Wednesday, September 30, 2009

Audit the Fed

By Thomas E. Woods, Jr.
Friday, September 25, 2009

Testimony in Support of HR 1207, The Federal Reserve Transparency Act of 2009, House Financial Services Committee, September 25, 2009

I am speaking this morning in support of HR 1207, the Federal Reserve Transparency Act. As the Committee knows, this bill would require a full audit of the Federal Reserve by the Government Accountability Office (GAO).

On November 10, 2008, Bloomberg News ran the following headline: “Fed Defies Transparency Aim in Refusal to Disclose.” The story pointed out that the Fed was refusing to identify the recipients of trillions of dollars in emergency loans or the dubious assets the central bank was accepting as collateral. When the initial $700 billion congressional bailout was being debated last September, Fed chairman Ben Bernanke and then-Secretary of the Treasury Hank Paulson couldn’t emphasize their commitment to transparency strongly enough. But “two months later, as the Fed [lent] far more than that in separate rescue programs that didn’t require approval by Congress, Americans [had] no idea where their money [was] going or what securities the banks [were] pledging in return.”

Matthew Winkler, editor-in-chief of Bloomberg News, put it simply: “Taxpayers – involuntary investors in this case – have a right to know who received loans, in what amounts, for which collateral, and why specific loans were made.”

This has been portrayed as a trivial matter being pursued by some cynical and uppity Americans who don’t know their place. But there is no good reason for Americans not to know the recipients of the Fed’s emergency lending facilities. There is no good reason for them to be kept in the dark about the Fed’s arrangements with foreign central banks. These things affect the quality of the money that our system obliges the American public to accept.

The Fed’s arguments against the bill are unlikely to persuade, and will undoubtedly strike the average American as little more than special pleading. Perhaps the most frequent of the claims is that a genuine audit would jeopardize the alleged independence of the Fed. Congress could come to influence or even dictate monetary policy.

This is a red herring. The bill is not designed to empower politicians to increase the money supply, choose interest-rate targets, or adopt any of the rest of the Fed’s central planning apparatus, all of which is better left to the free market than to the Fed or Congress. It seeks nothing more than to open the Fed’s books to public scrutiny. Congress has a moral and legal obligation to oversee institutions it brings into existence. The convoluted scenarios by which merely opening the books will lead to an inflationary catastrophe at the hands of Congress are difficult to take seriously.

At the same time, as we hear this objection repeated time and again, we might wonder just how independent the Fed really is, what with its chairman up for reappointment by the president every four years. Have these critics never heard of the political business cycle? Fed chairmen have been known to ingratiate themselves into the president’s favor close to election time by means of loose monetary policy and the false (and temporary) prosperity it brings about. Let us not insult Americans’ intelligence by pretending this phenomenon does not exist.

Moreover, try to imagine a Fed chairman doggedly seeking to maintain the value of the dollar even if it meant refusing to monetize a massive deficit to fight a war or “stimulate” a depressed economy. It is not possible.

If there is any truth to the idea of Fed independence, it lay in precisely this: the Fed may reward favored friends and constituencies with trillions of dollars in various kinds of assistance, while keeping the public completely in the dark. If that is the independence we’re talking about, no self-respecting American would hesitate for a moment to challenge it.

A related argument warns that the legislation threatens to politicize lender-of-last-resort decisions. Again, this is untrue. But even if it were true, how would that represent a departure from current practice? I hope we are not asking Americans to believe that the decisions to bail out various financial institutions over the past two years, and in particular to allow them to become depository institutions overnight that they might qualify for assistance, were made on the basis of a pure devotion to the common good and were not political at all. Most Americans, not unreasonably, seem convinced of another thesis: that Goldman Sachs, for instance, might be just a little bit more politically well connected than the rest of us.

Opponents of HR 1207 have sometimes tried to claim that the Fed is already adequately audited. If this were true, why is the Fed in panic mode over this bill? It is the broad areas these audits exclude that the American public is increasingly interested in investigating, and these are the gaps that HR 1207 seeks to fill.

The conventional wisdom seems to be that the monetary system we have now is sound and beyond reproach, and certainly better than any system that preceded it. My purpose today is not to render judgment upon such views, however deeply misguided I happen to consider them, and however inaccurate their implicit view of nineteenth-century financial panics. My point is simply this: if our monetary system were really as strong, robust, and beyond criticism as its cheerleaders claim, why does it need to rely so heavily on public ignorance? How can it be a sound banking system that depends on keeping the public in the dark about the condition of its financial institutions?

Let me also make clear that supporters of this legislation are strongly opposed to a watered-down version of the bill – which, incidentally, would only increase public suspicion that someone is hiding something.

If the Federal Reserve Transparency Act passes and the audit takes place, the American people will have achieved a great victory. If the legislation fails, more and more Americans will begin to wonder what the Fed could be so anxious to keep hidden, and the pressure for transparency will simply intensify. A recent poll finds 75 percent of Americans already in favor of auditing the Fed. The writing is on the wall.

The Federal Reserve may as well get used to the idea that the audit is coming. That would be a far more sensible approach than the counterproductive and condescending one it has adopted thus far, in which the peons who populate the country are urged to quit pestering their betters with all these impertinent questions. The Fed should take to heart the words of consolation the American people are given whenever a new government surveillance program is uncovered: if you’re not doing anything wrong, you have nothing to worry about.

The superstitious reverence that Americans have been taught to have for the Federal Reserve is unworthy of the dignity of a free people. The Fed enjoys a government-granted monopoly on the creation of legal-tender money. It is not an unreasonable imposition for Americans to demand to know about the activities of such an institution. It is common sense.

For further reading:
"The Real Reasons Behind Fed Secrecy", Ron Paul, September 30, 2009
"The Federal Reserve's Death Rattle", Thomas E. Woods, Jr., September 28, 2009

Wednesday, September 23, 2009

Federal Reserve Admits Hiding Gold Swap Arrangements

Press Release
Gold Anti-Trust Action Committee
Wednesday, September 23, 2009

MANCHESTER, Conn. -- The Federal Reserve System has disclosed to the Gold Anti-Trust Action Committee Inc. that it has gold swap arrangements with foreign banks that it does not want the public to know about.

The disclosure, GATA says, contradicts denials provided by the Fed to GATA in 2001 and suggests that the Fed is indeed very much involved in the surreptitious international central bank manipulation of the gold price particularly and the currency markets generally.

The Fed's disclosure came this week in a letter to GATA's Washington-area lawyer, William J. Olson of Vienna, Virginia (, denying GATA's administrative appeal of a freedom-of-information request to the Fed for information about gold swaps, transactions in which monetary gold is temporarily exchanged between central banks or between central banks and bullion banks. (See the International Monetary Fund's treatise on gold swaps here:

The letter, dated September 17 and written by Federal Reserve Board member Kevin M. Warsh (see, formerly a member of the President's Working Group on Financial Markets, detailed the Fed's position that the gold swap records sought by GATA are exempt from disclosure under the U.S. Freedom of Information Act.

Warsh wrote in part: "In connection with your appeal, I have confirmed that the information withheld under Exemption 4 consists of confidential commercial or financial information relating to the operations of the Federal Reserve Banks that was obtained within the meaning of Exemption 4. This includes information relating to swap arrangements with foreign banks on behalf of the Federal Reserve System and is not the type of information that is customarily disclosed to the public. This information was properly withheld from you."

When, in 2001, GATA discovered a reference to gold swaps in the minutes of the January 31-February 1, 1995, meeting of the Federal Reserve's Federal Open Market Committee and pressed the Fed, through two U.S. senators, for an explanation, Fed Chairman Alan Greenspan denied that the Fed was involved in gold swaps in any way. Greenspan also produced a memorandum written by the Fed official who had been quoted about gold swaps in the FOMC minutes, FOMC General Counsel J. Virgil Mattingly, in which Mattingly denied making any such comments. (See

The Fed's September 17 letter to GATA confirming that the Fed has gold swap arrangements can be found here:

While the letter, GATA says, is far from the first official admission of central bank scheming to suppress the price of gold (for documentation of some of these admissions, see and, it comes at a sensitive time in the currency and gold markets. The U.S. dollar is showing unprecedented weakness, the gold price is showing unprecedented strength, Western European central banks appear to be withdrawing from gold sales and leasing, and the International Monetary Fund is being pressed to take the lead in the gold price suppression scheme by selling gold from its own supposed reserves in the guise of providing financial support for poor nations.

GATA will seek to bring a lawsuit in federal court to appeal the Fed's denial of our freedom-of-information request. While this will require many thousands of dollars, the Fed's admission that it aims to conceal documentation of its gold swap arrangements establishes that such a lawsuit would have a distinct target and not be just a fishing expedition.

In pursuit of such a lawsuit and its general objective of liberating the precious metals markets and making them fair and transparent, GATA again asks for financial support from the public and from all gold and silver mining companies that are not at the mercy of market-manipulating governments and banks. GATA is recognized by the U.S. Internal Revenue Service as a non-profit educational and civil rights organization and contributions to it are federally tax-exempt in the United States. For information on donating to GATA, please visit here:

People also can help GATA by bringing this information to the attention of financial news organizations and urging them to investigate the Fed's involvement in gold swaps particularly and the gold (and silver) price suppression generally.

For further reading:
"A Short History of the Gold Cartel", James Turk, May 4, 2009
"Is there any gold inside Fort Knox, the world's most secure vault?", The Times, March 28, 2009
"Dubai Study Endorses GATA's Findings on Gold Market Rigging, Warns Oil Producers", Business Wire, March 3, 2005
"Free Not Fair: The Long-Term Manipulation of the Gold Price", John Embry and Andrew Hepburn, August 2004
"What is Happening to America's Gold?", James Turk, July 23, 2001

Tuesday, September 22, 2009

Virtual Currency Small but Growing Threat

By Victoria Ho
ZDNet Asia
Tuesday, September 1, 2009,39044908,62057395,00.htm

Virtual currency is still a small threat to real-world economies, but its growth could translate into numerous issues for countries in the long run, said an analyst.

According to Rodney Nelsestuen, financial strategies and IT investments senior research director at TowerGroup, these could come in the form of money laundering, fraud and the chance of the collapse of a virtual economy.

He told ZDNet Asia in an e-mail that virtual money has emerged as a money laundering vehicle over the past year, and remains a small but growing threat.

Virtual money also creates no actual economic value, and has "questionable sustainability", he said.

The Chinese government in July outlawed the use of virtual currency to trade for real-world products and services.

This includes virtual credits such as popular Chinese portal, Tencent's QQ coins.

Should other governments look into banning virtual money? Nelsestuen said outlawing it will drive it away from the public consciousness but will still be an issue for gamers, as virtual currency trading goes deeper underground.

In 2007, a virtual heist in Second Life ruffled feathers as online criminals made off with an estimated US$10,000 of Linden dollars, Second Life's virtual currency.

Furthermore, there is some real-world value created by virtual money, such as stored value cards offering retailers a new avenue to expand sales, he said.

One academic applauded China's move. Edward Castronova, Indiana University Bloomington professor of telecommunications, said in a New York Times report, virtual currencies could pose a threat to world economies, by shifting control of the money supply from the central bank to game developers.

Web payment facilitator PayPal, responding to an e-mail query from ZDNet Asia on the impact of the ban on revenues, and its plans to offer other goods and services, said only: "PayPal adheres to all local legislation in the markets in which we operate."

For further reading:
"In China, New Limits on Virtual Currency", The New York Times, July 1, 2009
"China Limits Use Of Virtual Currency", InformationWeek, June 29, 2009
"China bans online 'gold farming'", Dave Rosenberg, June 29, 2009
"Wildcat Banking in the Virtual Frontier", Matthew Beller, February 5, 2008
"QQ: China's New Coin of the Realm?", The Wall Street Journal, March 30, 2007
"Online Game Economies Get Real", Wired, November 6, 2002

Sunday, September 20, 2009

More Book Reviews: End the Fed

Since I posted the first review of Ron Paul's End the Fed (2009), other excellent book reviews have come to my attention. One such review is from David Gordon at the Mises Institute. David covers new books in economics, politics, philosophy, and law for The Mises Review, the quarterly review of literature in the social sciences, published since 1995.

Additional reviews are from George F. Smith, "One Man in a Million", and David Kinchen, "Bring Back Sound Monetary Policies Backed by Something More Substantial Than Printing Presses".

Also, watch U.S. Representative Ron Paul discuss his new book on C-SPAN Book TV (September 18, 2009).

Saturday, September 19, 2009

Opening the Mint to Gold and Silver - Then and Now

In a recent essay, Hugo Salinas Price, president of the Mexican Civic Association for Silver, has outlined his proposal for the restoration of a silver currency in Mexico, the world's largest silver producer. In "Opening the Mint to Gold and Silver - Then and Now", September 7, 2009, Salinas Price writes:
"Why did free coinage work at one time, and why would it not work again today? The reason is not hard to find: in the past, in earlier centuries, silver was money in itself. There was no 'price of silver'! The price of silver was expressed in the amount of things that a given amount of silver could purchase."
"While this gigantic counter-revolution in monetary affairs takes its time in presenting itself, I can see no other possible healthy move than the monetization of the silver ounce, to allow it to circulate permanently in parallel with numeric money."
Hugo Salinas Price has seen, first hand, how profligate inflation can leave a country’s entire economy in shambles as occurred in Mexico during 1994. Mr. Salinas is one of Mexico’s leading businessmen and, over the past 55 years, has guided Grupo Elektra to become one of Mexico’s most successful business enterprises. He holds degrees from Wharton and ITESM as well as a law degree from the Universidad Nacional Autonoma de Mexico. Moreover, Mr. Salinas is a renowned monetary expert in North America, and he has spearheaded the movement to remonetize silver in Mexico.

For further reading:
"Opening the Mint to Gold and Silver", Antal E. Fekete, February 5, 2008
"The silver bridge", Hugo Salinas Price, May 15, 2007
"The Origin of Mexico's 1994 Financial Crisis", Francisco Gil-Diaz, Cato Journal, Winter 1998

Thursday, September 17, 2009

Central Banks of Europe Extend Landmark Agreement on Gold Sales

On August 7th 2009, an ECB announcement was made concerning the third Central Bank Gold Agreement. Like the previous two agreements, this covers a five-year period, in this case from 27 September 2009 (immediately after the second agreement expires) to 26 September 2014. The announcement stated that the agreement will be reviewed after five years.

The third agreement started by reaffirming that "gold remains an important element of global monetary reserves", as was stated in the two previous agreements. See official gold reserves as reported by the World Gold Council.

There were two important changes. First, the collective ceiling was reduced so that "annual sales will not exceed 400 tonnes and total sales over this period will not exceed 2,000 tonnes", 500 tonnes lower than the 2,500 tonnes five-year ceiling provided for in the second agreement. However, because signatories to CBGA2 had significantly undersold the permitted annual ceiling in the final two years of the agreement, the new lower ceiling did not come as a surprise to market participants and had no impact on the gold price.

Second, the agreement stated that in recognition of the fact that the IMF intended to sell 403 tonnes of gold, these sales "can be accommodated within the above ceiling". The market also took this announcement in its stride, as the IMF had clearly stated beforehand that its planned sales would be conducted in a manner that would not add net new supply beyond what the market was already expecting from the official sector as a whole. In the event that the IMF is unable to arrange an off-market sale with another official sector institution, the sales will be conducted through the new CBGA3.

This third agreement covered the 15 original signatories to CBGA2 (the European Central Bank and the national banks of Belgium, Germany, Ireland, Greece, Spain, France, Italy, Luxembourg, The Netherlands, Austria, Portugal, Finland, Sweden and Switzerland), together with the national banks of Slovenia, Cyprus, Malta and Slovakia, which all joined CBGA2 on (or in Slovenia's case, just prior to) adopting the euro.

In both the previous agreements, signatories undertook not to increase their activities in the derivatives and lending markets above the levels of September 1999, when the first CBGA was signed. The new agreement includes no similar commitment, although central bank activity in these fields has been very limited in recent years.

For further reading:
"Fundamental Shift: Net Official Purchases Support the Price", Philip Klapwijk and Junlu Liang, September 16, 2009
"Turning point for gold as Central Banks become buyers", Lawrence Williams, September 2, 2009
"Central Bank Selling and the Gold Price", Adam Hamilton and Scott Wright, August 17, 2009
"Global Money Supply (2008 Update)", Mike Hewitt, July 13, 2008

Let's Open the Debate to a Free Market in Money

By Anthony Evans
The Guardian
Monday, September 14, 2009

Don't regulate banking – liberalise it. It's ludicrous to call the current financial system in Britain laissez-faire

Barack Obama's speech on Monday to Wall Street outlines an overhaul of the regulatory regime. On the anniversary of the bankruptcy of Lehman Brothers, politicians from both sides of the Atlantic are looking to remodel capitalism. The thirst for greater regulation is strong, united around Gordon Brown's judgment that "laissez-faire has had its day … the old idea that the markets were efficient and could work themselves out by themselves are gone".

The notion that the present financial system is "laissez-faire" is, of course, ludicrous. At present, we have a nationalised organisation that holds a state-granted monopoly on the issuance of currency. If this were any industry other than finance, the Bank of England would be seen as the Soviet-style planning board that it is.

Defending laissez-faire is therefore not a defence of the status quo; it is a positive prescription for a totally new regime. Here are three courses of action that would liberalise the banking system:

1. Legalise insider trading. The regulators have failed spectacularly. They did not foresee the systemic risk created by excess credit creation and over-leveraging, and it would be naive to expect any single organisation to steward an entire industry. Demonising hedge funds and banning short-selling miss the point since these are the ultimate protest vote for market participants. The meltdown of a year ago would not have happened had protesters been truly able to act on their knowledge; legalising insider trading would allow asset prices to integrate as much information as possible.

2. Repeal legal tender laws. When sovereigns control currency, they debase gold coins to augment their own coffers. When politicians control currency, they print money to monetise their debts. Even by giving control to independent central banks, we haven't found a way to protect the value of money, since there is still a monopoly provider with an incentive to inflate. The best form of consumer protection is competition, and commercial institutions should be allowed to offer currency to allow markets to determine the most effective medium of exchange.

3. Eradicate crony capitalism. The official narrative is that when Lehman Brothers failed, it sparked a crisis of such proportions that state action was the only way to prevent another Great Depression. But as we start to learn more about what went on behind closed doors, things become murkier. The haphazard manner in which some banks went bankrupt and others were bailed out probably has more to do with personal networks than economic necessity. But even if you have faith in the government to exercise its powers in the public interest, it simply doesn't have the knowledge to act. It's understandable that Hank Paulson put more emphasis on Wall Street than on conservative banks that spend less on lobbying, because that's the world he lives in. For the rest of us, these deals create regime uncertainty and weaken the power of markets.

These radical proposals challenge conventional wisdom and, in doing so, manifestly demonstrate that the present system is not laissez-faire. We have just scratched the surface of a free-market alternative, and critics have an intellectual obligation to admit this. Let's open the debate to a free market in money.

Anthony Evans is assistant professor of economics at ESCP-EAP European School of Management. Read related comments from the Mises Economics Blog.

For further reading:
"Strip the Bank of England of its power", The Times, July 2, 2009
“Insider Trading: Hayek, Virtual Markets, and the Dog that Did Not Bark”, Henry Manne, Journal of Corporation Law, Fall 2005
"The Modern Witch Hunt", Alexandre Padilla, October 22, 2002
"Abolish Legal Tender", D. Alexander Moseley, February 1999
"What is Morally Right With Insider Trading", Tibor R. Machan, Public Affairs Quarterly, April 1996
"Money and How to Privatise It: An Introduction", Roderick Moore, 1994
"The Failure of State Money and the Case for Monetary Individualism", Simon McIlwaine, 1991
"In Praise of Insider Trading", Matthew O'Keeffe, 1989
"Information, Privilege, Opportunity and Insider Trading", Robert W. McGee and Walter E. Block, Northern Illinois University Law Review, 1989
"The Illegality of Legal Tender", Philip W. Newcomer, December 1986

Wednesday, September 16, 2009

China May Ban Export of Gold, Silver

By Erik Bethel
Commodity Online
Wednesday, September 16, 2009

Last week Alan Greenspan noted that "Rising prices of precious metals and other commodities are an indication of a very early stage of an endeavor to move away from paper currencies.”

In other words, people are buying gold as a hedge against inflation.

Here in China, our firm SinoLatin Capital has been approached by numerous Chinese companies specifically looking to acquire gold mines in Latin America. We've studied the market for some time and we see China making several Latin American gold mining acquisitions over the next few years. How can retail investors benefit from these trends? One interesting way to play the South American gold market is AngloGold Ashanti (AU).

The South African mining company is moving forward on what they consider to be "one of the most important gold discoveries worldwide in the past decade" in the country of Colombia. The project, known as The Colossus (La Colosa in Spanish), is reputed to contain reserves of over 12 million ounces. The project is facing considerable environmental scrutiny but it looks like it will move forward this year.

But back to China. How could China affect the price of gold? We live in China and spend a lot of time with local industry leaders and policy makers. We hear repeatedly that the time has come to think seriously about how to survive the perceived dollar devaluation. In some cases we note serious concern, and in other cases absolute dread over a perceived dollar crash.
Over the past six months Beijing has made a series of moves to protect itself against a dollar devaluation. In a recent "BRIC Summit" in Russia several months ago, Chinese leaders came out strongly in favor of a new reserve currency to replace the dollar (including the IMF's "SDR" currency). China is also quietly purchasing mining assets and gold bullion. But the government has recently gone further.

According to Financial Sense:

As recently as 2002, the private ownership of gold was prohibited in China. You could be jailed if caught with any in your possession. Beginning in 2009, in a stunning about-face, the central government removed all restrictions. In fact, as Mineweb and other sources report now it is actively pushing folks to buy some personal metal, with China’s Central Television, the main state-owned television company, running news programs cum infomercials, letting the public know just how easy it is to purchase gold and silver as an investment.

It truly is as simple as can be, because every bank sells gold and silver bullion bars in four different sizes to individuals. (Try to find the same the next time you make the trek down to Wells Fargo.) Mining companies are reportedly encouraging employees to convert some of their wages to gold on payday. Gold is traded in some form 24 hours a day. And paper proxies for the metal are also soaring in popularity. There are persistent rumors that the export of silver has already been banned. Gold could be next.

Thus China, which only yesterday was the lowest per-capita consumer of gold in the world, is bidding to become the biggest. Some analysts believe it will pass India – the top dog since forever – as early as 2010. Clearly, the government believes the country is strengthened if everyone who can holds some hard currency.

All this suggests a mania in the making, and only in the formative stage. Imagine if hundreds of millions of new consumers climb on that particular bandwagon…

Gold is up 27% over the past 12 months and last week it hit the psychologically important US$1,000 mark. Could China propel this further? From our vantage point in Shanghai this is entirely possible.

Erik Bethel is Managing Director of SinoLatin Capital and resides in Shanghai.

Tuesday, September 15, 2009

International Financial Crisis and End of the Dollar Hegemony: USA versus ALBA

By Jutta Schmitt
Tuesday, September 15, 2009

The truth now is: "He who prints the money makes the rules"-- at least for the time being. (...) The goals are (...): compel foreign countries to produce and subsidize the country with military superiority and control over the monetary printing presses. -- Ron Paul

In November last year, at the third extraordinary Summit of Heads of State and Government of the Bolivarian Alternative for the Peoples of Our America (ALBA) -- Peoples' Trade Agreement (TCP), the presidents came together with the intention to confront the crisis of the global capitalist system.

Considering the volatility of the international financial system, the untenable situation of the capitalist model with its destructive logic, and the absence of proposals and categorical measures by the big global power centers in order to confront the crisis, the presidents of the ALBA member States shared the opinion that the international financial system cannot simply be re-founded but has to be replaced by a different one, based on solidarity, stability, ecological sustainability and social justice.

The Heads of State concurred with each other in that the countries of our region, if their response to the crisis intends to be efficient, definitely have to break lose and protect themselves from the grip of transnational capital so as to be able to take a different direction that does not make them dependent on the eroded international economic and financial system, nor on the US dollar hegemony, artificially maintained and literally imposed by force. To this effect, they agreed on creating a Latin American monetary zone that would, in its first phase, comprise the ALBA member States and it was further detailed that the monetary zone would count with a Chamber for the Compensation of Payments and a Stabilization and Reserve Fund, financed by the contributions of its member States.

What concerns the economic policies of the future Latin American monetary and economic zone, the Heads of State agreed on the implementation of an expansive policy of demand stimulation, Keynesian in nature, promoting investments to further the development of complementary economic activities. (1)

Furthermore, the presidents agreed that the Latin American monetary zone would issue its own currency, the 'Unified System of Regional Compensation' or Sucre, in order to gain independence from the international financial markets and to break with the eternal dependency on the US Dollar as the main currency for trade and financial transactions, prevalent up to now in the trade relations between our Latin American countries.(2)

The financial operations with the new currency are expected to begin next year, and there is trust that the ALBA member States can count on this instrument from the very 1st of January 2010 on.(3) Therewith, an extremely important step will be taken on the road to the necessary dismantlement of the present international economic and financial system which remains characterized by the hegemony of the US Dollar, enabling the United States to import goods and services from all over the world in exchange of a printed piece of green paper which is practically worthless.

The fact that the dollar today has no other real value than the value of the paper its printed on, makes the continuity of its world hegemony a matter of life and death for the United States of America.

In a condensed overview of the history of the rise and fall of the US dollar, it is pertinent to remind the reader that after the Second World War the North American economy was the most powerful and solid of the entire world. It had enormous capacities of exportation and credit, which allowed it to finance the reconstruction of Western Europe through the famous Marshall Plan, in view of fostering a future European market to absorb US exports and investments, as well as containing the possible influence of the Soviet Union in Western Europe.

The US Dollar transformed itself into the world's unchallenged, leading reserve currency, within the framework of the Bretton Woods international monetary system under the gold exchange standard.

The Dollar figured as the anchor or reserve currency, convertible in gold, and fixed exchange rates were established between the different international currencies.

However, the growing trade deficit of the United States, combined with an inflationary monetary policy, especially during the Vietnam War, lead to the collapse of the Dollar's convertibility in gold, which ended with its unilateral suspension by the Nixon administration in 1973. Therewith, the original Bretton Woods system had collapsed and the dollar suffered a sensitive decline as international reserve currency, although it did not really get challenged by other currencies at that moment, given the absence of a sufficiently strong competitor who could have occupied this position.

The breakdown of the Bretton Woods system lead to the devaluation of the dollar and thus caused a decrease of revenues from oil for the OPEC countries, as oil was priced in dollars only. This fact, in addition to the 1973 Jom Kippur war in the Middle East, lead to the rise of oil prices and the oil crisis of 1973/74, which, in turn, generated the phenomenon known as the 'recycling of petro-dollars' that ended up in strengthening once more the position of the US dollar.

In the absence of an alternative international reserve currency or the existence of a petro-currency basket, the dollar got 'anchored' to oil in a kind of 'oil-standard.' which enabled it to perpetuate itself, in spite of the enormous and growing balance of payments deficit of the US, as the primary international reserve currency and the only petro-currency, practically until our days. This panorama only had begun to change with the rise, at the beginning of the new millennium, of a strongly competing international reserve currency, the euro, and the displacement of the world economic center from North America to Europe and Asia.

Today, with the collapse of the international financial system and the generalized capitalist crisis, the panorama looks troubling for the US dollar.

Until now, two main factors have helped sustain the privileged position of the dollar in the world: Firstly, the capital flows towards the United States as a result of the re-investment, in the United States, of the commercial surpluses obtained by nations and investors through their trade with the US. Secondly, the exclusive pricing, on a world wide scale, of oil transactions in US dollars, being this factor of vital importance to the United States for guaranteeing the perpetuation of their currency as the leading and indispensable international reserve currency. This allows the US to continue to encumber itself with debts denominated in their own currency, for which the US holds the exclusive printing monopoly. This means that the Federal Reserve has printed and continues to print dollars in the quantity and at the time it deems necessary, practically without restrictions, apart from the capacity and will of others to absorb them on a global scale, and the inflationary pressure generated by this on the domestic as well as international level.

As if this were not enough, the immense capital flows towards the United States from abroad not only have financed its trade and balance of payments deficits, but, and perversely so, also the costs of its military spending which are the highest of the planet. This is how, on the one hand and given the astronomical costs of its military spending, US military supremacy would come down like a house of cards if the dollar would lose its role as the world's leading reserve and petro-currency; and on the other hand, it is the same US military supremacy by virtue of which the United States have been able to defend, in a 'preemptive' manner, their currency and its privileged position in the world on which the whole deficit-existence of the United States of America has comfortably rested until now.

In the words of US congressman, Ron Paul: "Ironically, dollar superiority depends on our strong military, and our strong military depends on the dollar. As long as foreign recipients take our dollars for real goods and are willing to finance our extravagant consumption and militarism, the status quo will continue regardless of how huge our foreign debt and current account deficit become." (4)

The price that a part of the world had to pay so that this perverse system would maintain itself intact, has expressed itself in pressures, coercion, threats, aggression wars, military coups and destabilizing operations, especially in the cases of those countries which, in one way or the other, have tried to establish another kind of financial framework which could have led, eventually, to the demise of the dollar hegemony.

Remember the case of Iraq with the decision of Saddam Hussein, in November of the year 2000, to shift Iraq's international reserves from the dollar to the euro and to price the sale of Iraqi oil in euros; a situation which was immediately reverted by the North American invaders once Iraq had been attacked and occupied in 2003.

There is the case of the continuous threats against the Islamic Republic of Iran, a country which in the year 2002 began to shift a big part of its international currency reserves from dollars to euros and which launched the project of an Iranian Oil Bourse to be set up on the island of Kish, which would price the sale of Iranian oil in euros and other currencies with exception of the dollar. The project was postponed various times for unknown reasons until the Iranian Oil Bourse finally opened its operations in February last year.(5)

And then, there is the notorious case of our Bolivarian Republic of Venezuela, victim of a military coup in the year 2002 and since then, of continuous destabilization operations which point to an eventual direct military intervention by the US Armed Forces, from Colombian territory; not only because of the appetite the government of the United States has for the natural and energy resources of Venezuela and the region, but also because President Hugo Chavez has pronounced himself in the past in favor of the pricing of Venezuelan oil in euros and other currencies, and also has traded certain amounts of Venezuelan oil for its respective equivalent in goods and services with other countries of the region, thus avoiding the use of the US dollar in inter-regional trade transactions.

Russia and China (which holds the world's largest dollar reserves), have long considered that the dollar does not fulfill a meaningful role as the leading reserve currency and have proposed, at the last summit of the G-8 in July this year, that a new, supra-national unitary currency be implemented worldwide, based on a mixture of regional reserve currencies and considered to be indispensable to overcome the abysmal crisis of the international financial system.

The price that ultimately had to be paid for the artificial maintenance of the dollar hegemony on a global scale, has been the very collapse of the international financial system, paid, as always and naturally, by the workers of this world, who do not only see the future of the present generation of workers compromised, but that of many generations to come.

Even the United Nations seem to have woken up, given that the recently published annual report of the United Nations Conference for Trade & Development (UNCTAD) 2009, suggests the replacement of the US dollar by a new, leading world currency. (6)

And while a chorus of ever stronger voices is beginning to be heard, claiming for a new international financial order, our ALBA member countries, confident in their own strength, will and potentiality, are taking the first concrete steps in order to not only detach themselves from the dollar hegemony but to establish the parameters of a new kind of mutually beneficial and complementary trade relations.

It is in this context that we can better understand why Latin America, at this moment and apart from its natural and energy resources being coveted by the global power centers, adopts special importance for the United States.

A regional alliance like ALBA, with its own currency for trade and financial transactions, constitutes doubtlessly another nail in the coffin of dollar hegemony.

This is at least one of the reasons for which, in the near future, the government of the United States will be pointing its guns against us, from Colombian territory.

Jutta Schmitt is University of Los Andes (ULA) senior lecturer in political sciences.


(2) ibidem.


(4) Hon. Ron Paul of Texas Before the U.S. House of Representatives, February 15, 2006;

(5) Oil Bourse Opens in Kish;


Monday, September 14, 2009

Book Review: End the Fed

The New American has published a flattering and thoughtful review of Congressman Ron Paul's latest book, End the Fed (2009), by Charles Scaliger, who states:
"For the first time in the Fed’s nearly century-long history, large numbers of Americans and not a few political leaders, led by Ron Paul, are waking up to the realities of central banking and the Fed’s role in causing the value of the dollar to depreciate and the economy to oscillate between boom and bust."

"If we do not soon abolish the Federal Reserve and return to sound money, we will likely experience national insolvency and an end to our dwindling political liberties. End the Fed is, simply put, a must-read for every American who can spell his name."
Listen to George Selgin discuss Ron Paul's bill H.R. 1207 and the audit of the Fed on Wisconsin Public Radio's The Joy Cardin Show (August 14, 2009). Selgin advocates an audit of the Fed as an initial reform, followed by constitutional restraints on the Fed, then abolishing the Federal Reserve System and replacing it with laissez-faire free banking.

Also, listen to U.S. Representative Ron Paul discuss the ongoing destruction of the U.S. Dollar on Jay Taylor's Turning Hard Times Into Good Times Internet radio program (April 7, 2009).

For further reading:
"Ron Paul Q&A: Audit the Fed, Then End It", Sudeep Reddy, September 16, 2009
"Ron Paul and the Federal Reserve", Thomas Greco, September 1, 2009
"The Fed on the Defensive", Gary North, August 29, 2009
"End the Fed? A not-so-crazy idea", George Selgin, August 3, 2009
"Bernanke Fights Audit Threat to the Fed", Forbes, July 21, 2009
"Auditing the Fed will Audit the State", George F. Smith, July 1, 2009
"Ron Paul's Competing Currencies", Peter Brimelow, January 29, 2008
The Case Against the Fed, Murray N. Rothbard, 1994

Saturday, September 12, 2009

Barrick Can't Get Gold Needed to Cover Hedges

By Adrian Douglas
Gold Anti-Trust Action Committee
Wednesday, September 9, 2009

Today Mineweb published a report by its writer, Dorothy Kosich, covering the announcement by Barrick Gold that it will eliminate most of its hedge book:

But Barrick is not eliminating hedges by actually delivering gold. The company is instead raising cash to pay off its obligations. This is technically a default on the delivery of the hedged gold.

I recently wrote an article titled "A Run on the Bank of the Gold Cartel" in which I asserted that many factors are coming together to put stress on the physical gold market. See:

Paul Walker, CEO of the GFMS metals consultancy, said recently that the gold price has risen because there have been "large, lumpy transactions in a market that has a degree of illiquidity." I can't think of a better euphemism for a short squeeze.

A gold hedge is entered into when a gold mining company expects that the future price of gold will be lower than it is today. The company enters into a contract with a third party to sell some of its yet-to-be-mined gold in the ground. For this the company receives the cash value of the gold based on the prevailing spot price. The company then has an obligation to produce the gold and deliver it to the third party at some future date. If the gold price indeed declines, the company reaps a superior profit on its gold sales compared with selling the gold as it is mined at the prevailing spot price. But if the price of gold rises, the mining company has forgone some of its profit by having sold the gold in advance at a lower price.

Barrick has announced that the company is not delivering the gold it has sold forward. The company is raising cash from the sale of stock so it might deliver cash instead of gold. I don’t know if this is a default under the terms of the company’s hedge contracts, but it is technically a default because gold was sold for future delivery and the future delivery is not being made.

MineWeb's story says: "Barrick intends to use $1.9 billion of the net proceeds to eliminate all of its fixed price gold contracts within the next 12 months, as well as $1 billion to eliminate a portion of its floating spot price gold contracts. A $5.6 billion charge to earnings will be recorded in the third quarter as a result of the change in the accounting treatment of the hedges."

Essentially this means that some time in the past Barrick received cash for its yet-to-be-mined gold that the company now is having to pay back, along with considerably more, insofar as the company is recording a loss of $5.6 billion without a single ounce of gold being involved. This is not mining; it is gambling. And Barrick, and more importantly its shareholders, lost big-time.

MineWeb's story says: "The company's current gold hedges include 3 million ounces of fixed-price contracts where Barrick does not participate in gold price movements. The contracts have a negative mark-to-market position of $1.9 billion as of September 7. In addition the company has 6.5 million ounces of floating contracts where Barrick fully participates in gold price movements. The current negative $3.7 billion marked-to-market position of the floating contracts does not change with gold prices. No activity in the gold market is required to settle these floating contracts." [Emphasis added.]

In theory Barrick should have to go into the market and buy gold to deliver into its obligations instead of paying cash. Of course this would blow the gold price sky-high and thus might bankrupt the company in the process. But this is not the end of the story because the counterparty to these hedges, probably JPMorganChase, no doubt also has obligations to deliver to some other entity the gold it was expecting from Barrick -- maybe a central bank. Will the counterparty also be able to settle its obligations in cash or will significant quantities of gold have to be purchased? Barrick may be getting off the hook but this technical default creates a shortage of physical gold.

Many other mining companies, such as AnglogoldAshanti, that had undertaken disastrously unprofitable hedges when gold was selling at multi-decade lows and below its cost of production have been delivering their production into their hedge obligations. Barrick’s action is different -- a technical default on delivering physical gold that had been sold forward.

This is explosive news for the gold market. The run on the Bank of the Gold Cartel is unfolding. Much more gold has been sold than can be delivered. The implications for the gold price are mind boggling.

Adrian Douglas is publisher of the Market Force Analysis newsletter and a member of GATA’s Board of Directors. Reprinted with permission.

For further reading:
"Has Barrick been barricked by the U.S.?", Antal Fekete, September 10, 2009
Barrick Raises Share Offer to $4 Billion", The Globe and Mail, September 09, 2009

Friday, September 11, 2009

United Nations Proposes New "Global Currency"

By Declan McCullagh
CBS News
Wednesday, September 9, 2009

The United Nations would like the dollar, euro, yen, and other national currencies to be succeeded by a new "global currency."

That recommendation appears in a U.N. report released this week, which suggests the dollar's outsize role in international finance has ended -- and says that it's time to invent a successor currency that would be managed by a "Global Reserve Bank."

Countries could "agree to exchange their own currencies for the new currency, so that the global currency would be backed by a basket of currencies of all the members," says the 218-page report from the U.N. Conference on Trade and Development.

Keep in mind that this is a U.N. report written by bureaucrats without any actual legal ability to create the global equivalent of the Federal Reserve. Anyone who remembers how a U.N. agency once called for a global e-mail tax of one cent per 100 e-mail messages -- but didn't exactly get it -- can attest to that.

The U.N. report grew out of the financial problems that swept the world in the last year or two, which it diagnoses as arising from too much speculation in commodity markets, a bubble in stock markets and housing markets, and trade imbalances between countries like China and the United States. Its prescription? "More stringent financial regulation" and "diversification away from dollars" as part of a new system of constant exchange rates. (Supachai Panitchpakdi, UNCTAD's secretary-general, also wants "vigorous" global actions, including "managing" energy prices through taxes, to dramatically cut greenhouse gas emissions.)

The diversification-away-from-dollars idea is a close cousin to what the Chinese government has been saying recently. China, of course, can now claim the dubious honor of being the largest foreign holder of U.S. Treasurys worth a total of $776.4 billion as of June 2009. According to a U.S. government report from 2007, China was the top foreign owner of Freddie and Fannie bonds too.

One aspect of the U.N. report that stands out is that, in all of its 218 pages of analysis and charts, it doesn't seriously contemplate a new currency that's based on something other than paper money, which can be devalued as fast as governments can run their printing presses or add zeros to their banknotes. The two classic options are gold and silver -- which are resistant to governmental inflationary urges -- though I prefer economist David Friedman's suggestion of a bundle of commodities. Then again, returning to money that's backed by something tangible may not require the ongoing services of an entire U.N. bureaucracy.

Declan McCullagh is a correspondent for and the author of the CBSNews Taking Liberties Blog.

For further reading:
"US Dollar As Reserve Currency Not Working Very Well", Kris Sayce, September 10, 2009
"Monetary Madness", Mark W. Hendrickson, September 10, 2009
"Dollar is Funny Money in Push for World Currency", Kevin Hassett, August 31, 2009
"How to Create a New World Reserve Currency", Gary North, July 11, 2009
"An International Monetary Fund Currency to Rival the Dollar? Why Special Drawing Rights Can't Play That Role", Swaminathan S. Anklesaria Aiyar, Cato Institute's Center for Global Liberty and Prosperity Development Policy Analysis, no. 10, July 7, 2009
"Dollar Slams Up Against A (Great) Wall", Robert Lenzner, March 27, 2009

Thursday, September 10, 2009

Gold Money versus the Monetary Ambitions of Governments

By Steve Saville
Excerpt from Commentary at
Thursday, September 8, 2009

China's government follows a mercantilist trade policy, meaning that it attempts to manipulate international trade -- via tariffs, subsidies, regulations and exchange rates -- in order to maximise the amount of money that flows into the country. This policy is unlikely to change anytime soon. Also, China's government exerts very direct and stringent control over its banking system, as evidenced by the rapid expansion of bank credit during the first half of this year at the behest of the government, and the subsequent slowing in the rate of credit expansion, again at the behest of the government. Thanks to its domination of the banks, China's government has a level of control over money supply that central-planners in the US and Europe can only dream about.

Chinese policymakers will not willingly relinquish the influence they now enjoy over the internal Yuan supply and the value of the Yuan relative to other currencies. For this reason, the increasingly popular notion that China plans to back the Yuan with gold, or link the Yuan's value to gold in some way, makes no sense at all.

The probability that there will be some sort of official link between China's currency and gold anytime soon is very close to zero, and the same can be said about every other national currency. Unfortunately, the current major trend is for increasing, not decreasing, government control over banking and money.

Another consideration is that it would be practically impossible for any single country, with the exception of the US, to link its currency to gold, because if all the other currencies remained free-floating/sinking then the exchange rate of the gold-linked currency would experience wild swings in response to changes in the US$ gold price. For example, a doubling of the US$ gold price over 12 months followed by a one-third decline over the ensuing 12 months would effectively cause the international prices of the gold-linked country's exports to double and then plunge over a 2-year period. That is, international trade could become extremely unstable for the lone country with the gold-linked currency. The US is the exception because a large chunk of international trade is conducted in US dollars. As a result, if the US were to link its currency to gold then the rest of the world would be forced to follow suit. This means that the US would have to be the first country to establish a gold link.

Many years into the future there will come a time when our present monetary system is so ravaged by inflation that a complete system change will be unavoidable. At this future time the reintroduction of an official monetary role for gold could become a realistic possibility.

Rather than having a Gold Standard or some other official (government-mandated/controlled) link between the currency and gold, the optimum solution would be for the government to get out of the money business altogether and let the market use whatever money it chooses to use. The trouble is, the optimum solution is so far outside the realm of mainstream thinking that it won't even find its way to the discussion table until after there is a total monetary collapse.

Steve Saville is the founder of The Speculative Investor and currently resides in Shanghai.

Wednesday, September 9, 2009

The Monetary Economics of E.C. Riegel

By Jon Matonis

Edwin Clarence Riegel (1879-1953), generally known as E.C. Riegel, was an independent scholar, author and consumer advocate who campaigned against restrictions on free markets that harmed consumers and promoted an alternative monetary theory and an early private enterprise currency alternative.

The above photograph shows American mutualist Laurence Labadie with the libertarian monetary theorist, E.C. Riegel, outside the latter's New York City home at 226 East 26th Street, November 14, 1948. Photo is courtesy of Labadie's niece, Carlotta Anderson.

Riegel's primary published works on monetary theory include Private Enterprise Money: A Non-Political Money System (1944), The New Approach to Freedom (1949), and Flight from Inflation: The Monetary Alternative (1978). As the publisher responsible for reviving many of his writings, Spencer MacCallum also prepared a detailed summary of Riegel's thoughts on money.

The entire individualist anti-statist position from Pierre-Joseph Proudhon, Josiah Warren, Benjamin Tucker, and William B. Greene to the modern money theorists, Hugo Bilgram and E.C. Riegel, is inextricably linked to the insistence of competing money systems and the evolution of marketplace control over money, credit, and interest rates. Riegel anticipated Austrian economist Friedrich Hayek's thinking that the separation of money and State also entailed the separation of the standard unit of value and the State. The non-Hayekian 'libertarians' persist in a dogged devotion to the gold standard, which Riegel believed was essentially a formula for a different brand of State-controlled money, run in collusion between ambitious State finance ministers and the major holders of gold, thereby tying currency to a gold price fixed by political agreement and made immune to the market adjustment process of a free market in gold trading.

With echoes of the late 19th-century standards battle between New York gold interests and the agrarian Free Silver Movement, Riegel's valun system describes a voluntary banking association of private abstract standards based on goods and services (or labor) that they are being exchanged for, similar to a mutual credit system. Essentially, a greater number of choices in monetary standards will increase the dignity of the common man and the overall prosperity of the people. In extrapolating this mutual participatory banking system, I doubt Riegel would have advocated that the valun currency unit assume the new monopoly privilege barring other free enterprise entrants. Therefore, other private currency units would evolve naturally and they would be competing directly against the valun. This is where it gets interesting.

Although Hayek departed from some of his Austrian peers in turning towards a totally free market monetary system that may end up not being based on a 100% gold-backed monetary unit, his insistence on free banking and market-determined standards was unwavering. In the worldwide evolution of standards left free to develop unhindered, I maintain that a metals based monetary unit will tend to dominate in the race for nonpolitical digital currency adoption.

We can observe this today in the many digital currency companies jockeying for adoption and circulation. The digital gold currency issuers, as opposed to the digital fiat currency issuers, appear to have a distinct advantage in trust when the elements of jurisdiction and political risk are removed. Otherwise, why would e-gold have achieved such market dominance before being challenged legally by the U.S. authorities? The evidence to date is that online, cross-border digital currency users will gyrate toward objectively-measured value, such as gold, rather than abstract subjective value.

What Riegel did not foresee as possible in the 1940s was technology's ability to permit competing non-State currency providers to issue online and beyond political boundaries. This is a paramount change to the money issuing landscape, not least of which allows for immediate convertibility, partial or full. Riegel's market process for nonpolitical money is correct; however, the conclusions that he reaches regarding the separation of standard unit of value and the State are not realistic. The challenge for the community currency crowd is to demonstrate in practice how a valun or a local time-labor note will prevail over a metals-based currency unit in the digital world.

For further reading:
"The Legacy of E.C. Riegel", Thomas Greco, September 7, 2009
"Monetary Theory of E.C. Riegel", Christopher Quigley, March 6, 2007
The Money Changers: Currency Reform from Aristotle to e-cash, David Boyle, 2003
"Anarchy and Money", Jon Matonis, December 15, 1984
Men Against the State, James J. Martin, 1953
Individual Liberty, Benjamin R. Tucker, 1926
Proudhon and His "Bank of the People", Charles A. Dana, 1896
Hard Cash, Ezra Heywood, 1875
True Civilization, Josiah Warren, 1863
Our Mechanical Industry, As Affected By Our Present Currency System: An Argument for the Author's New System of Paper Currency, Lysander Spooner, 1862
Equitable Commerce, Josiah Warren, 1852
Mutual Banking, William B. Greene, 1850

China Buys First IMF Bonds, Moves away from US Dollar Reserves

Business Intelligence Middle East
Friday, September 4, 2009

DUBAI -- China has agreed to buy the first International Monetary Fund bonds for about US$50 billion, the IMF said.

IMF managing director Dominique Strauss-Kahn and the deputy governor of the People's Bank of China, Yi Gang, signed the agreement Wednesday at IMF headquarters in Washington, the multilateral institution said.

Under the agreement, the Chinese central bank "would purchase up to SDR 32 billion (around US$50 billion) in IMF notes," it said.

SDRs are defined in terms of a basket of major currencies used in international trade and finance. The currencies in the basket are 44% US dollars, 34% euros, 11% Japanese yens and 11% pounds sterling.

SDRs are used as a unit of account by the IMF and other international organizations, that is calculated daily and which members can convert into other currencies.

"The note purchase agreement is the first in the history of the fund," the 186-nation institution said.

The IMF executive board approved the plan to issue notes to governments on 1 July.

China will use yuan, not dollars, to buy the IMF-issued bonds, it was revealed on Friday.The expectation had been that China would use dollars to buy the bonds.

The purchase price of each IMF bond should be paid "by transfer of the SDR equivalent amount of Chinese Renminbi to the account of the Fund", the agreement, which was signed earlier this week, stipulated.

A Chinese central bank official, speaking on condition of anonymity, said it was not clear how the bond purchase would be implemented in practice. One possibility is that the use of yuan is purely a question of accounting convenience.

The IMF might sell the yuan directly back to the Chinese central bank for dollars, hence allowing Beijing to diversify its foreign exchange reserves, said Zhang Bin, an analyst at the Chinese Academy of Social Sciences, a key government think-tank.

The issuance of bonds is an unprecedented step to boost IMF resources as the institution struggles to provide financing to help member nations cope with the global financial and economic crises.

"The agreement offers China a safe investment instrument. It will also boost the fund's capacity to help its membership -- particularly the developing and emerging market countries -- weather the global financial crisis, and facilitate an early recovery of the global economy," the IMF said.

The global economy is beginning to pull out of the worst recession since World War II, according to the institution, but recovery is expected to be sluggish and financial systems remain fragile.

China, whose dynamic economy is expected to lead the global economy out of recession, has been seeking greater representation at the IMF to reflect its rising economic might.

The IMF currently has to raise money by issuing bonds. It has a shortfall of funds due to the financial crisis, yet has to financially support some countries, said Zeng Gang, director of the Department of the Banking Industry of the China Institute of Finance and Banking.

He added that China's holdings of the IMF bond would help give it greater saying and influence in the IMF.

Besides this, holding the bond provides a relatively secure investment, given the risk of depreciation in holding the US dollar.

Since the US dollar holds a smaller proportion than the combination of the other three currencies, holding the IMF bond is safer than US dollar assets.

However, the bond is unlikely to act as the main investment product for China's huge foreign exchange reserves, because the total issue of the bond is only one-tenth of the T-bonds issued by America, and the bond buyer has to bear some exchange risk and interest rate risk, according to market analysts.

Some analysts argue that this bond is more close to debt, as private investors cannot participate and the bond cannot not be traded on a secondary market, which means the investors have to face some liquidity risks.

Brazil, Russia and India -- the other three countries that make up what is known collectively as the BRIC countries -- are seen as potential buyers of IMF bonds and are also in the vanguard of developing countries' drive for greater representation in international bodies.

A deal for Russia to buy up to US$10 billion of IMF should be concluded by September, a senior Russian government official said in early July.

Brazil is also in the market for US$10 billion worth of new IMF bonds.

Any bid by China to expand its formal influence at the IMF is likely to encounter resistance, especially from Europe, which has traditionally provided the fund's managing director.

Chinese think-tank economists said the purchase symbolised the country's "very first step" toward increasing its say in reshaping global financial institutions amid the financial crisis.

The bonds also allow China to diversify its massive holdings of foreign reserves, giving it an alternative to purchasing US State bonds. And it will give the IMF the resources it needs to help other countries battle through the global crisis.

China holds US$2.13 trillion in foreign exchange reserves, the world's largest stockpile, and economists reckon that about two-thirds are invested in dollar-denominated assets.

For further reading:
"China to use yuan, not dollars, for IMF bond buy", Reuters, September 4, 2009
"China to buy $50 billion of first IMF bonds", Associated Press, September 3, 2009

Monday, September 7, 2009

Gold Market Now Enjoys the 'Beijing Put'

By Ambrose Evans-Pritchard
The Telegraph, London
Monday, September 7, 2009

LAKE COMO, ITALY -- China has issued what amounts to the "Beijing put" on gold. You can make a lot of money but you really can't lose.

I happened to see quite a bit of Cheng Siwei at the Ambrosetti Workshop, a gathering of politicians and global strategists at Lake Como, including a dinner at Villa d'Este last night at which he listened very attentively as a number of American guests tore President Obama's economic and health policies to shreds.

Mr Cheng was until recently vice chairman of the Communist Party's Standing Committee and is now a sort of economic ambassador for China around the world -- a charming man, by the way, who left Hong Kong for mainland China in 1950 at the age of 16 as young idealist eager to serve the revolution. Sixty years later, he calls himself simply "a survivior."

What he said about US monetary policy and gold -- this bit on the record -- would appear to validate the long-held belief of gold bugs that China has fundamentally lost confidence in the US dollar and is going to shift to a partial gold standard through reserve accumulation.

He played down other metals such as copper, saying that they could not double as a proxy currency or store of wealth.

"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not stimulate the market," he said.

In other words, China is buying the dips, and will continue to do so as a systematic policy. His comment captures exactly what observation of gold price action suggests is happening. Every time it looks as if the bullion market is going to buckle, some big force steps in from the unknown.

Investors long-suspected that it was China. We later discovered that Beijing had in fact doubled its gold reserves to 1054 tonnes. Fait accompli first. Announcement long after.

Standing back, you can see that the steady rise in gold over the last eight years to $994 an ounce last week -- outperforming US equities fourfold, even with reinvested dividends -- has roughly tracked the emergence of China as a superpower in foreign reserve holdings (now $2 trillion).

As I have written in today's paper, Mr Cheng (and Beijing) takes a dim view of Ben Bernanke's monetary experiments at the Federal Reserve.

"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.

This line of argument is by now well-known. Less understood is how much trouble the Fed's "quantitative easing" policies are causing in China itself, where they have vicariously set off a speculative boom on the Shanghai exchange and in property. Mr Cheng said mid-level house prices are now 10 times incomes.

"If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise."

"Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down."

Of course China cold end this problem by letting the yuan rise to its proper value, but China too is trapped. Wafer-thin profit margins on exports mean that vast chunks of Chinese industry would go bust if the yuan rose enough to close the trade surplus. China's exports were down 23 percent in July from a year before even at the current exchange rate, and exports make up 40 percent of GDP. "We have lost 20 million jobs in this crisis," he said.

China's mercantilist export strategy has led the country into a cul-de-sac. China must continue to run its trade surplus. It must accumulate hundreds of billions more in reserves. Ergo, it must buy a great deal more gold.

Where is the gold going to come from?