, to Ben Bernanke’s “constrained discretion” approach, to recent legislation by Pence and Sen. Bob Corker, R-Tenn., that reduces the Fed’s mandate to the sole task of assuring price stability. But attempting to transmit the gold standard’s results without gold is wishful thinking.
TrimTabs: “U.S. Stock Market in Trouble Once Fed Interventions Stop. No Amount of Bond Buying Will Keep Stock Market Bubble from Bursting Eventually”!
- Why didn’t the stock market and treasury market crash in 2010? Who is doing all the buying? The FedRes and US government is manipulating the markets massively. This is to create the illusion of recovery and that their actions are bearing much fruits. These people’s idea of the real economy is the shuffling of fiat currencies round and round. This is nonsense. Real wealth cannot be created by playing the paper casino game of Wall Street.
- I do not believe their manipulations will change the inevitable. What it does is delay and build an existing problem into an even bigger ginormous calamity!
TrimTabs: “U.S. Stock Market in Trouble Once Fed Interventions Stop. No Amount of Bond Buying Will Keep Stock Market Bubble from Bursting Eventually.”
TrimTabs: “If the money to boost stock prices by almost $9 trillion from the March 2009 lows did not come from the traditional players, it had to have come from somewhere else. We believe that place is the Fed. By funneling trillions of dollars in cash to the primary dealers in exchange for debt, the Fed has given Wall Street lots of firepower to ramp up the prices of risk assets, including equities.” And, wisely, Biderman, just like Zero Hedge, asks what happens when the buying one day, some day, ends: “…stock prices will be higher by the time QE2 ends, but economic growth will not be sustainable without massive government support. Then even more QE will be needed, and stock prices could keep rising for a while. In our opinion, however, no amount of QE will be able to keep the current stock market bubble from bursting eventually.“ At the end of the day, the biggest problem is that the massive slack in the economy means that LSAP will have to continue for a long, long time, before the virtuous circle of self-sustaining growth can even hope to take over. By then bond yields may very well be high enough that Ron Paul will demand someone finally bring Paul Volcker out of the fridge.
What Source of Money Is Pushing U.S. Stock Prices Higher? Market Cap Rises $2 Trillion in 2010 as Buying by Companies and Foreigners Offsets Selling by Pension Funds and Retail Investors. However All of Gain and Then Some, $2.4 Trillion, Since QE2 Announced at End of August.
At the end of 2009, we published a report entitled, “Are Federal Reserve and U.S. Government Rigging Stock Market?” We questioned whether the Fed or the Treasury were pushing up stock prices because we could not identify the source of the money that pushed the market cap up by nearly $7 trillion from mid-March 2009 through December 2009.
At the time we released our report, many people thought it was crazy to suggest that the Fed or the government would manipulate the stock market. Yet Ben Bernanke, Alan Greenspan, and Brian Sack have all but admitted publicly this year that the Fed attempts to prop up stock prices.
The market cap of all U.S. stocks increased $2 trillion in 2010. All of the gain and then some, $2.4 trillion, occurred since the end of August after QE2 was announced. Once again, most of the money to push the market cap higher does not seem to have come from the traditional players that provided money in the past:
If the money to boost stock prices by almost $9 trillion from the March 2009 lows did not come from the traditional players, it had to have come from somewhere else. We believe that place is the Fed. By funneling trillions of dollars in cash to the primary dealers in exchange for debt, the Fed has given Wall Street lots of firepower to ramp up the prices of risk assets, including equities.
But what will happen when the Fed stops buying assets? If QE2 works and the wealth effect of higher asset prices creates a sustainable economic recovery, we think the Fed will stop its QE activities. The Fed is legally mandated to manage the economy, not the stock market, and we think the Fed will sacrifice the stock market to its legal mandate. If that happens, stock prices are likely to plunge to well below fair value.
A more likely outcome is that stock prices will be higher by the time QE2 ends, but economic growth will not be sustainable without massive government support. Then even more QE will be needed, and stock prices could keep rising for a while. In our opinion, however, no amount of QE will be able to keep the current stock market bubble from bursting eventually.
- Yesterday’s auction of Portuguese debts/bonds was deemed a ‘success’! This is propaganda. Who is buying these debts? My guess is: ECB and FedRes. All of this is simply an Illuminist bankster takeover of Portugal. If Portugal had resisted the takeover, the auction will probably crash! Illuminist banksters are conquering Europe and consolidating power via fraudulent finance! Both the FedRes and the ECB are Illuminist owned. (emphasis mine)
Ambrose Evans-Pritchard: The dam breaks in Portugal
Those of us chained by journalistic destiny to the eternal EMU crisis remember the exact moment when Ireland succumbed. Premier Brian Cowen was still insisting that his government was fully funded for months to come and had no need whatsoever for an EU-IMF loan package when the central bank put a swift stop to the charade. The moment that Governor Patrick Hohonan said he “absolutely” expected his country to accept a loan package worth “tens of billion”, it was over.
So I had a sense of deja vu this morning when Teodora Cardoso, the Adminstradora of the Banco de Portugal, blurted out in a conference that her country should turn to the IMF. “It would be easier if we had external support because the adjustment would be less abrupt: if we leave it to the markets it may be brutal,” she said. (My loose translation).
Meanwhile, Publico reports that “technical talks” are going on behind the scenes with the EU authorities and the IMF, with a plan likely to be in place by next week. This feels exactly like the final days – or hours – before Ireland gave in.
Evidently, there is a split at the central bank. Governor Carlos Costa still insists that a rescue can be avoided. “I have said it, and I will say it again: the Portuguese are solving their problems and have the ability to solve their problems themselves,” he said. Well, Dr Costa, if you cannot hold your own board together, do you expect us to believe this?
The current rule of thumb in the markets is that when yields on 10-year bonds rise above 7pc – they reached 7.24pc yesterday before ECB gunners fired off a whiff of grapeshot – the situation becomes untenable, especially for economies that are contracting.
Portugal’s central bank has just released its forecast for 2011, predicting that GDP will contract 1.3pc. Think about this. Interest costs on total public/private debt of 325pc of GDP are rising on a shrinking economy. The debt dynamics are deathly. Finance minister Fernando Texeira dos Santos this morning sounded like a man who has just been flattened by a Panzer. “We are doing our job. Clearly, Europe is not doing its job to defend the stability of the euro,” he said.
I cannot see what Portugal gains at this point from dragging out the agony, though I can quite understand why the ruling Socialists prefer to delude themselves a little longer. Any recourse to the IMF would shatter all that remains of their credibility. Let me be clear, there is no shame or necessary stigma to an IMF package, and the Fund is a much cuddlier institution than it was last time Portugal needed help. Nor let it ever be forgotten that Portugal is to a great extent the victim of EMU’s unworkable structure. However, the political reality is that any bail-out would be viewed by Portugal’s people as a disgrace and a humiliation.
As for Germany and France, what do they think will be gained by using press leaks to set in motion a chain of events that forces Portugal to take a loan package? Did they not learn from Ireland’s forced rescue that deployment of the EFSF bail-out fund offered no defence whatsoever against further contagion, failed to bring down Irish spreads, and merely drew closer attention to the fact the EU rescue machinery is too small and dysfunctional to cope with the berg beneath the protruding ice?
The EU strategy is simply unworkable. It relies on hope and a prayer, and the misguided belief that the North-South imbalances are “self-correcting” to pinch from Wolfgang’s excellent column once again. All we can do is stand back and watch in pain as the Euro-Hegelians ruin one country after another.
My sympathies to the Portuguese people who are not to blame for the foolish illusions of their governing elites. And remember, Cara Nação, this bail-out is not for you: it is for European banks exposed to Portuguese debt, just as the Irish and Greek bail-outs were in reality rescues for German, French, Belgian, Dutch, British, and Spanish lenders that ran amok during the credit bubble.
But you pay.
- This survey result is highly optimistic and unrealistically so. Most countries in the Eurozone are effectively bankrupt. Just because you can borrow even more money to plug your refinance needs does not make you solvent! If we were to look at the true balance sheet(ie. including unfunded liabilities, social security, …), debt levels of all these countries, their debt to GDP ratio is way above 100%. Even Germany’s debt to GDP ratio is around 135% conservatively!
- Ignore all the dis-information about Portugal, Greece, Ireland … being rescued. No one is being rescued. More debts have been piled on top of existing debts. The debt bomb has grown bigger and more destructive. The only way out, even though the ECB will deny it, is massive creation of money out of thin air: QE. This is currency debasement and the inflating away of all debts. Fiat currencies are being devalued against hard assets. Just look at the CCI, commodity price index, it is hitting record highs!
Survey of German Bankers: At Least One Euro-Zone Country Could Go Bankrupt
Billions in loans have succeeded in pulling Greece and Ireland back from the brink of bankruptcy. But many bankers are still expecting the worst. A new Ernst & Young survey reports that almost half of German banking executives think at least one euro-zone country will go belly up.
Where will the euro crisis lead us next? Will Portugal really be the next euro-zone country to ask for help from the European Union’s rescue fund? It would appear that the majority of investors are expecting it to. What’s more, German banking executives even go one step farther: According to a recent survey of executives at 120 banks in Germany conducted by the management consulting firm Ernst & Young, almost half of them predict that at least one euro-zone country will go bust. Indeed, when asked whether they currently expected to see a sovereign debtor in Europe default, 47 percent of those questioned answered “yes.”
Still, only a quarter of them said that they expected possible defaults to negatively affect their companies. Claus-Peter Wagner, the head of the financial services division of Ernst & Young’s branch in Germany, said that: “The vast majority of surveyed institutions hold either no or very few bonds of the shaky countries and, consequently, do not have to fear any direct losses.” Wagner also added that measures recently taken by the European Central Bank (ECB) to stabilize the bonds of weak euro-zone countries had been successful.
Nevertheless, Wagner did warn that there would be catastrophic consequences if one of these countries actually did become insolvent. “If some of the major banking houses are forced to make massive write-offs,” Wagner said, “it would lead to renewed turbulence in the entire global securities market.”
The ECB has recently being stabilizing the market by buying up the sovereign bonds of dangerously over-indebted euro-zone countries. Until the end of last week, the ECB had done this to the tune of roughly €74 billion ($96 billion).
Dispute within Portugal’s Central Bank
According to information obtained by SPIEGEL, Germany and France want to push Portugal to seek a bailout from the EU’s rescue fund as soon as possible because they don’t think the financially troubled country will be able to borrow funds on capital markets for much longer. Officials in Berlin and Paris deny exerting any pressure to make such a move. And Portuguese Prime Minister Jose Socrates insists that his country will be able to stick to its 2010 budgetary targets and does not need any assistance.
The debate over whether Portugal will eventually be forced to ask for help has sparked controversy within the country’s central bank. Teodora Cardoso, a member of the bank’s six-member board of directors, has publicly entertained the idea of accepting EU funds — and thereby pitted herself against her boss, Carlos Costa, the board’s governor.
Last week saw an additional rise in the risk premiums for the sovereign bonds of weak euro-zone countries. Greece and Ireland have already accepted help from their fellow euro-zone member states and the IMF that came with stiff conditions. However, Tuesday’s markets did bring some good news for Greece: At an auction of six-month T-bills, the Greek government was able to raise €1.95 billion instead of an expected €1.5 billion. According to the Finance Ministry in Athens, the interest rate on the papers was 4.9 percent.