Mish & Max Keiser, Economic & Political Predictions for 2012

December 29, 2011 · Posted in Global Economics · Comment

Here are Mish’s predictions for 2012:

Severe European Recession as the sovereign debt crisis escalates: Austerity measures in Italy, Greece, Spain, and Portugal plunges all of Europe into a major recession. Spain and Portugal will follow Greece into an outright depression.

Political Crisis in Europe: French President Sarkozy loses to socialist challenger Francois Hollande. German Chancellor Angela Merkel’s coalition collapses. The Merkozy agreement is either modified to do virtually nothing or is not ratified at all. This chain of events will not be good for European equities or European bonds.

Relatively Minor US Economic Recession: The US will not avoid a recession in 2012. Retail spending ran its course with the tail-off into Christmas of 2011. The Republican Congress has little incentive for fiscal stimulus measures in 2012 so do not expect any. However, with housing already limping along the bottom in terms of construction and investment (not prices), a US GDP decline will not be severe. The US may see a recession even if GDP barely drops. Certainly the US recession will be far less severe than the recession in Europe and Australia.

Major Profit Recession in US: Profit margins in the US will be torn to shreds as businesses will be unable to reduce costs the same way they did in 2008 and 2009 (by shedding massive numbers of employees).

Global Equity Prices Under Huge Pressure: Don’t expect the same degree of reverse decoupling of US equities we saw in 2011. The US economy will be better than Europe, but equities globally will take a hit, including the US. Simply put, stocks are not cheap.

Fiscal Crisis in Japan Comes to Forefront: Japan’s fiscal crisis and debt to the tune of 200+% of GDP finally matters. The crisis in Japan will start out as a whimper not a bang, but will worsen as the year wears on. If Japan responds by monetizing debt, not a remote possibility at all, Japanese equities will massively outperform in nominal and perhaps even in real terms. “Real” means “yen-adjusted”, not “inflation-adjusted” terms.

Few Hiding Spots Other than the US Dollar: US treasuries and German bonds were safe havens in 2011, but with yields already depressed don’t expect huge gains. Expect to see a strengthening of the US dollar across the board against all major currencies. Moreover, cash (one the most despised asset classes ever), may outperform nearly everything, even if the dollar goes virtually nowhere. Hiding places will be few and far between for much of 2012.

US Public Union Pension Plans Under Attack: States finally realize the need to rein in pension plans much to the dismay of public unions. Social and economic tensions in the US rise.

Regime Change in China has Major Ramifications: China will start a major shift from a growth model dependent on housing and infrastructure to a consumer-driven model. The transition will not be smooth. Property prices in China will collapse and commodity prices will remain under pressure.

Hyperinflation Calls Once Again Will Look Laughable: Unless there is a major disruption in the Mideast (which I do not rule out by any means), oil prices will drop and food prices will follow. If so, we will once again see silly talk from the Fed about preventing “unwelcome drops in inflation”. As always, the deflation key is not prices at all but rather credit and credit marked-to-market. Expect credit in all forms to come under attack and expect junk bonds take a hit as well. By the way, regardless of what happens to oil prices, hyperinflation calls will look silly.

As always, out of all the experts out there, Mish’s predictions are probably the ones I would pay most attention to.

Tags: 2012 predictions, china, europe, gold, mike shedlock, mish

What’s Behind the West’s Involvement in Lybia?

September 18, 2011 · Posted in Foreign Policy · Comment

Some food for thought regarding Lybia (a friend forwarded several articles to me):

First off, I believe it’s quite curious that the IMF was so quick to recognize the TNC as Lybian government:

International Monetary Fund (IMF) today recognised the rebel’s National Transitional Council (NTC) as the legitimate government of Libya, assuring the war ravaged country of rapid and sustainable economic recovery.

“I am happy to report that reflecting the views of the international community, the IMF will deal with the NTC as the government of Libya,” IMF Managing Director Christine Lagarde said.

“In this context, the Fund stands ready to help the authorities through technical assistance, policy advice, and financial support if requested, as they begin to rebuild Libya’s economy,” she said.

… it certainly helps motivate “rebel” leaders to seize power when they are given the ability to request massive financial aid, pay it out to themselves and their cronies, and kindly pass the bill on to the country’s future taxpayers, in short … the IMF’s modus operandi.

In March BBC already reported:

Libya has declared gold reserves worth more than $6bn at current prices, thought to be held largely at home.

The reserves are substantial, ranking in the global top 25, according to International Monetary Fund (IMF) data.

… since then gold has risen by about 30%, so those total reserves would now be closer to $8bn, if the reports are accurate.

And Asia Times Online asks Libya all about oil, or central banking?:

(…)

I have never before heard of a central bank being created in just a matter of weeks out of a popular uprising. This suggests we have a bit more than a rag tag bunch of rebels running around and that there are some pretty sophisticated influences.

(…)

Another provocative bit of data circulating on the Net is a 2007 “Democracy Now” interview of US General Wesley Clark (Ret). In it he says that about 10 days after September 11, 2001, he was told by a general that the decision had been made to go to war with Iraq. Clark was surprised and asked why. “I don’t know!” was the response. “I guess they don’t know what else to do!” Later, the same general said they planned to take out seven countries in five years: Iraq, Syria, Lebanon, Libya, Somalia, Sudan, and Iran.

What do these seven countries have in common? In the context of banking, one that sticks out is that none of them is listed among the 56 member banks of the Bank for International Settlements (BIS). That evidently puts them outside the long regulatory arm of the central bankers’ central bank in Switzerland.

The most renegade of the lot could be Libya and Iraq, the two that have actually been attacked. Kenneth Schortgen Jr, writing on Examiner.com, noted that “[s]ix months before the US moved into Iraq to take down Saddam Hussein, the oil nation had made the move to accept euros instead of dollars for oil, and this became a threat to the global dominance of the dollar as the reserve currency, and its dominion as the petrodollar.”

According to a Russian article titled “Bombing of Libya – Punishment for Ghaddafi for His Attempt to Refuse US Dollar”, Gaddafi made a similarly bold move: he initiated a movement to refuse the dollar and the euro, and called on Arab and African nations to use a new currency instead, the gold dinar. Gaddafi suggested establishing a united African continent, with its 200 million people using this single currency.

During the past year, the idea was approved by many Arab countries and most African countries. The only opponents were the Republic of South Africa and the head of the League of Arab States. The initiative was viewed negatively by the USA and the European Union, with French President Nicolas Sarkozy calling Libya a threat to the financial security of mankind; but Gaddafi was not swayed and continued his push for the creation of a united Africa.

(…)

So is this new war all about oil or all about banking? Maybe both – and water as well. With energy, water, and ample credit to develop the infrastructure to access them, a nation can be free of the grip of foreign creditors. And that may be the real threat of Libya: it could show the world what is possible.

Most countries don’t have oil, but new technologies are being developed that could make non-oil-producing nations energy-independent, particularly if infrastructure costs are halved by borrowing from the nation’s own publicly owned bank. Energy independence would free governments from the web of the international bankers, and of the need to shift production from domestic to foreign markets to service the loans.

If the Gaddafi government goes down, it will be interesting to watch whether the new central bank joins the BIS, whether the nationalized oil industry gets sold off to investors, and whether education and healthcare continue to be free.

Of course health care is never free, so just ignore that nonsensical statement. The article also makes some, in my opinion, very questionable analyses about monetary policy and central banking which I am sparing you in the excerpts above. But that doesn’t mean it doesn’t provide a lot of interesting journalistic insights into what may be going on behind the scenes in this project.

As my friend who sent me these articles pointed out: Let’s see how long it’ll take until we hear stories about Lybian assets missing.

Tags: bis, central banking, gold, imf, lybia

Gold Leaving the Leveraged Financial System …

August 22, 2011 · Posted in Investing · Comment

… I love the fact that the mainstream media is beginning to make the connection between soaring gold prices, falling treasury yields, and deflation.

What comes to mind once again is the inverted pyramid of the global financial system:

… as actors in the global financial system deleverage their positions, funds tend to flow from the higher spheres (stocks, derivatives, etc.) to the lower ones (US government bonds, power money such as gold/silver).

Tags: delevaraging, gold

Gold Price Exceeds Platinum

August 10, 2011 · Posted in Investing · Comment

For the first time in 2 1/2 years the gold price has exceeded that of platinum.

Back then the trend was reversed immediately.

According to Reuters this time gold is set to widen premium over platinum:

Gold prices rose above those of platinum for the first time since December 2008 late on Monday. The last time this happened, the situation reversed within a few days, and traders said then that the convergence of the gold-platinum ratio gave a clear signal to sell gold and buy platinum.

Today’s backdrop is very different.

“Gold as a defensive asset is being driven higher at the moment by risk aversion, and platinum as a cyclical asset is under pressure because growth is slowing,” said Michael Widmer, an analyst at Bank of America-Merrill Lynch.

“We were there around the great recession (2008), and then you had the various stimulus packages hitting the market, and you saw the prices of the two metals starting to diverge again,” he said. “The macro picture is a bit different this time around. I don’t think that it is a compelling trade.”

In contrast to the situation in 2008, gold’s premium to platinum is a function of its own strength, rather than a falling platinum price.

… interesting times.

Gold is a money commodity, platinum is not, at least it doesn’t seem to be acting like one.

In deflation money does well, all other commodities tank. I have said it many times before and over the past 3 years we have seen this theory confirmed beautifully.

Tags: gold, platinum

Rush to Gold Intensifies

August 8, 2011 · Posted in Monetary Economics · Comment

China Business News writes Central Banks Join Rush to Gold:

Central banks are ramping up their gold buying as they seek to diversify their reserves away from the dollar and other beleaguered currencies.

South Korea became the latest government to disclose a big bullion purchase, saying Tuesday that it recently bought 25 metric tons – more than doubling its holdings to 39 metric tons. Mexico, Russia and Thailand have also been major buyers in 2011.

This year, governments have almost tripled their net gold purchases, increasing their holdings by 203.5 metric tons this year, up from a 76-metric ton rise last year, according to the World Gold Council, an industry group backed by miners.

The demand marks a major shift in central banks’ thinking about gold. Increasingly, they see bullion as protection against risks posed by declining paper currencies and global economic upheaval, and their vast resources and conservative bent make them a powerful force in the gold market.

While gold is an asset that does not generate income, that shortcoming is less glaring among historically low interest rates.

Before 2010, governments had on balance been shedding their bullion for two decades, during which gold was seen by some as a relic. According to data from GFMS Ltd., a metals consultancy, 1988 was the last year that official holdings increased.

“We definitely have seen a sea change” in central bank attitudes toward gold, said David Greely, chief commodities strategist at Goldman Sachs Group. Central bank buying provides “longer-term support for gold prices,” he said.

I have said it before and I will say it again.

In a world of debt laden governments, great depressions left and right, and the monetary disfigurement called fiat currencies, gold provides a safe haven for all those who get it.

This will all the more be the case as global bond ratings are finally being cut.

As these lines are written gold has just hit $1,711.30.

Tags: central banks buying gold, gold

Utah’s Gold & Legal Tender Laws

May 28, 2011 · Posted in Monetary Economics · Comment

Fiat currency is demanded by individuals in exchange transactions because its acceptance in payments of debts is enforced by the state, because it is required in tax payments, and because reproducing the same currency without state approval is prevented via the threat or use of aggression. This ensures that there will always be some kind of demand for it.

(You can find some more information on the specific history of fiat money in the US in my post Government Power, Gold, Fiat Money, and the U.S. Constitution.)

The government also discourages the use of alternate media of exchange, e.g. in the case of gold in the US, through the imposition of capital gains taxes, but even without such additional hurdles there would be little to no threat to the enforceability of the fiat money system.

In fact, the US Treasury itself still mints gold and silver coins that it officially recognizes as legal tender for all debts public and private. For example, a 1 Oz American Eagle gold coin, is recognized as a $50 legal tender.

Mind you, the current value of 1Oz of gold on the open market is priced at around $1,500. So in other words you’d have to be a complete idiot were you to use that coin to buy, say, a concert ticket worth $50 or pay your taxes by supplying a commensurate number of such coins to the IRS, when you could just as well use paper money that you ascribe a much lower value to.

Recently there have been some developments in Utah toward recognizing gold and silver as legal tender for the metal value and NOT the amount minted on the coins:

The Utah Legislature on Thursday passed a bill allowing gold and silver coins to be used as legal tender in the state — and for the value of their precious metal, not just the face value of the coins.

State backers said they hope the move will help insulate Utah from a potential monetary slide as countries question the value of the dollar. Others, casting their eye nationwide, said it could spur a broader move by Congress or states to readopt a gold standard.

“Utah, if the governor signs this particularly, they’re going to change the national debate on monetary policy and get us back to basics,” said Jeffrey Bell, policy director for Washington-based American Principles in Action. Mr. Bell has been in Utah to help shepherd the legislation through.

Utah’s bill allows stores to accept gold and silver coins as legal tender. It also exempts gold and silver transactions from the state’s capital gains tax, though that does not shield exchanges from federal taxes.

It is true that merchants in Utah can now also accept a smaller amount of gold in payments, reflecting the open market price of gold, rather than its legal tender amount. But they would still be required by federal law to accept fiat currency. Individuals would also still be required to pay federal capital gains taxes on their realized gold gains.

I would say that, by and large, Gresham’s Law applies here as much as anywhere else. So long as the government aggressively enforces the use of its fiat currency and in fact requires its use in the settlement of tax debts, people will be inclined to push those paper dollars back into circulation, while hoarding the “better” money: gold and silver coins.

Thus I view the recent laws passed in the US state of Utah as a mere recognition of what already is. The exemption of gold from capital gains taxation on the state level may make it lucrative to sell gold in Utah, but that’s about the extent of the impact of this law as far as I can tell.

Tags: Amercian Gold Eagle, fiat money, gold, gold money, legal tender, utah

Gold, Treasury Notes, Dollar – May 2011

May 14, 2011 · Posted in General Economics · Comment

The long term trend for gold, Treasury Notes, and the US Dollar seems to be holding up.

There has been some noticeable action in Treasury Notes most recently, in particular since February 2011 investor’s appetite has been growing again and thus rates have declined and remained within the range that has been developing since 2008:

Gold’s trend has been holding up steady as always:

As you can see in the chart there has always been room for dips in gold, and that is not different now. It may very well drop somewhere between 1,300 or 1,400, however, so far it has always done so only to bounce back even stronger after that. In particular when the next credit crunch happens it is possible that gold will see some dips alongside all other commodities, but then come roaring back up while other commodities continue to crash. This is at least what happened in 2008 and it may well happen again.

… and the seemingly most hated currency in the world has also remained within it’s long term trading range, and it may be possible that once again it will show some significant strength for the months to come:

The deflation trade has been dormant for a while indeed, but its expected trends have held up so far, and its benefits are most noticeable when everything else snaps back into the general trend of the Great Depression 2.0.

Tags: dollar rally, gold, treasury, us dollar

Government Power, Gold, Fiat Money, and the U.S. Constitution

December 26, 2010 · Posted in Government, Monetary Economics · Comment

When we repeat again and again, like a broken record, that pieces of paper with words on them, that is Constitutions, Bills of Rights, Amendments, and the like, have no power to sustainably constrain aggressive gangs, such as governments, then we do that for a reason.

When we say that if such revered and supposedly binding scripture can’t even do the trick, that then surely it is even more deranged to fall prey to the illusion that rather non-binding check marks in polling booths will do the job, then we do that because we have sound syllogistic reasoning to back it up and on top of that have observed centuries of historical evidence.

Those who scoff at such propositions are free to do so. They can mistakenly call the ideas nihilistic, defeatist, and cynical. But in doing such things, they are unfortunately missing something: That is, that such accusations are not arguments against the logical and empirical truth-content of the propositions made; that they are emotional knee jerk reactions that arise out of childhood scar tissue and a deliberate disregard for knowledge in fields where that knowledge hurts them. If they have counter-evidence, then by all means, present it!

When we propose Voluntaryism, then it is out of a deep desire for meaningful change and the conviction that we can no longer afford repeating the same mistakes over and over again, expecting different results; the definition, by the way, of insanity.

And a better case couldn’t have been made in the lab of human society than that of the formation of the United States: A small central government, granting significant rights to states and localities, limited in its powers to tax and imprison, constrained by a Constitution whose spirit and words expressly and virtually unmistakably limit the potential for arbitrariness on the part of those in power, a Bill of Rights that grants to every citizen the due process of law before depriving him of his freedoms and property as punishment for crimes, a clear separation of Executive, Legislative, and Judiciary, all imbued with the Enlightenment spirit of the time, highly secular, and highly in favor of the protection of every individual’s equal rights to Life, Liberty, and Property.

Granted, the American Republic from the outset denied certain rights to certain minorities, but so did the rest of the world! The fact doesn’t change that in comparison there hasn’t been a better example for the deliberate establishment of a limited, constrained, republican form of government, born out of reason, and not passed down through traditions of hegemonic power structures.

Seriously, those who believe that it is possible to have a sustainable limited form of government could not ask for a more ideal example to go ahead and make their case!

The case of Gold, Money, and the U.S Constitution is yet another prime example of how all such Constitutions, Articles, Bills of Rights present nothing but a minor roadblock in the way of bureaucrats’ never ceasing quest for oppression, abuse, and aggression.

It clearly lays out how the spirit and the original intent of such well meaning documents can be turned upside down completely and 100%, giving the abusers the great and far reaching benefit of depredations under the appearance of due process and legitimacy – a far more destructive and longer lasting form of tyranny than outright brute force.

Attorney Eugene C. Holloway lays out the case in 4 parts. I will just provide a quick summary and noteworthy references, but the whole thing is well worth a read.

PART 1 – THE CONSTITUTIONALITY OF PAPER MONEY

The basic case for the unconstitutionality of fiat money in the US arises out of Article 1, Section 8, clause 5, which states that Congress shall have the power …

To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

When the Constitution was drafted to replace the Articles of Confederation, some people wanted to include a power that used to be granted as per the Articles, and add “to emit bills of credit” as an enumerated power of Congress.

Bills of credit are essentially paper money bills that, however, grant the holder the right to redeem them for gold or silver money at a future date. They are in that sense fiat money “light”.

So one can argue that if even such a highly constrained form of paper money was struck out upon drafting the US Constitution, then surely it should be clear that an outright fiat money regime was most definitely not desired by the majority of the founders whose experience of the depredations caused by the Continental Dollar was all to vivid at the time.

The Delegate Luther Martin’s statement, albeit for the wrong reasons, provides a stellar case to support the notion that it is fiat money that makes large scale war and murder possible in the first place, of course imbued with all the typical, juicy and fear-mongering language of a true early-day neocon:

(…) a motion was made to strike out the words “to emit bills of credit.” Against the motion we urged, that it would be improper to deprive the Congress of that power; that it would be a novelty unprecedented to establish a government which should not have such authority; that it was impossible to look forward into futurity so far as to decide that events might not happen that should render the exercise of such a power absolutely necessary; and that we doubted whether, if a war should take place, it would be possible for this country to defend itself without having recourse to paper credit, in which case there would be a necessity of becoming a prey to our enemies (…)

In conjunction with the 10th Amendment it should be clear that, as per the Constitution, the U.S. Congress should not be allowed to print or delegate the printing of fiat money:

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

And as we all know, bureaucrats will always stick with passion and consistency to the application of laws that are passed to constrain their own power, right? Well …

PART 2 — THE LEGAL TENDER LAWS

This part documents the three big legal tender cases and the Supreme Court’s step by step perversion of the obvious intent of the US Constitution:

Treasury Secretary Salmon P. Chase, proponent of a national currency, but opposed to making it legal tender, was by his own admission forced by the exigencies of the Civil War to accept the 1862 program of New York Congressman Eldridge G. Spaulding and the House Ways and Mean Committee to issue the federal government’s first legal tender notes and suspend the right to redeem the notes in specie. The scheme worked insofar as it succeeded as a means of financing the war without crushing the fragile Northern economy with excessive direct taxes. In the second Legal Tender cases Justice Bradley explained in salutary terms how the device works as an “imperceptible tax” to finance war by invisibly spreading the financial pain:

Particularly eye-opening to me was the ease with which such legal tender laws could be enforced with minimal effort:

Some scoff at the statement that the legal tender laws are coercive. The answer to those skeptics appears in Andrew Dickson White’s monograph Fiat Money Inflation in France. In 1793, failure to accept the French paper money was made punishable by death and the punishment was actually imposed as demonstrated by the lists of those condemned to the guillotine. In contrast to the Draconian measures taken after the French revolution, the import of the U.S. legal tender laws has been merely to allow private and public debtors to legally discharge their debts by payment of legal tender currency. But this form of interference by the state in private transactions to appropriate the wealth of creditors is coercive nevertheless; and the French experience illustrates the direction that any kind of state coercion can take once the state’s authority to act is established.

The following statement from the Attorney General and the subsequent note by the author illustrate the maddening logic used to literally turn the US Constitution upside down:

[Opposing] counsel quotes from the debates in the Federal Convention of 1787 to show that members of that body were opposed to making paper a legal tender. The very quotations prove that the members considered that the power to emit bills of credit involved the power to make them a legal tender, and hence they struck out of the draft of the Constitution the power to emit bills. But it is no uncommon experience that the words of a constitution or statute are found, in their fairest interpretation, to import more than their authors distinctly designed. It is not given to man, when framing a constitution, to foresee all the cases to which the conferred powers will properly extend. And in this very matter, notwithstanding that the power to emit bills of credit was struck out, this court has held that the power exists; and why, then, does it not exist with all that in 1787 was supposed the belong to it? [Note the logic here: The Constitutional Convention struck the authority to emit bills of credit because they were opposed to paper money as a legal tender, but inasmuch as the authority to emit bills of credit has now been recognized, legal tender ought to come along as well because the founders felt that they went hand in glove!]

PART 3 – CONFISCATION AND THE GOLD CLAUSE

Even knowing that it actually happened, it still is almost unthinkable that the United States government would nationalize the personal assets of its citizens, give paper in exchange at 60% of the value of the assets – and book a profit. The public begrudgingly recognizes that the government can take private property as long as the taking is accomplished by due process (such as an eminent domain proceeding) and the owner receives just compensation. However, we expect those cases to be relatively isolated and infrequent. In 1933, the U.S. government devalued the dollar by 40% in less than eight months, but not before it ordered a docile population to exchange their gold for paper and banned gold ownership and transactions in gold to keep citizens from escaping the devaluation. The combined actions operated as a confiscation of the property of every citizen, all at once, with no compensation.

The constitutional validation of these actions followed a similar pattern to the validation of the legal tender laws: (1) unchallenged legislative precedent falling into accepted custom, (2) incremental changes in constitutional interpretations over a period of time and (3) the precipitation of a major crisis that the government chose to address by assuming theretofore unexercised and unauthorized power.

It was now finally time to see if plain and outright Orwellian measures would bode well with the American public, WW1 was a welcome guinea pig:

During the First World War Congress passed a number of war measures, including the 1917 Trading With the Enemy Act, that were designed to marshal the economy to support the war effort. The laws gave much power to the executive branch and were generally acknowledged to be authorized under the constitutional war powers. As originally enacted, Section 5(b) of the Trading With the Enemy Act, 40 Stat. 411, provided:

That the President may investigate, regulate, or prohibit, under such rules and regulations as he may prescribe, by means of licenses or otherwise, any transactions in foreign exchange, export or earmarkings of gold or silver coin or bullion or currency, transfers of credit in any form (other than credits relating solely to transactions to be executed wholly within the United States), and transfers of evidences of indebtedness or of the ownership of property between the United States and any foreign country, whether enemy, ally of enemy or otherwise, or between residents of one or more foreign countries, by any person within the United States; and he may require any such person engaged in any such transaction to furnish, under oath, complete information relative thereto, including the production of any books of account, contracts, letters or other papers, in connection therewith in the custody or control of such person, either before or after such transaction is completed.

As if that wasn’t enough, this law was amended shortly thereafter to read:

During time of war or during any other period of national emergency declared by the President, the President may, through any agency that he may designate, or otherwise investigate, regulate, or prohibit, under such rules and regulations as he may prescribe, by means of licenses or otherwise, any transactions in foreign exchange, transfers of credit between or payments by banking institutions as defined by the President, and export, hoarding, melting, or earmarking of gold, or silver coin or bullion or currency, by any person within the United States or any place subject to the jurisdiction thereof; and the President may require any person engaged in any transaction referred to in this subdivision to furnish under oath, complete information relative thereto, including the production of any books of account, contracts, letters or other papers, in connection therewith in the custody of or control of such person, either before or after such transaction is completed. Whoever willfully violates any of the provisions of this subdivision or of any license, order, rule or regulation thereunder, shall, upon conviction, be fined not more than $10,000, or, if a natural person, may be imprisoned for not more than ten years, or both; and any officer, director, or agent of any corporation who knowingly participates in such violation may be punished by a like fine, imprisonment, or both. As used in this subdivision the term ‘person’ means an individual, partnership, association, or corporation. [Emphasis added.]

Thus, what was solely a wartime measure that many believed had expired was converted into a statute granting war time powers to the President in times of “national emergency,” a term which was not defined in the law (and which, if such an emergency existed in 1933, itself had been precipitated by government mismanagement). This law identified a new “enemy” – domestic “hoarders” who would be subject to imprisonment for violating any rule laid down by the President at any future time during a period of national emergency declared by him based on undefined criteria. Professor Henry Mark Holzer’s monograph “How Americans Lost Their Right To Own Gold And Became Criminals in the Process” catalogues the events of 1933, and more; and it should be read as an adjunct to this article, which despite its appearances is a relatively superficial treatment of the subject.

All hail the mighty Fuerer!!

PART 4 – SEARCHING FOR AMERICA — A COMMENTARY

As many political libertarians, they get this kind of stuff so right in the analysis, and so wrong in the very final conclusions, when they still think that somehow it is possible to establish a “good” government.

Thus Holloways final statements here are brilliant up to the point where he urges to not abandon that ideal. This is, in my humble opinion, but a minor blemish on an otherwise excellent treatise:

[T]he complaints against the gold standard were, and are in actuality, complaints against the unyielding discipline of objective value. The goal of stable prices is inherently inconsistent with a standard that allows gold to circulate as money. If the money supply is inelastic, as it likely would be in the case of gold, normal improvements in technology and productivity naturally ought to cause prices to decline. Businesses have proven throughout history to have a remarkable ability to adapt individually to market conditions (or to go out of business). If they knew that there would be no inflation to negate the natural decline in prices, sooner or later they would figure out how to adjust their business processes to adapt for declining prices – for example, by using strategic product pricing techniques. Surely we must have learned by now that there are grave risks associated with a fiat money system and that the market’s call to be relieved of its function and obligation to deal with objective value is no justification for the government to saddle its citizens with that risk.

Runs on banks arose when depositors were worried about the safety of their deposits. Come now, that cannot be the fault of the monetary system. The banks either had the gold or they did not. But, it is said, they lent the money to finance farms and businesses and mortgages. OK, they must have lent too much and did not keep adequate reserves or failed to arrange privately to be covered by other banks or insurance companies. Anyway, even if depositors gave express or tacit permission for the banks to lend out their money, if a bank promises to redeem bank notes in gold on demand, the bank ought to be managed to be able to do that. To avoid subjecting the bankers to punishment for mismanagement and to avoid causing depositors to have a healthy skepticism about bank trustworthiness, the Federal Reserve System was chartered to insulate the banks from the market’s preference for trustworthiness and to give the depositors a sense of security by government fiat. The Fed was created to bail out irresponsible banks and foster price stability by the expansion of money and credit – a most dangerous game, one that has been played with almost universal failure ever since the first coin was debased.

Instead of allowing the market to fix the problem of declining prices and irresponsible banks, the new System in 1913 allowed the problem to be assumed by the Fed. But in spreading the risk over the entire system and theoretically lowering it, the government created a broader risk, a risk that was national in its scope rather than isolated to individual banks and businesses. When the Fed realized that its expansion of credit in the 1920’s had created a stock market bubble without raising prices, it was faced with a paralyzing dilemma: it could not keep a deflation of the stock market bubble from spilling over into the general economy. The Fed found that it had no precise control over what sectors of the economy would be impacted first by a credit contraction and no way to engineer a deflation so that it did not permeate the economy. Bubbles usually appear at the fountainhead of inflation and then begin to permeate the economy. Bursting the bubble cannot be accomplished surgically – at least no one has figured it out yet, as the internet bubble illustrates. The Fed, despite nine decades of experience, has yet to devise a way to exercise better long term control over the money supply than the gold standard accomlished. I suspect that it is this obvious fact that Mr. Greenspan was referring to in his remarks on December 19.

War and other crises provide pretexts for increases in government power. Once it is acquired, rarely does the assumption of that power completely relent when the crisis subsides. The departure from the discipline of gold money in 1862 with the greenback and in 1933 with gold prohibition was attended by crises that added measurably – by step-functions – to the U.S. government’s control over the economy and its ability to confiscate the fruits of the individual’s labor through inflation. In both cases, there were later repeals, but the repeals represented two steps forward and one step back. The 1879 Resumption Act did not eliminate the legal tender laws, which remain in effect today. Likewise the restoration of gold ownership rights in 1974 and the legalization of gold clauses in 1977 did not resurrect the gold standard or put gold coins back into circulation as money.

We do not know how the government will respond to the upcoming financial difficulties that appear inevitable. But the history of gold money in the U.S. and the increased sophistication and technology available to the government indicate that one may find it difficult to escape the solutions that are handed down. It will not be enough to understand the benefits that the discipline of gold creates for long-term political and economic stability if the vast majority of citizens do not appreciate the political value of a gold standard. It will not be enough to buy gold while it is legal and hide it before the next prohibition occurs. Where, other than the black market, will it be useful? It will not be enough to hope that confiscatory laws and regulations will not be enforced. As will be demonstrated in a later article, the 1933-1974 regulations were enforced. It will not be enough to draft new gold clauses in an attempt to predict what loopholes might be overlooked in the next law. The loopholes eventually will be closed both by the legislature and in the courts. And it will not be acceptable, for me at least, to leave my home in a vain attempt to find a place where I can have greater social, political and economic freedom. I doubt that there is such a place; and even if there were, why should I allow myself to be driven from my home? Some of us have now lived long enough to know that despite Lord Keynes’ famous comment, when the long run has run its course, we will still be here; and even if we are not, our children certainly will be. So the long run is important.

Many of us do not care to evade the law or become exiles or fugitives. We prefer to live and remain in a country where our daily affairs can be conducted freely, in private or in the open, without any concern that, some day, those charged with our protection will turn on us, confiscate our meager savings and forbid us from engaging in prudent and honest trade with our fellow citizens. That is the country that Thomas Jefferson and James Madison thought they had created. I like the idea of living in their country. It is the America that I want to leave to my children and I will continue to search for it.

It is becoming increasingly apparent that the fiat system is entering an unstable, perhaps uncontrollable, phase at precisely the time when a major crisis is brewing. Government budgetary and fiscal policies promoting guns and butter and lower taxes, and monetary policies designed to fight deflation, “stimulate the economy” and monetize historically high mountains of debt are classic signals that the worst fears of the founders are being realized on a scale that they could not have imagined. The accumulation of government power over the individual in such an environment will be, and is, accelerating. Privacy is almost a thing of the past and the movement of assets will join the transfer of money as a carefully regulated activity.

The general population today, unlike the citizenry in 1862 and 1933, has no understanding of monetary economics. Moreover, huge portions of the population (including large and small business enterprises) are in one form or another feeding at the trough of government largesse with absolutely no regard for or understanding of the source of the government’s revenues or how a nation’s wealth is created and what is required to sustain it. They see government money as a kind of natural resource. It is an easy trap to fall into. Just the other night I listened to President Bush commit a substantial sum to fight AIDS in Africa and caught myself saying, “Finally, we are going do something to fight that awful epidemic,” without the least thought about where the money will come from. But if we do not think about where the money comes from, except to oppose direct taxes that affect us, we are digging our own financial graves.

Many people apparently believe, vaguely, that their financial well being is somehow threatened by those seeking lower taxes and less government. (If they are feeding at the trough, perhaps they are right.) And they make no connection whatsoever between monetary policy and their financial security. This wholesale ignorance facilitates, with no serious main stream criticism, the appropriation of wealth from one citizen through inflation and taxes and the redistribution of it to others in the form of government benefits, contracts and programs. I am reminded of the Roman Emperors who taxed the people and then tossed out bread and gold during parades and pageants to curry the favor of the masses. The system will not change until we improve the understanding of the citizens whose votes influence policy.

A libertarian society protected from, and by, a limited government may have been an ideal that the founders sought; but it has never been achieved. Even so, that fact, and the fact that the contrary direction appears to have been generally taken, does not mean that the ideal should be abandoned. If you understand the economic risks posed by the fiduciary (”trust me”) monetary standard and the moral dimensions of its inevitable consequences, you should attempt at a minimum to educate the people around you about the history, the respectability and the security that can be found in the gold standard and encourage them to pass the word. Changing popular understanding begins in your neighborhood, in your business circles and in your associations. It is a daunting undertaking, but it most certainly will not be accomplished if those who understand its importance shrink from the task or retreat into cynicism.

In The Regulation Game, a treatise on government’s regulation of enterprise, authors Bruce M. Owen and Ronald Braeutigam questioned the wisdom of using government power to achieve economic security and justice rather than allowing the market to work. They concluded, “We do not know the answers to these questions. Nevertheless, we are reminded of Edward Gibbon’s comment on the fall of Athenian democracy: ‘In the end they valued security more than they valued freedom, and they lost both.’”

Tags: fiat money, gold, money

Dollar, Gold, Treasurys Continue to Act Well

October 9, 2010 · Posted in Investing · Comment

The Dollar

It’s important to cut out the noise you hear in the media from people who are incapable of looking at events past the duration of a week or so.

The dollar has been taking a break from its long term rally against the Euro, but continues to stay within the trading range that I have been eying for a while.

It’s even possible that the Dollar falls further against the Euro to somewhere around 1.45, and then again rises to levels below 1.20.

Gold

Well, what should I say about gold. It continues to rise to record levels, hitting $1344 on Friday, while those who don’t understand the concepts of money and in particular gold during deflation angrily observe the trend with clueless stares.

Treasury Yields

Treasury yields have hit a 20 month low and are now at 2.38 percent.

The alarm bells are ringing for equities … once more.

Tags: dollar, gold, treasury yields

Gold Prices Hit All Time Record High

September 14, 2010 · Posted in Investing · Comment

Today gold bugs are happy as Gold Prices Surge, Top $1,270:

NEW YORK (TheStreet ) — Gold prices were popping Tuesday as investors turned to gold as safe-haven asset after a slew of disappointing economic data.

Gold for December delivery was adding $27.30 to $1,274.40 an ounce — a record high — at the Comex division of the New York Mercantile Exchange.

The article obligatorily drones on about the cause for the gold price surge now suddenly being inflation fears again, which is of course the purest nonsense as I outlined a while back.

These people try to fit in day to day events into their tiny mental box and spout out knee jerk platitudes as quickly as they possibly can, whenever they observe one isolated incident. Gold prices rising? Inflation! Economy not growing meanwhile? Stagflation! Interest rates dropping. Deflation! Prices not rising quickly enough? Disinflation! Dollar AND gold up?? How weird!!

Few people ever dare to go ahead and attempt to explain the big picture, that is why since 2007 Treasury yields and mortgage rates have moved near or BELOW historic lows, why the dollar is up, gold is up, silver is up, and soft commodities, stocks, and home prices are down, rents are falling, and why you can get a meal at Taco Bell for under $1 …

The answer is one word: Deflation.

Tags: deflation, gold