China and the United States of America certainly share an interesting relationship – much more so than, perhaps, most other countries. It seems to be a complex love-hate relationship, especially so when their huge economies are so intricately intertwined with each other’s. It’s made even more complicated by the fact that the governments of both countries sometimes act contrary to, and are even prepared to hush up, their respective citizenry’s animosities and protests towards the other’s country’s policies (whether it’s humanitarianism, protectionism, jingoism, murderous business practises, etc.). Fortunately, today we’re not going through all that! Today’s news follows hot on the heels of the recent snafu of U.S. Senator Tim Geithner calling China a “Currency Manipulator”.
Ever since President Nixon opened the doors to China back in the 1970′s, the relationship has certainly been interesting – and complicated. Of course, now China is a critical piece of the global economy and a huge funder of the U.S. trillion-dollar debt, which is even more important in light of the U.S.’s massive deficit spending.
Still the important question remains: will China still continue buying up U.S. Treasury Bonds?
The answer seems to be… Yes.
A senior Chinese banking regulator, Mr. Luo Ping, said that China will continue to buy US Treasury Bonds even though it knows the dollar will depreciate because such investments remain its “only option” in a perilous world, on Wednesday, 11th January 2009. China has used the dollars it accumulates selling manufactured goods to US consumers to accumulate the world’s largest holding of U.S. Treasury Bonds.
Ostensibly, China keeps buying US Treasuries, because in this very difficult environment, the US Treasury is the safest investment with the least amount of flees. It does not appear that Ping is betting on a turnaround in the US market, but rather, he is seeking a safe haven to hold China’s money.
However, the increasing US budget deficit and its potential impact on the dollar have raised questions about the future Chinese appetite for US debt.
Luo Ping, a director-general at the China Banking Regulatory Commission, said after a speech in New York that China would continue to buy Treasuries in spite of its misgivings about US finances.
Mr Luo, speaking at the Global Association of Risk Management’s 10th Annual Risk Management Convention, said: “Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”
Mr Luo, whose English tended toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . . we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”
However, Mr Luo said Chinese officials would encourage its banks to finance domestic mergers and acquisitions rather than provide rescue finance to distressed financial companies in other countries: “There will be no bottom-fishing of financial institutions, particularly in the US, because there is a lot of uncertainty about the quality of the books.”
Mr Luo said China intends to maintain its separation of investment and commercial banking based on its observations of the US after repeal of the Glass-Steagall Act that enforced a similar division of banking activities.
“To some extent, Glass-Steagall has fuelled the crisis,” Mr Luo said. “The separation of commercial and investment banking is likely to stay longer [in China] than before.” Like senior financial officials in other developing nations – such as Mohammad Al Jasser, vice-governor of the Saudi Arabian Monetary Agency – Mr Luo also spoke out against what he called America’s laissez-faire capitalism.
“Government ownership was viewed as something negative but the pendulum is swinging the other way. Perhaps banking is [no different from] public utilities where government participation is necessary,” he said.
“Deregulation in the US has gone a little bit too far. The market can’t be omnipotent.”
Also, Luo said China is not looking to make direct investment in any US financial institutions. “There will be no bottom-fishing of financial institutions, particularly in the US, because there is a lot of uncertainty about the quality of the books,” said Lou.
Investors wanting to buy gold or silver should go with the bullion coins: American Eagles, Maple Leafs, or Krugerrands. These coins move dollar for dollar with the world price of gold, and are easy to buy, sell, and trade or redeem. Additionally, tracking the value of these coins is easy. No “expert” has to look at them: they are widely recognized and accepted from money changers to coin dealers in all parts of the world today.
Thomas Jefferson and Andrew Jackson understood “The Monster”. But to most Americans today, Federal Reserve is just a name on the dollar bill. They have no idea of what the central bank does to the economy, or to their own economic lives; of how and why it was founded and operates; or of the sound money and banking that could end the statism, inflation, and business cycles that the Fed generates.
Alan Greenspan is not, we’re told, happy about this 42-minute blockbuster. Watch it, and you’ll understand why. This is economics and history as they are meant to be: fascinating, informative, and motivating. This movie could change America. This documentary traces back the roots of economic instability in the U.S. to the Federal Reserve in a manner, which is not found in most “conspiracy-flicks”: It’s logical, backed by historical facts and interviews. Highly convincing and – beware – leaves the audience with a feeling of powerlessness.
Dedicated to Murray N. Rothbard, steeped in American history and Austrian economics, and featuring Ron Paul, Joseph Salerno, Hans Hoppe, and Lew Rockwell, this extraordinary new film is the clearest, most compelling explanation ever offered of the Fed, and why curbing it must be our first priority.
Voiceover: “The Federal Reserve System virtually controls the nation’s monetary system, yet it is accountable to no one. It has no budget; it is subject to no audit; and no Congressional Committee knows of, or can truly supervise, its operations.”
These are the words of the late professor Murray N. Rothbard, economist and academic advisor of the Ludwig von Mises Institute. The institute is dedicated to the ideals of a free market and sound money. This program is dedicated to the memory of Murray N. Rothbard and his prolific work on money and banking.
For more than twenty years, the living standards of middle class Americans have steadily declined; incomes have remained flat or falling and the opportunities and security we once took for granted have begun to fade. For most families, one income no longer pays the bills; it requires two or more incomes to afford a home, pay medical and childcare expenses, and put children through school. Unless present trends change, young workers are unlikely to ever live as well as their parents. Good jobs with a future are harder to come by; education doesn’t count for what it once did; taxes continue to rise while social security is going bankrupt. Private pensions are no longer reliable; economic volatility and uncertainty are on the rise. Politicians espouse numerous theories about the cause of this country’s economic woes; seldom however do these officials look below the surface: the roots of our economic ills can be traced to central banking and our present monetary system.
The Federal Reserve claims to manage our money; instead it makes our money worth less and less every day. It has generated continuous and worsening business cycles and lowered our living standards.
Lew Rockwell: It’s really no different from a burglar in your house wanting to steal your money. That’s what the Federal Reserve does. It depreciates your savings; it takes away your economic security; and it ought to be treated as an institution that does that, rather than something of alleged benefit.
Voiceover: Money is supposed to serve as a reliable standard of economic value, not a source of instability. Until we restore sound money and take away the government’s ability to debase it, we have little hope of restoring the freedom and prosperity that made America great.
Lew Rockwell: And we really have a choice of what we want in money. Do you want money that is going to be losing its value every year, or do you want money that is going to be gaining in value? If you are happy with your money losing value, then you want the present system. If you want money to increase in value, then you want a gold standard.
Voiceover: What is money? As the good that makes exchange possible, it’s the foundation of every economic activity. In the earliest times, people traded goods and services directly. This form of exchange is known as “barter.”
Joseph Salerno: That is, if a fishing tribe desired to have maybe wheat, which they themselves did not produce, they would seek out other individuals that produced wheat, and then they would exchange theirs for fish.
Voiceover: But barter had limitations in the marketplace.
Joseph Salerno: Well, actually people perceived pretty quickly problems with that direct exchange: if you wanted, for example, fish and you had wheat, but the people who had fish didn’t desire the wheat, you were stuck. Unless you went out and found some other good, possibly berries, that everyone in that society consumed. Then you would trade the wheat for the berries in full confidence that you could turn around and trade the berries for the fish or anything else you desired.
Voiceover: Eventually, the most widely accepted goods in a society became valued for their use in indirect exchange. Money is simply another name for the most generally accepted medium of exchange.
Through our history, many goods have served as money. Feathers from the Quetzal birds were used for exchange by the Mayan Indians up to the 15th century in Central America. Tealeaves compressed into bricks were traded in East Asia through the 1800s. Wampum shells were money to North American Indians, while early American colonists traded beaver pelts, which had a high value both at home and abroad. Metal coins first emerged in Greece and Asia Minor during the 7th century BC. Gold and silver were valued for their use in beauty and jewelry and the decorative arts. They were durable, easily divisible, and limited in supply. These precious metals also had a high value-to-weight ratio, making them easily transportable.
Joseph Salerno: You might think back, we can think back to a time when iron was used as money, for example in Africa, but imagine going into the Sears-Roebuck and trying to purchase, say, a lawnmower for $350. That would take a ton of iron, whereas it only takes an ounce of gold.
Voiceover: In 1536, less than fifty years after Christopher Columbus set foot on the American soil, a Spanish mint in Mexico City struck the first coins made in the New World. These silver coins eventually found their way into the British Colonies. Great Britain’s mercantilist policies deliberately tried to keep precious metals out of America, so the Spanish milled dollar became the unofficial currency. It was often divided into eight pieces for smaller transactions, hence the term “pieces of eight,” with 1/4 of the coin being “two bits.”
In 1792, Thomas Jefferson adopted the dollar as this country’s official monetary unit.
Lew Rockwell: He looked around. He investigated to see what the American people were using, and that was the dollar. So that’s why the dollar became the standard in the United States. And we went onto a gold and silver standard, and started minting gold coins with the American eagle, a $10 gold coin.
Voiceover: Jefferson in particular spoke eloquently of the dangers of paper money. During the war for independence, the continental Congress printed vast sums of paper money out of thin air to finance the army. The diluted money supply naturally depreciated to almost nothing, leading to the phrase “not worth a continental.”
Lew Rockwell: The people who held onto these notes, who tended to be patriotic Americans concerned about wanting America to be free of British control, lost everything whereas the Tories, who wanted nothing to do with this American-government money and immediately got rid of it, were benefited. And Pelatiah Webster, one of the first American economists, and others who looked to this, saw that this paper money unbacked by gold was extremely dangerous.
Voiceover: As early as the 16th century in Europe, goldsmiths stored gold coins for their customers for a fee and issued receipts for the gold to the depositor. Thus began the use of paper as money.
Joseph Salerno: In other words, if you came in and deposited 10 ounces of gold for safekeeping, you got back receipts in the amount of 10 gold ounces and those receipts entitled you to instantaneously redeem that gold.
Voiceover: These receipts soon became widely accepted as means of exchange, since it was easier and safer to use the receipts for significant transactions. This was the origin of banknotes as money substitutes. These first bankers then took that process one step further.
Joseph Salerno: In effect, if the goldsmith had 1,000 ounces of gold and 1,000 ounces of legitimate receipts being held by the depositor of that gold, he could increase his profits by merely printing another thousand ounces worth of receipts, and lending them out. In which case he would effectively get fifty-percent reserve banking, or fractional reserve banking. Only a fraction — 50% of the receipts — were now backed by gold.
Voiceover: There was no longer a one-to-one ratio of paper to gold. Now there could be three or four pieces of paper in circulation for every unit of gold in the vault. These bankers were no longer simply storing or warehousing gold for a fee, they were artificially inflating the money supply and loaning out these phony receipts at interest. This system became known as “fractional reserve banking” and was later transported to the early American colonies. It formed the root of the American commercial banking and ultimately the Federal Reserve System.
Lew Rockwell: This is a fraudulent system, it’s not allowed in any other business. If you had a grain warehouse that had loaned out the grain it was supposed to have in storage, that’s considered criminal, and the guy would go to jail. But the banks are the one industry that’s allowed to get away with this and to profit from it.
Voiceover: Alexander Hamilton became the first treasury secretary and in 1791 set up the first Bank of the United States as America’s central bank to expand the supply of paper money for the benefit of the government and the commercial banks.
Joseph Salerno: Alexander Hamilton believed in a strong central government and he saw a central bank as one of the means by which the government could be centralized and by which its power could be expressed.
Voiceover: Thomas Jefferson opposed this view. He saw a central bank as an undemocratic tool of the northeastern banking establishment. It was dismantled after twenty years.
Joseph Salerno: Jefferson was an opponent of the strong central government and at all costs wanted to remove the central bank.
Voiceover: In 1816, the federal government made another attempt to set up an inflationary central bank, but this Second Bank of the United States was denounced by president Andrew Jackson as a “monster bank,” for benefiting a few at the expense of many.
Joseph Salerno: They inflated the money supply, which brought about a boom initially, that is prosperity for the country, followed by a bust; when they stopped inflating the money supply many businesses that had depended on the low interest rates that were introduced or induced by the initial inflation went out of business.
Voiceover: Jackson succeeded in abolishing the second central bank in 1836. But by then, speculators had set up hundreds of new private banks with little or no gold to back the notes they issued. The nation’s monetary system became more stable when the United States introduced the gold standard in 1834. The dollar was worth approximately one-twentieth of an ounce of gold.
Joseph Salerno: The gold standard was understood by the founding fathers, by Andrew Jackson and others, as being a money of the people. That is, it was a hard money, a money that could not be tampered with, that could not be inflated to permit government expenditures skyrocketing.
Voiceover: But by 1862 Abraham Lincoln needed to fund his invasion of the South. So, once again, the government began to print up paper money.
Joseph Salerno: Basically the United States went off the gold standard in order to finance the Civil War. And you’ll find in history that almost every large war, every major war, has involved a departure from the gold standard, because the gold standard put strict limits on government financing.
Voiceover: Lincoln’s notes became known as “greenbacks” because they were printed in green ink rather than the usual black ink on the reverse side. These so-called fiat notes were deemed legal tender by the government, but they were not redeemable in gold.
Lew Rockwell: Lincoln, under cover of war, issued tremendous numbers of greenbacks. Gold was still circulating but people were forced to accept these greenbacks as if they were at par with gold.
Voiceover: The government’s power to print unbacked paper notes would later become the pillar of the Federal Reserve System.
After the Civil War, the nation’s monetary system became sounder, when the US adopted a gold standard.
Lew Rockwell: We were back on the gold standard in 1879, and had probably the greatest period of growth and prosperity ever in the country’s history.
Voiceover: For nearly twenty years, the total output of goods and services grew at an unprecedented rate of 4% per year.
Joseph Salerno: The reason being that with the sound money and without the ability to manipulate the interest rate, we had a lot of genuine saving and investment, which then led to more capital goods and higher labor productivity in the United States.
Voiceover: In the midst of this prosperity, the big industrialists and financiers were plotting to expand their empires with the help of government. With the passage of the Interstate Commerce Act of 1887, the large railroads succeeded in blocking their smaller competitors through regulation.
Joseph Salerno: The ICC was put in place in order to protect the railroad owners from competition. It was not the case that it was going to protect consumers or shippers. In fact, consumers were hurt because ultimately, with higher railroad rates, they were forced to pay higher prices for the goods and services that were shipped across the country.
J.P. Morgan (left) & John D. Rockefeller (right)
Voiceover: By 1896, they were poised to do the same thing with the banks. Two camps emerged as leaders in this economic war. They were led by J.P. Morgan, the world’s most powerful private banker, and John D. Rockefeller, the oil tycoon.
Morgan and Rockefeller were great adversaries, but, despite their business differences, they both favored a central bank. They wanted cheap credit and an inflated money supply to finance the expansion of their empires. Together, they led the campaign to sell the idea to the American public, which later led to the founding of the Federal Reserve.
Joseph Salerno: If the American people got wind of the fact that this bank was not in their interests … in fact, if they understood instead it was in the interests of the financial elites who would use it to inflate the money supply and, in doing so, increase their own revenues, there would have been hell to pay. Legislation would have never passed under those conditions. So it had to be sold to the American people as a way of making their currency more “elastic.”
Voiceover: The bank reform campaign received a boost in 1907, when there was a run on some of New York’s biggest banks, thanks to their fractional reserves. Panic spread among depositors who got wind of the bank’s insolvency and tried to withdraw their money.
The Knickerbocker Trust failed, and two other institutions went to the brink of bankruptcy despite a $35 million bailout from J.P. Morgan. Wall Street swiftly adopted the fear of bank failures to sell the idea of a central bank, or lender of last resort, to the American public.
Lew Rockwell: And so the Federal Reserve was to be the lender of last resort, in case any bank had any trouble. They wouldn’t have to worry: they would get the cash from Washington DC.
Hans Hoppe: The question is, however, whether it really is desirable to have such a thing as a lender of last resort. The correct position appears to me that every single bank should be responsible for its own debts and contractual obligations, and if banks through imprudent policy then go bankrupt, this should not be considered a bad thing, but in fact considered to be a magnificent thing, because bankruptcies or the danger of bankruptcies is precisely what makes banks adhere to sound policies.
Voiceover: Bank runs and failures continued at an alarming rate. In 1908, the National Monetary Commission — headed by John D. Rockefeller Jr’s father-in-law, Senator Nelson Aldrich — was set up to push for a central bank.
In November of 1910, under the guise of a duck-hunting trip, six men took a secret train ride to an exclusive private club on Jekyll Island, Georgia, to write a Central Banking Act. The classified gathering read like a who’s who of American banking. There were two Rockefeller men: Aldrich and Frank Vanderlip of the National City Bank of New York; two Morgan men: Henry P. Davison from Morgan Bank and Charles D. Norton, president of Morgan’s First National Bank of New York; Paul Walberg, a Kuhn-Loeb partner; and Assistant Treasury Secretary A.P. Andrew, who was friendly to both camps.
They spent a week at the luxurious club as Morgan’s guests, crafting the proposal that would form the basis of the Federal Reserve System. It would be three years before their vision was realized. Just before Christmas 1913, the Federal Reserve Act was passed by Congress and signed by President Wilson. It established a Federal Reserve System to oversee monetary policy and regulate the commercial banks.
“If the American people got wind of the fact that this bank was not in their interests … there would have been hell to pay.”
Lew Rockwell: It’s no coincidence that the Federal Reserve System was established by the Wilson administration. This was the height of the Progressive Era, a time of tremendous government expansion of special interest deals in Washington.
Voiceover: There are twelve regional reserve banks concentrated in the East and in the Midwest. The board of governors of the Federal Reserve controls and coordinates their activities. The board is made up of seven members appointed by the president. Even though there were twelve regional banks, Wall Street soon ran the show. As president of the New York Fed, Morgan protégé Benjamin Strong seized control of the board’s Open Market Committee operations. Strong would remain the dominant force at the Fed until his death in 1928.
The Federal Open Market Committee, now based in Washington, directs the Fed’s most important instrument of monetary policy: the purchase and sale of government securities on the open market. To increase the supply of money and credit, that is “to inflate,” the Fed buys government securities from a few handpicked firms with newly created money. To tighten money and credit, the Fed sells securities. In this, it can act on its own discretion.
Joseph Salerno: Every government wants the ability to create new money: it’s an alternative to raising taxes. Taxes, when they are raised, tend to evoke a lot of resistance among the public. It’s much less [painful] to increase the money supply. The effects, the negative effects don’t occur until six months, a years, two years later — at which time the increasing prices can be blamed on other factors: the weather, speculators, and so on.
Voiceover: Another device the Fed uses to control the amount of money in circulation is setting the discount rate: this is the interest rate charged to member banks when they borrow short term from the so-called “discount window.” If the Fed lowers the discount rate for its loans, commercial banks will likely borrow more from the Fed. This increases the amount of funds banks have to lend. Bank credit thus becomes cheaper, as reflected in lower interest rates on bank loans and credit cards. The increase in funds available for banks to lend also increases the amount of money in the economy.
The Fed can also manipulate the nation’s money supply by raising or lowering the reserve requirement. Banks are required to set aside a percentage of their deposits as reserves to meet depositors’ demands. When the Fed was established in 1913, it cut reserve requirements in half over the next four years, doubling the money supply by the end of World War I.
But the Fed’s real power lies in its monopoly to create money. Although the US was still on the gold standard in 1913, it was quickly eroded as the Fed continued to expand the money supply. The first step was backing Federal Reserve notes by only 40% in gold, allowing the money supply to be increased two and a half times. The inflationary effect to fractional reserve banking was also heightened by the central bank.
Hans Hoppe: The commercial banks are permitted to create checkbook money on top of Federal Reserve notes. That is to say, the commercial banks are only obliged by law to hold reserves, in the form of Federal Reserve notes, of 10% to back all demand deposits that they have. Ninety percent of their demand deposits are backed by nothing.
Voiceover: The Federal Reserve System adds another inflationary layer to an already unstable banking system. For example if the central bank has $100 worth of gold reserves in its vaults and a 10% reserve requirement, it can print up $1,000 of new notes in deposits, which become the reserves of the commercial banks. The commercial banks take this $1,000 and, if they’re required to hold 10% again in reserve, they can multiply the $1,000 into $10,000 through fractional-reserve loans. So an inverted pyramid is created with $100 worth of gold, or real money, at the bottom and $10,000 of inflated paper money at the top. As this $10,000 of new paper money circulates in the economy, it drives prices up, therefore reducing the buying power of ordinary citizens.
Lew Rockwell: When they spend that money, the people who get the new money first and are able to buy products with it benefit, and the people who get it at the end lose because, when they go to spend it, the prices have already gone up, and so they’re able to buy less. And so there’s a transfer of wealth and of power from some segments of the economy to others because of the actions of the central bank. And basically, those who benefit are the government itself, big banks, government contractors, and anybody who is a closely associated with the federal government.
Voiceover: By making enormous amounts of credit easily available, the Fed can also drive down interest rates, sending out the wrong signals to investors. It sets in motion an unsustainable investment boom that carries with it the seeds of its own destruction. It’s this business cycle that is ultimately responsible for economic disasters such as the Great Depression.
Soon after the Federal Reserve was established, the US entered World War I. Once again, the government temporarily abandoned the gold standard to print more money to finance the war effort. The US government borrowed heavily and the national debt ballooned from $1 billion to $27 billion. A sharp spike of inflation followed; this set off a cycle of rapid expansion and contraction in the economy. To dampen the overheated economy, the Fed halted its inflation, causing interest rates to nearly double over the next 18 months.
By 1921, the market begun to recover: new technology helped to increase productivity; markets developed for new cars and appliances. The 1920s were a period of extraordinary growth but, behind the scenes, much of this growth was distorted by a Fed-generated inflationary credit expansion.
Joseph Salerno: These were the “Roaring ’20s” — this was a period of increasing affluence. That hid the inflation from American economists.
Voiceover: The Fed-generated bubble burst in the Wall Street crash of October 1929. Speculators who had borrowed money to buy shares when bank credit was readily available saw the stock market lose one third of its value. Bank loans totaling $7 billion were outstanding. As the speculators defaulted on their loans, bank failures spiraled, and the Great Depression set in.
Joseph Salerno: Depositors lost their bank accounts, both their savings deposits and checking deposits. They saw them disappear into thin air.
Voiceover: In 1932, Franklin D. Roosevelt was elected president and quickly implemented a New Deal policy of “spending us to prosperity.” Even though we needed lower taxes and lower spending, his administration would seek unprecedented amounts of money to finance its big-government programs.
In his inaugural speech of March 4, 1933, Roosevelt vowed to put an end to poverty and the unemployment lines and get people back to work. It didn’t work: the Depression got worse, thanks to increased central planning. FDR only succeeded in making the monetary system even less sound. Just after taking office the president declared a four-day nationwide bank holiday, absolving the bankrupt fractional-reserve banks of any need to repay their depositors. But before the banks reopened, the Roosevelt administration had to come up with a scheme that would lead people to believe that new deposits would be safe. It created the Federal Deposit Insurance Corporation to lull the public into a sense of security. In reality, the Federal Deposit Insurance Corporation holds just half of 1% of all the deposits it ensures, but what people are counting on is that the Fed, as the lender of last resort, would step in and print whatever money would be necessary to prevent a massive bank run.
By the mid-1930s control of the Fed by the New York bankers was drawing to a close. The Morgan era ended when President Roosevelt, who was no friend of the Morgans, appointed Marriner Eccles as its governor. Eccles, a Republican from Utah, moved the activities of the Open Market Committee to Washington.
President Roosevelt was on hand for the dedication of a new $3½ million building to house the Fed.
F.D. Roosevelt: I dedicate this building today to progress. To progress toward the ideal of an America in which every worker will be able to provide his family at all times with an ever-rising standard of American comfort.
Voiceover: Nineteen thirty-three also marked the beginning of the end for the gold standard, there was no end to Roosevelt’s appetite for spending on such New Deal programs as the gigantic $13 billion Tennessee Valley Authority, which flooded vast areas of productive farmland to provide government-subsidized electricity, and the Works Progress Administration, which spent $11 billion on make-work jobs and pork-barrel public works. But the US currency was tied to gold, which limited the amount of money the Fed could print to pay for these costly projects, so the government scrapped the gold standard for American citizens in 1933, and then Roosevelt confiscated the people’s gold.
As in World War I, the warring parties in the Second World War abandoned the gold standard to finance the war with central-bank-generated inflation. After the war there was an attempt to use the prestige of the gold standard to establish a global inflationary system. The world’s financial leaders met at Bretton Woods in New Hampshire, under the direction of the famous economist John Maynard Keynes. Their idea was to set up a new international monetary system that would have both gold and inflation.
Joseph Salerno: Under this system, the US dollar would be redeemable in gold, but only for foreign official institutions — central banks and foreign governments — at the rate of $35 per ounce. All other currencies would have fixed exchange rates with the US dollar and they would be redeemable in US dollars.
Voiceover: The New York Times editorialist Henry Hazlitt was one of the first to realize that this “semigold standard” would not succeed.
Ron Paul: Even from the very beginning, it was doomed to failure. And this very outstanding journalist at that time, Henry Hazlitt, predicted it wouldn’t work, because, he says, the temptation will always be that the government will print more money, because they will accept these dollars and they won’t demand the gold and won’t hold the government in check. And he was absolutely right.
Voiceover: During the 1960s, the US government was trying to meet the cost of massive social welfare programs at home and the Vietnam War abroad. By printing more money, President Lyndon Johnson believed, the US government could accomplish its goals without raising taxes, which may have caused a taxpayers revolt. In other words: it could have both guns and butter.
Lyndon Johnson: We will make sure that every dollar is spent with the thrift and with the commonsense which recognizes how hard the taxpayer worked in order to earn it.
Voiceover: But the more money the US printed, the more it eroded the value of the dollar: nervous foreigners began redeeming their dollars in gold as they were entitled to do under the Bretton Woods agreement. After paying out billions in gold, the US was left with $36 billion worth of outstanding debt to foreign creditors and gold reserves worth just $18 billion. Rather than stop the inflation, in 1971, President Richard Nixon refused to redeem any more dollars.
Richard Nixon: I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.
Voiceover: It was the death now for the Bretton Woods semigold standard and a triumph for the Federal Reserve. The dollar would no longer have even the illusion of a fixed value against other currencies: it would float against them causing even more dislocation in foreign trade and massive uncertainties for businessmen. Worse, the final check on dollar creation disappeared, creating endless possibilities for inflation. It’s running at more than 300% since 1971 thanks to the Fed’s power to create money out of thin air and to insure deposits. No US federal budget has been balanced since it abandoned the gold standard.
Joseph Salerno: I don’t think that that’s something that enhances the efficiency of our economy. I believe that the best money is a market-determined money, such as we had under the gold standard. In order to get back to a market-determined money, the Fed has to be abolished.
Voiceover: There is not now, nor has there ever been, any direct control over the Fed by the president or Congress. The meetings of the Federal Reserve Board are held in secret, and nobody knows exactly what goes on. If you watch the business report every night, commentators are constantly speculating about what the Fed might do:
News speakers: All eyes were on Washington today as the Federal Reserve met to decide the future direction of interest rates.
Most economists expect the Fed to leave monetary policy unchanged.
Voiceover: It has born a whole industry of Fed watchers who try to second-guess the Fed.
Lew Rockwell: The Federal Reserve has been surrounded by secrecy over since its planning, its installation, and its operations to the present day. And the reason is because they can’t tell the truth; if they told the truth, there would be a revolution; there would be a bunch of Americans that are ready to go and toss them out of the building.
Voiceover: A recent attempt to open the Fed to public scrutiny came in 1993. The head of the House Banking Committee, Rep. Henry Gonzales from Texas, called for an independent audit of the Fed’s operations; he wanted the proceedings of the Open Market Committee videotaped, with detailed minutes released within a week instead of vague summaries issued several weeks later. Gonzales also proposed that the president chooses the twelve heads of the Fed’s regional banks instead of powerful bankers. Predictably, Fed Chairman Alan Greenspan resisted the changes. What was surprising was President Bill Clinton’s position: he declared the reform would “run the risk of undermining market confidence in the Fed.”
After the Mexican government inflated and devalued the peso in 1995, the Mexican economy went into a tailspin. Alan Greenspan lobbied Congress and the Clinton administration for a $52 billion bailout. As it turned out, the Fed’s member banks held as much as $26 billion in Mexican debt. With no choice in the matter, American taxpayers and
savers paid the bill.
Ron Paul: The congressmen themselves, from my experience there, are pretty naive and they don’t understand. But the few that have to — like the chairman of the banking committee, who is aware of this and goes along with it — continue to perpetuate this myth that the Federal Reserve brings about stability and they do good things for economic growth even though they are the culprits; they are the ones who caused all the problems; they are the ones who caused the recession and unemployment and the downsizing of big businesses and all the ill effects that we have to witness. But their PR job is excellent because they have convinced most congressmen that they are very necessary to maintain stability and economic growth and all these wonderful things they claim credit for.
Voiceover: It is clear that the United States cannot rely on Alan Greenspan or any other Fed chairman to fight the chronic inflation that has wrecked our savings, distorted our economy, redistributed income and wealth, and brought us devastating booms and busts. Despite the established view, Greenspan, the Fed, and big commercial bankers are not the inflation fighters they pretend to be. The Fed and its allied banks are not part of the solution to inflation in the business cycle: they are the problem itself. To limit chronic inflation and boom-bust business cycles, the currency must be backed 100% by gold. That would remove the Fed’s ability to print money, which amounts to no more than legalized counterfeiting. Instead there would be a monetary system where gold serves to anchor the dollar rather than the fiat reserves created by the Fed.
Lew Rockwell: If we were to establish a real gold standard, the average American family would benefit tremendously: first of all there would be more jobs, better jobs, more secure jobs, more business opportunities, no more business cycle, no more recessions and depressions; people’s savings would be secure; you would not have to worry if you put away money for your old age that its value would be stolen by the central bank and by the central government, as they are today.
Voiceover: Under a 100% gold standard there would be no place for fractional-reserve banking. For checking accounts and other demand deposits, the banks would keep reserves on hand to meet depositor’s claims; banks would receive a fee from their customers for keeping their gold. In loan banking, investors would hand over their money for a fixed period of time to earn interest. Once the gold standard is in place, individual bank depositors would always have access to their money, and investors would be kept informed through their balance sheet, and, at a national level, a tight rein would be kept on government spending.
Ron Paul: You have, relatively, price stability. You have a stable purchasing power for the money. You eliminate the business cycle. You have reasonable interest rates rather than gyrating interest rates, and you get rid of the political manipulation of interest rates and the political manipulation of the money supply. And this, then, preserves wealth and builds wealth and allows for economic growth.
Voiceover: It’s as simple as this: sound money means economic prosperity and limited government; unsound money means inflation, recessions and depressions, and big government. What sort of system do we want for our families? Don’t we want prosperity and security that we can hand on to future generations? Transition to a gold standard will not be easy, but as Murray Rothbard put it, “The alternative is much worse.”
“Since 1980, the Fed has enjoyed the absolute power to do literally anything it wants: to buy not only US government securities, but any asset whatever, to buy as many assets, and to inflate credit as much as it pleases. There are no restraints on the Federal Reserve. The Fed is master of all it controls.”
– Murray N. Rothbard (1926–1995)
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Investors wanting to buy gold or silver should go with the bullion coins: American Eagles, Maple Leafs, or Krugerrands. These coins move dollar for dollar with the world price of gold, and are easy to buy, sell, and trade or redeem. Additionally, tracking the value of these coins is easy. No “expert” has to look at them: they are widely recognized and accepted from money changers to coin dealers in all parts of the world today.
Don’t you just love it when politicians put their foots in their mouths and say things, stupid things? Especially words spoken (or in this case written) that have huge repercussions for their countries? On the other hand, some people believe such snafus might even be planned and staged, for a more sinister purpose. In the following case, I’ll leave the decision up to you.
In a written response to questions from senators debating his confirmation, Mr Geithner accused China of “manipulating” its currency and promised that the Obama team would push “aggressively” for Beijing to change its policies. The sharp tone and use of the legally-loaded term “currency manipulation” ricocheted through financial markets as investors shuddered at the prospect of a Sino-American spat in the midst of a global slump.
Tim Geithner
Clearly this was not a slip of the tongue. It might, conceivably, even have been a bureaucratic snafu. The tough language came in a 102-page document answering numerous questions from senators — an odd place from which to lob a bombshell at Beijing. If so, it speaks poorly of a man who is already in trouble for failing to pay attention to his taxes. Most likely, therefore, Mr Geithner’s language suggests a change in Washington’s tactics towards China.
American policymakers have long pushed Beijing to accelerate the appreciation of the yuan, arguing that China’s exchange-rate policy played a big role in creating the global imbalances and that—both for the sake of China’s economy and the rest of the world—the currency needs to strengthen. However, Hank Paulson’s Treasury studiously avoided accusing Beijing of “currency manipulation”, a term that carries legal implications.
Every six months, the U.S. Treasury must publish a list of countries which it deems to be currency manipulators. Once a country appears on that list, formal negotiations to end the manipulation must begin. The Treasury under George Bush, particularly in recent years, preferred a softer behind-the-scenes approach and refused to brand China a manipulator. Although Mr Geithner did not commit himself to any specific action, the use of the m-word suggests Team Obama will take a tougher line.
Exactly what it means is uncertain. It is not even clear who will manage America’s economic strategy with China (there is some speculation, for instance, that Hillary Clinton wants the State Department to take the lead). But there is no doubt that Barack Obama’s economic team includes a number of people who are frustrated with the world’s failure to convince Beijing to strengthen the yuan. Mr Obama himself supported legislation in the Senate to get tougher on China. More important, his advisers see tough words now as a prophylactic—a warning that Beijing must not be tempted to prop up its staggering economy by weakening the yuan.
Domestic politics also plays a big role. China’s bilateral trade surplus with America has long been a lightning rod in Congress, and with unemployment up the protectionist pressure is sure to rise. The $800 billion stimulus package making its way through Congress already has dubious “Buy American” measures that demand government spending should be on American goods. By sounding tough up front, the logic goes, the Obama team will be better able to diffuse the more extreme protectionist sentiment.
Unfortunately, this strategy is dangerous on a number of counts. The basic economic analysis—that a stronger yuan, on a trade-weighted basis, is necessary to rebalance China’s economy away from exports—is surely right. But the world’s immediate problem is a dramatic shortfall in demand across the globe and that will not be righted by exchange-rate shifts. Currency movements switch demand between countries; they do not create it. In the short-term, therefore, the outlook for the world economy depends on whether governments’ stimulus packages are successful and, right now, team Obama would do better to focus on the scale, nature and speed of Beijing’s stimulus measures than rant about the currency. What’s more, the evidence for currency manipulation is weakening. Although China still runs a huge current-account surplus, it is no longer accumulating foreign-exchange reserves at a rapid clip, as capital is flowing out of the country.
Like all politicians, he qualified his statement with various good wishes toward the Chinese, but the damage was quickly done. Markets began to wonder if China would retaliate by scaling back its massive purchases of U.S. government debt, contributing to a 70-basis-point sell-off in 10-year U.S. Treasury bonds between Jan. 26 and Feb. 4.
More important, the political calculus could easily misfire. Domestically, Mr Geithner’s comments may simply fan congressional flames for tougher action on China. Lindsey Graham, a senator who first pushed for a 27.5% tariff against China in 2005, called the comments “music to my ears”. And Sino-American economic tensions are already rising as Chinese officials hotly dispute the idea that their savings surplus had anything to do with the current global mess. (An official at China’s central bank recently called the idea “ridiculous” and an example of “gangster logic”). Traditionally, Chinese officials do not respond well to public admonition and, given the scale of China’s economic woes, they are likely to be pricklier now.
The stakes are extremely high. Everyone knows that protectionism and beggar-thy-neighbour policies exacerbated the Depression. With the global economy in its most dangerous circumstances since the 1930s, rising Sino-American tensions is the last thing anyone needs.
There’s even more bad news. Geithner’s utterance caused interest rates to jump, costing prospective American homeowners (and many that were seeking to refinance existing mortgages) around 10% more in interest charges. Making home loans more expensive is not a great way to get the housing market moving — nor is it a great way to instill confidence in debt markets. The sell-off quelled a major rally in Treasuries as investors who had been flocking to the safe haven of government paper amid the global recession questioned whether Treasuries had become too expensive. In the last four months of 2008, yields (which decline as prices rise) dropped from 4% to a low of 2.25%.
But the rally isn’t over. The fear that China will stop buying U.S. debt is unfounded. Beijing can’t buy anything else with its excess dollars. There are simply no alternative investments that are large enough or liquid enough. But more importantly, there are fundamental reasons why Treasury prices will move much higher (and yields lower) — and why the current opportunity to go long U.S. Treasuries should be grasped with both hands.
There are two aspects of the ongoing recession that may come as a surprise to some observers as events unfold. The first will be the failure of central banks to re-ignite credit growth in the ailing banking system. The second will be the failure of governments’ debt expansions to increase the cost of funding. In other words, the long end of the yield curve will continue to be depressed, just as it has been in Japan for the past 16 years. In the early 1990s observers in Japan argued that 10-year Japan government-bond yields of 3.5% could not persist for long. That was when the government debt-to-GDP ratio was around 50%. It now stands at 150% and 10-year yields are 1.36% (having gone as low as 60 basis points in the interim).
In our view, yields on U.S. 10-year Treasury notes will fall to between 1.5% and 2% by the end of 2009. This is because the banks are broken and their customers are keen to spend less. The monetary base, the money element that the Fed can control, is a fraction of credit outstanding in the U.S. system ($2 trillion versus $47 trillion). No matter how fast base money is pumped up, the reduction in credit outstanding will overwhelm it. During this phase we should expect credit contraction and its attendant deflationary effects on asset prices and consumer goods and services.
Yields are also bound to go lower because demand for U.S. government debt will easily match supply, even though Washington must sell hundreds of billions of dollars in bonds in coming months to fund stimulus measures and bank rescues. Consider the uncanny parallel between the composition of assets on bank balance sheets in 1929 and balance sheets at the start of this crisis. The ratio of loans to investments, which include Treasuries and other securities, was 2.6:1 in 1929 and 2.8:1 in 2008. During the early period of the Great Depression, banks restructured their balance sheets to reflect a much more conservative lending stance. They reduced loans — in absolute and relative terms — and increased investments in safe assets, mostly Treasuries.
Of course, there are major differences between today’s banking and monetary systems and those of the 1930s, but the one constant is human behavior. Personal balance sheets, corporate balance sheets and bank balance sheets will inexorably move into safer instruments given the wealth destruction that has occurred in riskier assets over the past year (and which will continue for the foreseeable future). If the banking sector alone were to move toward its more conservative 1935 ratios, then the increased demand for government paper from that source alone would be $700 billion.
It’s likely that shifts in household and corporate investment patterns will produce even greater demand — which is why U.S. 10-year notes remain attractive, not for their paltry yield but for their capital-gain potential. The next bull market will be concentrated in government paper — even as confidence in government itself erodes.
Investors wanting to buy gold or silver should go with the bullion coins: American Eagles, Maple Leafs, or Krugerrands. These coins move dollar for dollar with the world price of gold, and are easy to buy, sell, and trade or redeem. Additionally, tracking the value of these coins is easy. No “expert” has to look at them: they are widely recognized and accepted from money changers to coin dealers in all parts of the world today.
Are you a new collector or investor who’s looking to start collecting silver bullion? The coins featured below are common and highly popular bullion coins, which hold much lesser premiums compared to numismatic coins or rare silver coins. I’ve included some details on each coin, and how to take care of them.
The Current Price Of Silver, And Why It’s A Good Time To Buy.
As the current precious metals bull market continues and the dollar price of gold continues to skyrocket, silver metal prices will see even more dramatic gains that gold. Today, for the first time ever, the amount of silver available to investors is less than the amount of gold. One of the reasons for this is that most of the gold that is mined continues to exist, in the form of jewelry and money. Only around 11% is used for industrial and medical purposes. Silver, on the other hand, is used for industrial purposes in far higher rations than gold is. That means that most of the silver that is mined is actually discarded as waste and usually not recovered.
Historically, the price ratio of gold to silver has always averaged around 12:1, which means that gold was valued about 12 times more than the prevailing value of silver. The reason for this can be assumed to be that, on average, the supply of silver was 12 times greater than the supply of gold. The free market always balances these things out naturally. However in modern times, the amount of silver available to investors is far less than the amount of gold; the amount of silver being mined is far less than the amount of gold; and government reserves of silver are almost nonexistent compared to their reserves of gold.
So if silver is currently rarer than gold, why is the gold price higher? It’s because everybody thinks it’s supposed to be lower. People’s perception of silver is that it is the poor man’s gold, a cheaper metal with less intrinsic value than gold. Because of that perception, people are quicker to put their money into gold as an investment. Gold is glamorous. Gold signifies wealth. Silver seems mediocre. But these are mere perceptions, and once the market corrects the price of silver based on the law of supply and demand, the price of silver will skyrocket even more than gold will.
Think of it this way. The historic average price ratio of gold to silver has always been 12:1, as mentioned above. But the current ratio at the time of writing is about 73:1. This is despite silver being scarcer than it has ever been, even more scarce than gold. Even if we are conservative and say that the price corrects itself to the 12:1 ratio, that would be a huge gain in the silver price. And in all likelihood, silver will see far greater gains than that. Some even expect the price to match or even to surpass the price of gold.
I’ve been gradually increasing the amount of silver I buy for my family because I think that only as the gold price climbs very high will people start to realize the potential of silver to increase in value. Silver prices per ounce are currently very low, so the time to start buying is NOW.
Though many are bullish on Precious Metals for the next 10 years or more, it is also important to predict futures with a right mind-set. Predict them realistically, and most importantly know why you are buying physical metals. Do not be too greedy and do not be too fearful at the same time. If you have done your research properly, you ought to stay firm on your beliefs and change your investment/collection goals with the long-term trend of the world.
Silver Maples,Silver Eagles And Perth Mint Silver Coins Do Very Well as Legal Tender Silver Coins Worldwide. Also, Kilo Bars And Ten Ounce Bars Do Well Too! Remember Silver Is Still Silver At The End Of The Day, But It Would Be Wiser To Buy The Most Common Silver In Whatever Market That Country/Region Prefers.
The year of a coin/bullion does not matter (in fact sometimes older coins tend to hold slightly more value to newer ones), precious metals are ultimately precious metals. They can be exchanged/traded as long as the Silver content and purity stays the same. Numismatic coins are more for collectors who really like the coin/bullion itself and as such are not recommended for investments and beginners due to the high premiums they hold. In good times, the value of numismatic coins goes up in price. But in bad times like a currency crisis, a numismatic bullion is usually worth only for its metal content.
FAQ: Why Can’t I buy Silver at Spot or Below Spot?
This is the exact same question I asked myself when I first started in Precious Metals. Your answers are below.
1. There are dealer premiums to pay, shipping, insurance, taxes, bank forex losses and risk.
2. Most countries do not have a silver or gold mine. Even big dealers like Monex pay premiums for their metals. The ones who garner huge profit are those mints who buy precious metals by the millions of tons below spot, and sell it at a mark-up above spot. They make and play by the volume.
3. The same weight of Silver cost more to ship than Gold. Gold no doubt is slightly denser than Silver, yet when combined together, Silver takes a whole lot more space compared to Gold.
I’ll continue with more details on the various options for purchasing and investing in silver in another post.
Investors wanting to buy gold or silver should go with the bullion coins: American Eagles, Maple Leafs, or Krugerrands. These coins move dollar for dollar with the world price of gold, and are easy to buy, sell, and trade or redeem. Additionally, tracking the value of these coins is easy. No “expert” has to look at them: they are widely recognized and accepted from money changers to coin dealers in all parts of the world today.
We already covered 15 of the most common fallacies and myths behind holding and investing in gold held by the general public. Surprising, there are even more myths ingrained in the minds of people. However, holding a few of them shouldn’t stop you from purchasing and investing in gold, silver or other precious metals. Odds are, you already know the value of gold and silver, or at least, your parents or grandparents do.
More often then not the question is where to purchase gold, what types to purchase and how to store it safely and securely. I’ll return to that topic in another article.
Meanwhile let’s continue with some other common myths about gold and other precious metals.
Here are some more common myths about gold and owning gold:
16. There is not enough gold in the world to use as money.
Wrong. Twice as much refined gold exists in the world today as there was 30 years ago.
There is “not enough gold” only for those people who have none. If that describes you, you should buy gold immediately!
If you are a liberal socialist, or communist, remember to avoid buying “more than your fair share,” which is 7/10ths of an ounce, or seven tenth-ounce gold coins. At $320/oz., that’s $224 worth. (130,000 tonnes, or 4.18 Billion ounces of gold in the world, divided by 6 Billion people, is .69 oz. each.)
Of course, that price reflects today’s low valuations. If gold were to be valued the same as dollars (100 times more), then there would be $22,400 worth of gold (the same 7/10ths of an ounce) available per person on earth.
17. There is too much gold in the world today to use as money.
Wrong. With $8 Trillion dollars in M3 in the U.S., and $1 Trillion worth of Gold in the world (valued at today’s prices), there is certainly much less “gold value” in the entire world than there are dollars in the U.S. Gold will jump up in price quite nicely for those who hold it.
18. The supply of gold is not flexible enough to use as money.
Wrong. There is always enough of gold to use it as money. When there is little gold, the gold has more value, which, in turn, causes a mining boom, which brings out more gold. When there is a lot of gold, it has less value, and mining slows down. Gold is inherently both flexible enough, and stable enough, to use as the perfect money.
19. Nobody accepts gold and silver.
Wrong. As recently as 1964, 90% silver coins were in use in the United States, and for over a hundred years previous to that. The U.S. Constitution says gold and silver are the only forms of lawful money. Worldwide, gold and silver are probably more widely traded and recognized than the U.S. paper dollar.
20. Gold is a bad investment because you can’t spend it, I mean, the supermarket will not take it.
That’s bad reasoning. You can’t spend a bond, or a share of stock, or the title to a piece of land at the supermarket either, but those are all accepted as investments. In fact, if you negotiate directly with any store manager or owner, you’d have a greater chance of getting them to accept precious metals as payment than any other investment vehicle. Gold is the most liquid investment available; it is the very definition of “liquidity”.
Investors wanting to buy gold or silver should go with the bullion coins: American Eagles, Maple Leafs, or Krugerrands. These coins move dollar for dollar with the world price of gold, and are easy to buy, sell, and trade or redeem. Additionally, tracking the value of these coins is easy. No “expert” has to look at them: they are widely recognized and accepted from money changers to coin dealers in all parts of the world today.
I’ve previously covered 10 of the most common fallacies and myths behind holding and investing in gold held by the general public. If you’ve been following this series of articles you would be way ahead of most people in realising the need to build up your financial reserves in inflation-proof commodities like gold and silver.
Well let’s continue with today’s discussion, here’s 5 more common myths about gold and other precious metals.
Here are some more common myths about gold and owning gold:
11. Gold does not pay an interest rate.
Wrong. From 1971 until 1980, gold increased from $35/oz. to $850/oz. That was an increase of about 24 times, 2400%, or an annual increase of 34%. Even a bond paying 34% would not be as good, because a bond paying that high of a rate would most likely default, and remember, gold can not default. The best investor in the world, Warren Buffet, has only been able to increase his portfolio at an annual increase of about 20% over the years. Gold, as an investment, for a certain time period, has vastly outperformed the best money managers in the world, and gold will do so again for everyone who owns it now. 12. The world can never go back to gold and silver.
Wrong. For over 6000 years, gold and silver have been money. They continue to be money today (metals are loaned out at an interest rate, and are still used and held by banks and nations and wise investors), and will be the most popular money on earth again, (if it isn’t right now).
Under a gold standard, society prospers and human productivity increases, which causes the gold you own to be able to buy more and more over time. Under a gold standard, entrepreneurs are better able to plan for the future, and invest wisely, and thus, create a better life for everyone.
13. The banks are selling gold.
Yes and no. Officially, they have sold a mere 10% of their reserves in the last 10 years, from about 34,000 to 30,000 tonnes. And many banks have bought gold. Besides, annual supply is 2500 tonnes, and demand is 4000 tonnes. There is not an oversupply, but an under supply of gold in the world.
Actually, the banks are selling gold, but they are doing it secretively, through loaning it out, but still claiming it as a holding and asset on their books. The best estimates are that about half or less of the approximately 30,000 tonnes of central bank “official” gold remain in their vaults.
And why are they selling gold secretively? The people who create and control the dollar (Alan Greenspan and the Federal Reserve) must attempt to force the price of gold and silver down to keep the dollar strong. If people see gold and silver going up, they will be more likely to spend dollars for gold. And if people flee the dollar, and buy gold and silver, the con game of paper money comes to an end. But their con game will end, as they all do.
But the real point is that central bank sales or loans are not, and can never be, an infinite supply; but rather, a limited supply. When that supply stops, as it must and eventually will, (and there’s no way to tell exactly when this will happen) it will create a huge and immediate “supply and demand” system shock and imbalance. That shock will cause prices to skyrocket much faster than when the price of gold went from $35/oz to $850/oz when the United States finally stopped selling gold (redeeming gold for dollars and went off the gold standard) in 1971.
14. The Federal Reserve, the United States government, and the powerful banks are all lined up to keep gold low, and they are too powerful to fight by investing in actual gold myself.
Wrong. The default on the dollar in 1971 proved the vulnerability and fallacy of the attempt of the bankers to keep the price of gold fixed low. It proved the fallacy of thinking one can use the printing press to create wealth. Nobody can fight market forces forever, and market forces are the strongest economic force and reality.
I believe the powers that are systematically suppressing gold know exactly what they are doing. They are using public companies to do the dirty work of short selling gold and taking on the gold derivative contract obligations. This way, when the bullion banks such as J.P. Morgan and Goldman Sachs fail, the primary ones hurt will be the owners of those stocks. In other words, the ones hurt will be the little guy who thought he could own “a piece of the house” in the rigged game played with dollars.
You are not alone if you buy gold. You would ally yourself with the stronger and larger side of the market that is buying the 4000 tonnes per year, as opposed to the 2500-tonne annual mine-supply. 15. We can determine when central bank sales will end. If there is a 1000 tonne supply/demand deficit, and the central banks of the world have 15,000 tonnes left, then gold will not rise for the next 15 years.
No, it’s not that simple.
First, the supply/demand deficit is not a static number; it is rapidly rising, which will cut the time substantially.
Second, not all the banks will sell gold until they have nothing left. Back in 1971, the U.S. stopped selling when a third of the reserve still remained, so that will also shorten the time.
Third, many of the central banks of the world have no interest in helping the U.S. dollar stay alive for a few more months, when it is certain to crash. They will want to hold onto gold, or accumulate more gold, to keep their own currencies strong, or to have a reserve in case of currency collapse.
Fourth, and most important, there is a tremendous supply of paper wealth that could pour into the gold market and absorb all supply at any moment. The 15,000 tonnes of gold still held by the central banks, at $330/oz., is valued at a mere $160 Billion. The world, in a panic, could buy that much gold at that price in a single hour. In fact, there are many investment funds that control far more than $160 Billion in capital. Thus, a single investment fund that realized the truths presented in this article could make a snap decision that would bring the investment opportunity of a lifetime to a swift end.
Investors wanting to buy gold or silver should go with the bullion coins: American Eagles, Maple Leafs, or Krugerrands. These coins move dollar for dollar with the world price of gold, and are easy to buy, sell, and trade or redeem. Additionally, tracking the value of these coins is easy. No “expert” has to look at them: they are widely recognized and accepted from money changers to coin dealers in all parts of the world today.
Last week, we went into detail into some of the common fallacies and myths behind holding and investing in gold held by the general public. And we offered our reasons why these beliefs are false and erroneous, and even dangerous: You certainly wouldn’t want to be caught holding on to worthless pieces of paper when a depression or hyper-inflation starts, would you?
Today, we’ll continue with some of the other common myths about gold and other precious metals.
Here are some more common myths about gold and owning gold:
6. The only reason gold might go up in value is a potential war in the Middle East.
Wrong. Gold must go up for a long list of fundamental, long term, systemic reasons related to supply and demand factors. The media falsely claims that war, or short term political tensions, are the only reason gold “might” go up because most political worries are temporary. For the most part, political worries or rumors of war are distractions from the real risks, which are pervasive, systemic, and long-term.
7. The U.S. government still has gold; and that still backs the dollar at least somewhat, right?
Wrong, and this brings us to the fundamentals. If the 7700-tonne (248 Mil. oz.) U.S. gold reserve still exists (and some seriously doubt that it does), it would only provide an ounce of gold for about every $33,000 dollars that exist as M3, the most comprehensive measure of dollars available.
This is not opinion here. Look up the numbers and do the math. (8.3 Trillion dollars in M3 / 248 million oz. = $33,467/oz.) If you really think that U.S. gold reserve is backing the dollar, then you must value gold at over $33,000 per ounce as a necessary logical consequence of what the numbers actually are. Stated another way, if gold is valued at $334/oz., only 1% of U.S. dollars (as M3) are backed by gold, and that’s IF the U.S. gold reserve actually exists.
Now the concept of “gold at $30,000/oz.” doesn’t mean that an ounce of gold will have the purchasing power that $30,000 does in the year 2002. It will probably be much less. One “myth” is that we tend to think of the dollar having a relatively stable value. By the time gold hits $30,000/oz., the value of the dollar will be much lower.
And I am also not saying that an ounce of gold in the future will have the same purchasing power it does today. Not all of the price change will be due to dollar devaluation. Gold will probably be much more valuable than it is today, and that is extremely difficult to quantify, and it certainly cannot be quantified in dollars which are not a stable unit to measure anything.
Further, I am not predicting gold will be $30,000/oz., and then stabilize at that price. By the time fraudulent dollar excesses are blown off between now and the time gold hits $30,000/oz, in all probability there will be further increases in the number of dollars printed, and/or added to the electronic banking system. For example, it will take some time for gold to move from $300/oz. to $30,000/oz. If M3 increases by a factor of 10 in that time, then the real target price becomes $300,000/oz.
But not all the U.S. gold is for sale. That hypothetical gold amount of U.S. Treasury gold above is simply used to point out the problem, and calculate that theoretical target price. Since that gold is not for sale, or if that gold does not exist at all, then the dollar will drop in value to a point where the dollar gold price is much higher than $30,000/oz. gold.
Additionally, if the vast majority of dollar holders decide, due to a sudden burst of rational thought, to abandon holding the dollar in favor of holding gold, the dollar price may well exceed a million dollars per ounce. And again, this doesn’t mean an ounce of gold will have anything close to the value of a million dollars in 2002.
As an example of the difficulty in determining changing values, a silver quarter was once a day’s wage. Suppose that in the future, a silver quarter will be worth a day’s wage again, or over $80 (a day’s wage) in 2002 money. But then again, due to mechanization and increased productivity, perhaps a day’s wage in the future will not be one silver quarter, but perhaps 4-5 silver quarters. In that event, an ounce of silver in the future may well be worth about $80/oz., as measured in 2002 dollars, up from $4.30/oz.
8. Now that Gold and Silver are no longer backing the dollar, the metals are just like any other commodity, and are therefore no longer money.
That’s absolutely false. Precious metals are unlike any other commodity. They are extremely scarce, are not destroyed by dividing into smaller units, can be melted together again, and don’t rust away or spoil.
Most other commodities have less than one-year supply above ground, and are consumed or spoil in less than a year, and are unfit to use as money. Grain is an exception, as it can be stored for up to 20 years, and grain was also used as money in historic times.
Gold has 50 times as much above ground supply (130,000 tonnes) than is mined each year (2500 tonnes).
GOLD IS MONEY, and remains as money throughout the world, used by banks, central banks, governments, and people.
If gold truly were just like any other commodity, then those people who create the economic propaganda would be just as pleased that “consumers are spending” whether they were buying gold or cars. Obviously, gold is very different.
9. Gold inflates just like paper currency.
No, it does not. The supply of gold worldwide increases by about 2% per year, about the same rate as the increase in world population, so that the amount of gold available per person remains at a constant of about 7/10ths of an ounce.
So, while the supply of gold has increased by a factor of 2 in 30 years, the supply of dollars in U.S. banks (M3) has gone up about 30 to 100 times! They say that the dollar inflation rate is low at about 3%, but those are government statistics that don’t include the cost of housing, fuel, and food; in other words, lies.
A more accurate inflation rate for dollars created might be obtained by looking at M3 increases. From 1980 until 2000, this grew at 6.7% annually.
And actually, the supply of Silver (available for sale at the COMEX) has decreased dramatically.
In 1990, total world silver was an est. 1,340 million oz.
In 1995, total world silver was an est. 850 million oz.
In 1996, total world silver was an est. 700 million oz.
In 1998-99, total world silver was an est. 400 million oz., and people were predicting that in five years, there would be no more silver.
I’ve been watching silver since 1998, and I’ve watched COMEX inventories fall from 400 million oz. down to a low of 70 million.
10. Gold does not do anything; it just sits there.
Wrong. In contrast to all other paper investments or paper contracts, Gold can never lose all of its value. That’s quite an amazing accomplishment, and a very unique and valuable property. In contrast, every paper currency ever created in the history of the world has always gone to its intrinsic value, which is zero. Gold keeps men honest, and prevents the theft of your wealth through inflation. In fact, gold cannot even be taxed away, (like land), because governments have no way of detecting whether or not you actually own any gold.
Those are three amazing qualities of gold, that when considered all together, make something wonderful; gold’s value can’t go to zero, and it can’t be inflated away or taxed away.
Investors wanting to buy gold or silver should go with the bullion coins: American Eagles, Maple Leafs, or Krugerrands. These coins move dollar for dollar with the world price of gold, and are easy to buy, sell, and trade or redeem. Additionally, tracking the value of these coins is easy. No “expert” has to look at them: they are widely recognized and accepted from money changers to coin dealers in all parts of the world today.
Many false ideas about gold, silver and other precious metals prevent many people from investing in them or even owning them. Today we shall refute some of these common myths so that everyone can protect their wealth against inflation by owning gold.
False ideas about gold have been systematically put forth through the schools and universities, newspapers and TV for generations. These myths are deeply rooted in the minds of many people, having become a part of popular world-view of American culture. Only a few people see through the myths to recognize self-evident truths easily. Others need more help, which is the purpose of today’s article. Most people will only begin to wake up to reality when they see the price of gold move far higher than they thought possible, and they start struggling to understand what is going on.
Here are some common myths about gold and owning gold:
1. I can’t afford the risk of investing in gold.
Wrong. The real risk is in not having any gold. If you do not own gold, you have put 100% of your portfolio at risk to go to zero. Every investment is a risk. The value of cash can go to zero with runaway inflation. The value of stocks can go to zero after bankruptcy. The value of land can go nearly to zero in a depression when there are no buyers, and you have no ability to pay an assessed property tax, and the government puts the property up for auction to pay the tax.
Today, in the fall of 2002, the United States is experiencing large trade deficits, which is putting very strong pressure on the dollar to devalue about 30%, or more. So there is a huge risk for holding cash or bonds. The flat out truth is that gold and silver are the very safest investments you can own.
2. U.S. Treasury Bonds are the safest investments in the world, my broker told me so.
Wrong. Your broker does not work for you; brokers work for investment banks. The banks are partners with the government, and the government has bonds to sell. Bonds have a risk that gold does not have. Bonds can drastically swing down to zero value in two different ways, either due to inflation or default. Gold represents “payment in full,” and it cannot default, it will never be inflated away, and it will always be worth something substantial.
The U.S. has actually defaulted on its monetary obligations numerous times in history. In the revolutionary war, money to pay the soldiers was printed up that became worthless. In the civil war, greenbacks were printed up that became worthless. Then, the fed defaulted on the dollar in 1933 and later in 1971.
And even if U.S. Treasury Bonds are paid off by printing more paper money, who is to say that the paper dollar of the future will have any value at all?
U.S. Treasury Bonds are a con game that has two purposes. First, bonds enslave the government to the ones who issue the debt, because the borrower is the servant to the lender. Second, by offering bonds to the public, bond purchases help to siphon money away from people in the economy who would otherwise have no other option but to either save their money, or to invest directly into the economy which would allow them to prosper and accumulate wealth.
3. I’ll buy options or futures contracts on gold when the time is right, not gold itself.
Don’t be deceived. Options and futures contracts are not the same as gold, and are no substitute. They are contracts that will be defaulted on when gold makes the big move up. Futures contracts in platinum already defaulted in the year 2000 when there was a platinum shortage.
4. Why do I need gold if the dollar is still backed by gold?
The dollar is not backed by gold, or silver, though it once was. Dollars could no longer be redeemed for gold within the U.S. since 1933. The overseas dollar defaulted on the promise to be redeemed in gold in 1971. Since then, there is absolutely NO gold backing the dollar whatsoever.
5. Ever since the U.S. won WWII, the dollar is supported by our military might, and oil, so we don’t need gold to back the dollar.
In point of fact, there is a huge supply and demand deficit in gold. But the most important point of all is that the U.S. can’t make war on everyone in the world who buys gold or refuses to hold paper dollars.
Investors wanting to buy gold or silver should go with the bullion coins: American Eagles, Maple Leafs, or Krugerrands. These coins move dollar for dollar with the world price of gold, and are easy to buy, sell, and trade or redeem. Additionally, tracking the value of these coins is easy. No “expert” has to look at them: they are widely recognized and accepted from money changers to coin dealers in all parts of the world today.
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