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Banned
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Originally Posted by roachboy
host---these last couple posts of yours are very interesting...thanks for putting them together.
what i dont follow is the linkage you make between this credit crisis and the entirety of the post-bretton woods currency system. it seems to me to jump a number of levels analytically. could you spell out the steps involved?
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Thank you, roachboy.
I think that the best way to start to answer you is to offer this:
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http://www.constitution.org/mon/greenspan_gold.htm
......In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.
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The author of the above statements is quoted more than 30 years later, lower on this page:
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......No. We are not accepting downturns, nor do I think we look at it as desirable.....
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"They"dodged a downturn after the 2000 Nasdaq stock index crash, which took blue chips stocks with it, over the two subsequent years, via a massive creation and pumping of liquidity into "hard assets"...housing, culminating in the sub-prime lending blow off top of 2005-2006.
For 20 years before that, culminating in the blow off top of paper assets in the 2000 nasdaq, the scheme was to destroy demand for hard assets:
This was written nearly 3-1/2 years ago, but it is a brief relevant piece of the puzzle, IMO:
Quote:
http://www.financialsense.com/Market...2004/0614.html
....Austrians warn of a crack-up boom, wherein the real economy suffers from encroachment by the financial sector, and monetary debasement urges on investment in hard assets, commodities, and energy supplies. The flight from paper currency and securities has encouraged investment in things essential for industrial production, building construction, energy output, and food preparation.
The trend is evident in the bull market shown in the Commodities Research Bureau chart. Corporate profit margins and household budgets are each under great strain. Cost inflation threatens businesses and families. Some label the movement underway as the Great Train Wreck. A major driving force overshadows the situation. It is historic advances made by China and their growth story....
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In 1980, gold briefly peaked at $800+ per oz. There was a day in 1980 when an ounce of gold bought the DOW, the Dow Jones Industrials index (DJIA) of 30 stocks was at 800 points briefly in 1980. Silver jumped to $50/ounce. I can remember, in late 1979, long lines at metals exchanges (primarily coin shops and some jewelery fabrication outlets) of people queued up to sell their sterling tea service, heirloom flat ware, and hoarded pre-1965 silver US dollar coins, halves, qtrs., and dimes at prices that have not been reached since.
While gold has exceeded $800 this year for the first time in 27 years, silver has barely broken $16.00.
In the 80's and 90's, central banks were bent on putting gold back in it's box. They conducted surprise, huge auctions of their gold stores to drive the price of gold down, intending to keep the invetor emphasis on paper money and other paper assets. In addition, and probably with more impact, they lent their gold to speculators at one percent annual interest. The speculators sold the borrowed gold, further pressuring down prices.
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http://www.moneyweek.com/file/8038/h...gold-down.html
How central banks have held gold down
09.02.2006
....."The starting point for the real story on gold is the quantity of gold held by central banks and the financial derivatives related to part of this gold," says Cheuvreux. "According to the IMF the official figure for gold held by central banks in their vaults is 31,000 tonnes, but the reality is much lower..."
"The origin of today's problems in the gold market date back to the 1980s when central banks began to lend or deposit part of their gold holdings with leading bullion banks (such as JPMorgan Chase, Goldman Sachs, Citibank, etc) in return for a fee, the gold lease rate, typically about 1-2% p.a then (currently about 0.2%). This was seen as a sensible use for an asset that otherwise earned no income for central banks..."
"From the mid-1990s onwards, however, the nature of much of the central bank gold lending and sales changed," says Cheuvreux. And here, we bring new readers up to speed with the story so far.
According to GATA and now Credit Agricole the central banks of the major Western governments have lent out a lot more gold than they've admitted to. Why not?
It was just sitting there...inert...at No.79 on the Periodic Table...racking up insurance and storage costs...a barbarous relic of a time before Mankind perfected the art of printing money with no other backing than the promise to pay with more paper.
It seemed like a no-brainer. The central banks got to squeeze a yield from their gold. The borrowers got to sell the gold on, and use the proceeds to fund more exciting investments like 10-year US Treasuries yielding 4% per year or so. Yes, these "carry trade" returns were tiny. But the cost of borrowing gold was tinier still.
Of course, most of the gold has since wound up in necklaces and wedding rings. So it's unlikely to make it back into the global bullion market. And it's never going to see the inside of a central bank vault again.
But what's to worry about? So long as gold remains a mere relic...a yellow reminder of what used to be money...no harm done. Unless something absurd happens, that is. Something absurd like, say, gold doubling to $573 an ounce inside 5 years. If that happened, then the "carry trade" of borrowing gold to invest in paper could become a very expensive way to bankrupt the entire global financial system.
Hence GATA's contention that Western central banks have sought to keep the price of gold down. Cheuvreux now cites the Bank of England's infamous fire-sale of mid-1999. Gordon Brown and the US administration had just failed to make the International Monetary Fund dump some of its gold onto the open market. So instead, Prudence sold half of our holding yours and mine, gentle reader at the bottom of gold's 20-year bear market.
"From the UK's standpoint," says Cheuvreux, "the handling of the sale was a fiasco. We believe the current loss to UK taxpayers of about $2bn makes a mockery of Tony Blair's comment to the House of Commons:
'It was carried through perfectly sensibly and we actually got the best deal for the country.'"
New and "unexpected" sources of gold supply also showed up at the turn of this century. In October 1999, for instance, the Bank of Kuwait offered to lend the UK its entire 79-tonne holding of gold. "Additional US military spending for Kuwait was announced shortly after," notes Cheuvreux...which is some kind of accusation, right?
Chile then sold 34 tonnes in 2000, and Uruguay moved 57 tonnes to London for lending. Most of the cash realised from these transactions as with most other gold carry trade deals - found its way into government bonds. So here too, the central banks distorted the market, pushing up bond prices...pushing down yields...and helping pump up the bubble in debt.
"Our suspicion is that Bernanke will try to keep the US credit expansion going as long as possible (probably with the inevitable consequences). A further leg in the current credit expansion and inflationary boom in assets (with hyperinflationary risk) seems most likely outcome at this stage. At the same time, the heavily debtladen US economy is also at risk of a deflationary slowdown.".....
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To his credit, Ron Paul hounded Alan Greenspan whenever Greenpsan tesitified before the congressional committee that Paul served on:
Quote:
http://www.usagold.com/gildedopinion...span-gold.html
7/22/1998.....
Dr. PAUL. A very quick question. You seem to welcome, and you have been quoted as welcoming, a downturn in the economy to compensate for the surge and modest growth in the economy. Is it not true that in a free market, with sound money, you never welcome a downturn in the economy? You never welcome the idea of decreased growth, and you don't concern yourself about this? And yet, here we talk about when is the Fed going to intervene and turn down the economy?
It seems that there is a welcoming effect to the fact that the Southeast Asia has tampered-you know, price pressures. Couldn't we make a case that the free market would operate a lot better than the market we use today?
Mr. GREENSPAN. I think you have to define what you mean by a ''free market.'' If you have a fiat currency, which is what everyone has in the world--
Dr. PAUL. That is not free market.
Mr. GREENSPAN. That is not free market. Central banks, of necessity, determine what the money supply is. If you are on a gold standard or other mechanism in which the central banks do not have discretion, then the system works automatically.
The reason there is very little support for the gold standard is the consequences of those types of market adjustments are not considered to be appropriate in the 20th and 21st century. I am one of the rare people who have still some nostalgic view about the old gold standard, as you know, but I must tell you, I am in a very small minority among my colleagues on that issue.
<h3>Dr. PAUL. So I guess we have to accept the downturns?
Mr. GREENSPAN. No. We are not accepting downturns, nor do I think we look at it as desirable.</h3> What we do look at is an economy which is running at a pace which is unsustainable over the long run and will eventually run off the tracks and create significant disruption. So we do not look forward to a weakening in growth. All we are concerned about is a pattern of growth which is sustainable.
In other words, when we talk about our goal as maximum sustainable economic growth, the ''maximum'' and the ''sustainable'' are both crucial elements to that. We can get a maximum growth in the short run, which is not going to help anybody over a longer-term period. That we would consider to be an unacceptable or undesirable pattern of growth.
Dr. PAUL. Thank you.
2/24/1999
Dr. PAUL. Thank you, Mr. Chairman.
Mr. Greenspan, a lot of economists look to the price of gold as an indicator and as a monetary tool. It has been reported that you might even look at the price of gold on occasion.
Last summer on a couple of occasions here when you were talking before the committees on securities and on derivatives you mentioned something that was interesting. You said that central banks stand ready to sell gold in increasing quantities should the price rise, which I thought was rather interesting.
Then I followed up with a letter to you to ask you whether or not our central bank might not be involved in something like that, in the gold market. And you did answer me and stated that since the 1930's the Federal Reserve has had no authority to be involved with the gold markets.
I am quite confident that the Treasury has authority to be in gold markets, but you stated that the Federal Reserve did not. But this contradicts some reports that have been made by some Federal Reserve officials that said that the New York Fed was very much involved in the London gold pool from 1961 to 1971. But your answer implied that the Fed has never been involved since the 1930's, which I think is interesting.
The reason why this could be of importance is that we do know that our Treasury was supporting a fixed price of gold at $35 an ounce in the 1960's, so therefore the price of gold of $35 an ounce was totally useless in predicting what might happen and what did happen in the 1970's. So if central banks stand ready to lease and sell gold in increasing amounts should the price rise, we are more or less, you know, in a time when the gold price is probably so-called fixed; and we do know that the evidence is there that central banks do loan gold, they sell gold. So could it be that the price of gold today is less valuable to the economists, who think that gold could help us, in thinking that maybe we are in a period of time comparable to what we had in the 1960's?
Mr. GREENSPAN. I think the price of gold has, over the decades, been a generally usable indicator of what the level of inflation has been. Obviously, during the period of an active gold standard, which was really prior to World War I, the price level pretty much locked itself in to the gold price. In fact, by definition it did.
The issue of buying and selling gold as the price changes is indeed exactly what we used to do. We used to, at a certain thing called the gold points, which was the price of gold plus the transportation cost differentials, we, that is, the United States Treasury, stood ready to buy and sell gold at a spread, as indeed all other participants in the gold standard did. So in that regard that was exactly what was happening.
But, needless to say, since we have gone off the gold standard, and especially since 1973, there has been basically a general float of the dollar vis-a-vis gold, which means that the gold price is like another commodity's price.
Nonetheless, like a lot of commodity prices, and perhaps better than most, it has been useful, in my judgment, in trying to get some sense of what inflationary pressures have evolved in this country.
Dr. PAUL. Even if the central banks, who are the major holders of gold, are willing to sell gold in order to manipulate the price or hold the price at a certain level? We are not on a gold standard, so what would the motivation be?
Mr. GREENSPAN. They are not doing it for purposes of fixing the gold price. They are looking for it to reduce their stock of gold when they have sold on the grounds that: one, it costs to store the gold; and, two, it didn't obtain any interest. So they perceived it to be a poor asset to hold. But the purpose was not to manipulate the price of gold.
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Quote:
2/17/2000
Dr. PAUL. "My concern is what is going to happen when this bubble bursts? I think it will, unless you can reassure me. But the one specific question I have is will M3 shrink? Is that a goal of yours, to shrink M3, or is it only to withdraw some of that credit that you injected through the noncrisis of Y2K?"
Mr. GREENSPAN. "Our problem is, we used M1 at one point as the proxy for money, and it turned out to be very difficult as an indicator of any financial state. We then went to M2 and had a similar problem.
<h3>The difficulty is in defining what part of our liquidity structure is truly money.
</h3>Our measures of money have been inadequate and as a consequence of that we
have downgraded the use of the monetary aggregates for monetary policy purposes.
<h3>Dr. PAUL. "It is hard to manage something you cant define."
Mr. GREENSPAN. "It is not possible to manage something you cannot define."
</h3>
2/11/2004
Dr. PAUL. "Maybe there is too much power in the hands of those who control monetary policy, the power to create the financial bubbles, the power to maybe bring the bubble about, the power to change the value of the stock market within minutes? That to me is just an ominous power and challenges the whole concept of freedom and liberty sound money."
Dr. GREENSPAN. "Congressman, as I have said to you before, the problem you are alluding to is the conversion of a commodity standard to fiat money. We have statutorily gone onto a fiat money standard, and as a consequence of that it is inevitable that the authority, which is the producer of the money supply, will have inordinate power."
7/21/2004
Dr. PAUL. "Yesterday's testimony was received in the press as you painting a pretty rosy picture of the economy.
So my question to you is, how unique do you think this period of time is that we live in and the job that you have?
<h3>Since there is no evidence that fiat money works in the long run, is there any possibility that you would entertain that, quote, we may have to address the subject of overall monetary policy not only domestically but internationally in order to restore real growth."</h3>
Mr. GREENSPAN. "Well, Congressman, you are raising the more fundamental question as to being on a commodity standard or another standard. And this issue has been debated, as you know as well as I, extensively for a significant period of time. Once you decide that a commodity standard such as the gold standard is, for whatever reasons, not acceptable in a society and you go to a fiat currency, then the question is automatically, unless you have Government endeavoring to determine the supply of the currency, it is very difficult to create what effectively the gold standard did. I think you will find, as I have indicated to you before, that most effective central banks in this fiat money period <h3>tend to be successful largely because we tend to replicate that which would probably have occurred under a commodity standard in general."</h3>
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So, with that background of contradiction and mismanagment in place in this post, consider that "they" will do anything to "preserve growth". They will contrive and implement ways to make house valuations seem higher than the trend and fundamentals dictate that they will go. I believe that the only way to do this is to massively inflate the dollar. First there will be attempts like this bailout to inflate housing and other "hard goods" prices, the exact opposite of the recent scam to drive gold prices down.
As the ecomomy increaqsingly fails, and the downturn grips the entire world and chokes growth and demand for petroleum and raw materials, as it already has for US housing units, what the FED fears most, will happen. Deflationary depression. The only question is how many will be destroyed first by the continued inflationary attempt....it's already killing the solvency of many who bought into this housing bubble which was a "hail mary" save in response to the 2000 stock and other paper assets downturn.
I don't see where they can find another speculative bubble to throw instantly printed out of thin air liquidity at. Too many individual and business credit ratings are imploding to provide a sufficient pool of "new marks" to lend money to for buying into the "next new thing"....so it's wreck the dollar to save housing and lower the burden of the accumulated federal debt.
Unlike Argentina in 2000, the US enjoys the advantage of most of it's debt being denominated (and owed) in US dollars. As the Fed prints more to pump inflation to preserve "growth", debt is paid back against unchanged dollar figured principle...lent at a dolalr worth much more than when paid back via excessively printed, fiat script! |