Saturday, October 30, 2010

Gold Will Outlive Dollar Once Slaughter Comes

By John Hathaway
Bloomberg Opinion
Thursday, October 28, 2010

The world’s monetary system is in the process of melting down. We have entered the endgame for the dollar as the dominant reserve currency, but most investors and policy makers are unaware of the implications.

The only questions are how long the denouement of the dollar reserve system will last, and how much more damage will be inflicted by new rounds of quantitative easing or more radical monetary measures to prop up the system.

Whether prolonged or sudden, the transition to a stable monetary system will become possible only when the shortcomings of the status quo become unbearable. Such a transition is, by definition, nonlinear. So central-bank soothsaying based on the extrapolation of historical data and the repetition of conventional wisdom offers no guidance on what lies ahead.

It’s amazing that there is no intelligent discourse among policy leaders on the subject of monetary rot and its implications for the future economic and political landscape. Until there is fundamental monetary reform on an international scale, most economic forecasts aren’t worth the paper on which they are written.

Telltale signs of future trouble aren’t hard to spot. Only a few months ago, Federal Reserve Chairman Ben Bernanke and a chorus of other high-ranking Fed officials were talking about exit strategies from the U.S. central bank’s bloated balance sheet and the financial system’s unprecedented excess liquidity. Now, those same officials are talking about pumping more money into the system to stimulate growth.

Risky Targets

And they’re not alone: Six months ago, the chief economist of the International Monetary Fund, Olivier Blanchard, suggested that raising inflation targets to 4 percent from 2 percent wouldn’t be too risky.

This sort of talk must grate on the nerves of our trading partners, China, India, Russia and others, who have accumulated pyramids of non-yielding Treasury debt. No haven there. Return- free risk may be a better way to put it. And bickering among central bankers over currency manipulation and rising trade tensions doesn’t exactly reinforce one’s confidence in a scenario of sustained economic growth and a return to prosperity.

The prospects for an orderly unwinding of the extreme posture of global monetary policy are zero. Bernanke, Jean- Claude Trichet and Mervyn King, his counterparts in Europe and the U.K. respectively, are huddling en masse upon the most precarious perch in the history of monetary affairs. These alleged guardians of monetary stability, in their attempts to shore up the system, have simply created the incinerator for paper money. We are past the point of no return. Quantitative easing may well become a way of life.

No Freak Occurrence

The consensus investment view seems to be that the credit crisis of 2008 was a freak occurrence, unlikely to repeat. That is wishful thinking. Monetary policy has painted itself into a corner. Based on our present course, there will be more bubbles and more meltdowns.

Financial markets and institutions sense trouble, as reflected in the flight to supposedly safe assets such as Treasuries and corporate-debt instruments with paltry yields, as well as the reluctance to lend by commercial banks. We are stuck in an epic liquidity trap. The irony is, if global central banks succeed in creating inflation, the value of these safe assets will be destroyed. It is a slaughter waiting to happen.

In the pedantic mentality of central bankers, their playbook creates just the right amount of inflation. As inflation accelerates, consumers will spend to get rid of their dollars of diminishing value and spur the economy. Once consumers start spending, it will be time to raise interest rates because a solid foundation for prosperity will have been established, they say.

Slender Thread

But whatever the playbook promises, the capacity of financial markets to overshoot can’t be overestimated. The belief among policy makers and financial markets in the possibility of this sort of fine-tuning is preposterous, but it is the slender thread on which remaining investment and business confidence rests.

The breakdown of the monetary system will be chaotic. When inflation commences, it will be highly disruptive. The damage to fixed-income assets will seem instantaneous. Foreign-exchange markets will become dysfunctional. The economy will become even more fragile and unpredictable.

Gold is an imperfect, but comparatively reliable, market gauge for the extent of current and future monetary destruction. The recent acceleration in the dollar price of the metal to $1,381, a record high in nominal terms, coincided with talk of a new round of quantitative easing and highly visible discord among major nations on trade and currency-valuation issues.

Naysayers’ Bubble

Naysayers point to gold’s price and see a bubble, without understanding that the only acceleration that is taking place is in the rate of decline of paper currency. The Fed is organizing an attack on the dollar’s value, believing that this is the most expedient way to defuse deflationary market forces. The man in the street is unaware, a perfect setup. Inflation can only be successful when the public doesn’t see it coming.

The sudden torrent of commentary on gold isn’t the sign of a bubble. Anti-gold pundits provide a great service to those who grasp this historical moment: They facilitate the advantageous positioning of the one asset most likely to be left standing when the dust settles.

John Hathaway is a managing director of Tocqueville Asset Management LP in New York. The opinions expressed are his own.

For further reading:
"US dollar: Prepare for a prolonged devaluation", Scott Boyd, October 28, 2010
"Is there a way out of the currency war?", Laurence Copeland, October 27, 2010
"The Debate Over Money Manipulations: A Short History", Christopher Westley, October 25, 2010

Thursday, October 28, 2010

A Cross of Gold

Dr. Edwin Vieira, Jr., constitutional lawyer, historian, scholar, GATA consultant, and author of the magisterial history of the monetary system of the United States, Pieces of Eight, presented his justification for a gold-based monetary system at the October dinner meeting of the Committee for Monetary Research and Education in New York.

Vieira's address was drawn from his paper, "A Cross of Gold", and you can find it at GATA's Internet site here:

Vieira elegantly states:
"The present domestic and international monetary and banking systems have slipped into the initial stages of terminal dissolution. In their present forms, they cannot long survive."
"The weaknesses of this system became apparent only forty-three (43) years after the initiation of the scheme, when the great panic of 1907 proved that the National Banking System needed a major overhaul. The fundamental flaws pointed out at the time were that the system provided no single 'lender of last resort' to pump up the pyramid of currency and credit in times of crisis, and set up no central regulator to discipline the bankers in order, if possible, to forefend crises altogether. To overcome these deficiencies, the locus of economic power needed to be translated to a still higher level."
"So full national cartelization and central regulation of the banks was set up in the Federal Reserve System through the Federal Reserve Act of 1913. Indeed, the Federal Reserve System went beyond mere national cartelization to national Ponzification. The Federal Reserve regional banks promised their depositors to redeem Federal Reserve Notes on demand, which promises were 'guaranteed' by the United States Treasury’s ability to extract payments from taxpayers. So, just as in a classical Ponzi scheme present payments to the first tier of 'investors' are 'guaranteed' by revenues to be derived from subsequent tiers of duped 'investors', under the Federal Reserve System promises of present redemption of Federal Reserve Notes were 'guaranteed' by anticipated tax revenues—except that, far better than the classical Ponzi scheme, these revenues could be coerced from unwilling 'investors'."

Monday, October 25, 2010

The Case Against the Fed

The Case Against the Fed by Murray Rothbard is brilliantly presented in this 24-part audio format by LibertyInOurTime.


Proceed to Part 1 of 24.

Sunday, October 24, 2010

Rothbard on Fractional Reserve Banking: A Critique

By Michael S. Rozeff
The Independent Review, Volume 14, Number 4
Spring 2010

From the Abstract: Murray Rothbard, in The Case for a 100 Percent Gold Dollar (1974), maintains that fractional-reserve banking is fraudulent and inherently destabilizing of the economy. However, by considering how a regime of laissez faire in money and banking might operate, we may reach a judgment quite different from Rothbard’s.

Rozeff writes:

"Murray Rothbard, in The Case for a 100 Percent Gold Dollar (1974), maintains that fractional-reserve banking is fraudulent. Viewing it as coercive and unlawful, he argues that banks ought to be allowed to serve only as warehouses for money. He insists that all deposits become bailments, not debts or credits. Money would always be an asset, never a liability. A proper bank would, in his view and by law, hold all deposits intact and become a 100 percent reserve-storage or safety-deposit bank, although to call such a business a bank under these conditions is something of a misnomer because such a so-called bank makes no loans.

Rothbard’s firm belief that fractional-reserve banking constitutes fraud rules out fractional-reserve free banking even in a free market. This position, I argue, goes against basic ideas of liberty and the free market, both of which Rothbard champions. When he regards fractional-reserve banking as fraudulent and proposes its illegality, he introduces his own ethical judgment based on his own assessment of the merits of any and all exchange transactions that may occur between banker and depositor. He introduces his own idea of the appropriate property rights in a bank deposit, his own idea of what appropriate money must be, and his own idea of libertarian law. Although he is entitled to his opinions, the market participants in a condition of liberty in free markets decide all these matters for themselves, and their reasoning and valuations may differ from Rothbard’s. They may not regard fractional-reserve banking as fraudulent, and they may want to transact via fractional-reserve banking arrangements. They may wish to circulate media of exchange that are someone else’s liabilities.

Rothbard’s position has since been espoused in books by both Jesus Huerta de Soto (2001) and Jorg Guido Hulsmann (2008) as well as in articles, such as one by Hans-Hermann Hoppe, Hulsmann, and Walter Block (1998) that argues against fiduciary media. These latter-day adherents to Rothbard’s position show no diminution in the strength of their convictions, despite the criticisms presented by George Selgin and Lawrence H. White (1996), who have argued against Rothbard’s position and supported free banking. For example, Hulsmann writes in his book, “There is no tenable economic, legal, moral, or spiritual rationale that could be adduced in justification of paper money and fractional-reserve banking” (2008, 238). This extraordinary statement boldly restates Rothbard’s beliefs. If a community willingly and freely uses paper money, shall Hulsmann maintain that they have no rationale? Moreover, it is not difficult to locate scholarship that provides viable economic reasons for paper money and fractional-reserve banking. It is quite easy to find numerous real-world instances in which paper money, tokens, scrip, and credits arose spontaneously (see Timberlake 1987). I argue here that the Rothbardians have not proven, either on grounds of morality or on grounds of economics, that paper money or fractional reserve banking evinces criminal behavior.

Monetary Freedom - Instead of arguing, as Rothbard does, that monetary freedom necessarily requires 100-percent-reserve banking, let us ask what monetary freedom might look like. The institutions and practices that arise under freedom are impossible to know in advance. We can imagine many possibilities. People themselves decide what kinds of property rights they want and find acceptable in bank accounts. They hammer out what is fraudulent and what is not. Banks and their customers decide the details of their own exchanges. People decide what value standards (units of account) to use to establish prices and what media they want to use as money, whether commodity, paper, electronic, or something else. People may demand bank audits as they see fit, and they may become part of the market structure. Banks may issue their own banknotes. Perhaps banks arrange central clearing houses that issue notes. Retail establishments may become involved in issuing various clearing certificates. Local clearing systems may arise that use credit clearing. People trade and use banknotes as money if they wish. They depreciate those currencies that they believe are losing value, and they flock to the media that they think may appreciate or hold their value. If media are convertible, people decide on the appropriate media of redemption."

Tuesday, October 19, 2010

A Rally in Bitcoin

By Jon Matonis

Bitcoin has had about a 64% rally recently which is not surprising given that more and more people are learning about its existence and circulation as a new P2P anonymous digital currency. The massive viral effect of a P2P digital currency have now kicked in and it seems as though a new merchant or a new exchanger emerges daily. As of October 19th, 2010, total Bitcoin in existence equalled 4,315,250 with 86,305 Bitcoin blocks generated (source: Bitcoin Exchange).

One such exchanger, Mt. Gox, does an excellent job of tracking and charting the USD:BTC exchange rate on a daily basis:

Trading volume at Mt. Gox set new records during early October 2010 and you can still follow some of the action and comments here.

Bitcoin is an unbacked currency in a traditional commodity-reserve sense but limited in its issuance by CPU cycles and electricity. As their web site states, only 21 million coins will be brought into circulation, but I suspect that may need to be adjusted when unsustainable deflation appears.

Issuing statistics and some of the leading exchangers can be followed at Bitcoin Watch. A relatively new exchanger on the Bitcoin scene is Canadian Nanaimo Gold with a nice user interface. The exchanger Bitcoin 4 Cash bills itself as "the premier Bitcoin dealer that respects anonymity" and the BitCoin/MetalCoin Exchange will trade Bitcoin for gold and silver coins. BitcoinFX provides two-way exchange for Bitcoin into Liberty Reserve. In Alabama, Bitcoin2cash will provide Bitcoin for cash sent in the regular mail and vice versa, which is financial privacy in its rawest form (the bid/ask spread is wide at 25/200, but I respect these guys!). And finally, another interesting exchanger to follow is the Finland-based Bitcoin Exchange, which has an excellent statistics section. Needless to say, Bitcoin deserves serious consideration as we move into The Monetary Future.

If you enjoyed this article, please donate Bitcoin to: 13N81mY1B2Y3KugUQ8dcidhvZKDrhrZmZn

For further reading:
"A Short Introduction to Bitcoin - A Peer to Peer Cryptocurrency", Bluish Coder, October 10, 2010
"Bitcoin Electronic Currency: The Future of Money", Elliott Prechter, Elliott Wave International, September 30, 2010
"Difficulty vs Time Graph", Bitcoin Blogger, September 19, 2010
"Intriguing: Disruptive Technology To Upend All Banks", Bitcoin Blogger, August 8, 2010
"What are Bitcoins?", Quezi, July 22, 2010
"Is It Time For Digital-Only Dollars?", Phil Maymin, Hartford Advocate, July 8, 2010
"BitCoin and the 'Wild West'", Niklas Blanchard, Modeled Behavior, June 30, 2010

This article was also published in Digital Gold Currency Magazine (November 2010).

Monday, October 18, 2010

North vs. Brown

By Gary North
Specific Answers
Friday, October 15, 2010

Ellen Brown's Web of Debt Is an Anti-Gold Currency, Pro-Fiat Money, Greenback, Keynesian Tract. Here, I Take It Apart, Error by Error.

Ellen Brown's 2006 book, The Web of Debt, has become a best-seller within the Patriot movement. This indicates the extraordinary intellectual vulnerability of the Patriot movement. Its members cannot distinguish conservatism from radical leftism. This book promotes the following:
The Populist economics of America's far Left

A vast expansion of Federal government welfare

Pure fiat money: printing press money

Total Federal government control over money: "Obama dollars"

Legal tender laws that force people to accept Obama dollars

The American Civil War as a great engine of economic growth

Franklin Roosevelt's New Deal as a great economic program

The gold coin standard as a terrible evil that restrains the state

Ellen Brown is the latest in a long line of pro-fiat money, anti-gold currency, monetary statists who have infiltrated the conservative movement.

They have accomplished this for over 50 years by the tactic of wrapping themselves in a flag of opposition to the Federal Reserve System. I call them false-flag infiltrators. I have written about them here:

Read the rest of the article.

Wednesday, October 13, 2010

IMF at the Epicenter of Currency Earthquake

By Ben Davies
King World News
Sunday, October 10, 2010,_Gold_Shines_as_Currency_Wars_to_Continue.html

Henry Hazlitt was the modern literary agent of libertarianism. At the advent of Bretton Woods he stood alone in his New York Times editorials condemning the monstrosity, as he termed it, that was the IMF. He considered this entity no different to the Federal Reserve Bank. Another organization espousing the values of economic growth and price stability. In reality, they were both merely agents for the propagation of money to aid and abet the continuation of the flawed policies and practices of a country. In the case of the IMF they called on loans from member countries to 'bail out' bankrupt nations globally. The IMF prolonged the inevitable misery and didn't address the issues that got the country into difficulties in the first place.

Emergent nations once patronized by IMF bailouts and inappropriate 'conditional love' have put two fingers up. I can almost hear the BRIC nations silent mutterings, "Why should we 'flex' our currencies to assist the developing nations who so highmindedly leered over us in troubled times passed and revelled in our misery."

Bretton Woods was possible due to the economic strength of US. The Plaza Accord was permitted because it was in the best interest of the US. The Louvre Accord which tried to arrest the efforts of the Plaza Accord of two years earlier, ironically, was permitted because it was in the best interest of the US.

The US and developed nations no longer wield power anymore. " IMF who? " the BRIC’s cry. Right now the emergent nations are more content to say "our currency, your problem". Unfortunately the West, particularly the US have returned the favour, "our bonds, your problem" and so the stalemate will prevail.

Unfortunately as each day passes, the friction of the global monetary fault lines grow stronger. These fault lines will release their energy in the largest world monetary earthquake known to man, as we witness the inevitable demise of the fiat currency system - as all such systems have failed before, leaving not one survivor.

Ben Davies is the CEO of Hinde Capital.

For further reading:
"The World Monetary Earthquake - The Dash From Cash", Hinde Capital, October 2010

Monday, October 4, 2010

FinCEN Proposes Reporting On All Cross-Border Transactions

Press Release
Financial Crimes Enforcement Network
United States Department of the Treasury
Monday, September 27, 2010

FinCEN Proposes Regulatory Requirement for Financial Institutions to Report Cross-Border Electronic Transmittals of Funds

VIENNA, Va. - The Financial Crimes Enforcement Network (FinCEN) today announced that it has submitted for publication in the Federal Register a notice of proposed rulemaking (NPRM) that would require certain depository institutions and money services businesses (MSBs) to affirmatively provide records to FinCEN of certain cross-border electronic transmittals of funds (CBETF). Current regulations already require that these financial institutions maintain and make available, but not affirmatively report, essentially the same CBETF information. FinCEN issued this proposal to meet the requirements of the Intelligence Reform and Terrorism Prevention Act of 2004 (IRTPA). Section 6302 of IRTPA directed the Secretary of the Treasury to study the feasibility of "requiring such financial institutions as the Secretary determines to be appropriate to report to the Financial Crimes Enforcement Network certain cross-border electronic transmittals of funds, if the Secretary determines that reporting of such transmittals is reasonably necessary to conduct the efforts of the Secretary against money laundering and terrorist financing."

“By establishing a centralized database, this regulatory plan will greatly assist law enforcement in detecting and ferreting out transnational organized crime, multinational drug cartels, terrorist financing, and international tax evasion,” said FinCEN Director James H. Freis, Jr. “FinCEN has examined the cross-border reporting issue, taking into account the exceptional benefit to law enforcement and the modest cost to industry, and we look forward to working closely with both as this rule moves forward through the public comment process.”

The proposal will produce valuable data for law enforcement agencies by having first-in and last-out depository institutions (those institutions that are the first to receive funds transferred electronically from outside the United States or the last U.S. institution to transmit funds internationally) to report all such transmittals of funds. MSBs that conduct CBETF will be required to report international transactions equal to or in excess of $1,000. FinCEN estimates that fewer than 300 depository institutions and 700 MSBs will be subject to this requirement.

FinCEN conducted an extensive study of the technical feasibility to the government of imposing such a requirement and in January of 2007 published the congressionally mandated report; Feasibility of a Cross-Border Electronic Funds Transfer Reporting System under the Bank Secrecy Act that affirmed the feasibility of the reporting system. FinCEN, with the participation of both the financial services industry and law enforcement, then conducted a follow on study to determine and quantify both the benefits to the public of the system and the costs to parties affected by any such potential regulatory requirement. That study, Implications and Benefits of Cross-Border Funds Transmittal Reporting, has also been made available today on FinCEN’s web site. As required by the statute, FinCEN also will work to ensure that all technical capacity issues are addressed.

FinCEN is also proposing to require an annual filing by all depository institutions of a list of taxpayer identification numbers of accountholders who transmitted or received a CBETF. This additional information will facilitate the utilization of the CBETF data, in particular as part of efforts to combat tax evasion by those who would seek to hide assets in offshore accounts.

This proposed rulemaking encourages public comment for 90 days after publication in the Federal Register.

[Updated: Comments should be submitted on, or before, December 29, 2010]

Fact Sheet: FinCEN NPRM; Cross-Border Electronic Transmittal of Funds

FinCEN's mission is to enhance U.S. national security, deter and detect criminal activity, and safeguard financial systems from abuse by promoting transparency in the U.S. and international financial systems.

Friday, October 1, 2010

Europe's Central Banks Halt Gold Sales

By Jack Farchy
Financial Times, London
Sunday, September 26, 2010

Europe's central banks have all but halted sales of their gold reserves, ending a run of large disposals each year for more than a decade.

The central banks of the eurozone plus Sweden and Switzerland are bound by the Central Bank Gold Agreement, which caps their collective sales.

In the CBGA's year to September, which expired on Sunday, the signatories sold 6.2 tonnes, down 96 per cent, according to provisional data.

The sales are the lowest since the agreement was signed in 1999 and well below the peak of 497 tonnes in 2004-05.

The shift away from gold selling comes as European central banks reassess gold amid the financial crisis and Europe's sovereign debt crisis.

In the 1990s and 2000s, central banks swapped their non-yielding bullion for sovereign debt, which gives a steady annual return. But now central banks and investors are seeking the security of gold.

The lack of heavy selling is important for gold prices both because a significant source of supply has been withdrawn from the market, and because it has given psychological support to the gold price. On Friday bullion hit a record of $1,300 an ounce.

"Clearly now it's a different world. The mentality is completely different," said Jonathan Spall, director of precious metals sales at Barclays Capital.

European central banks are unlikely to sell much more gold in the new CBGA year, according to a survey by the Financial Times.

Although many central banks declined to detail their sales plans, the responses of some, along with numerous interviews with bankers and consultants, suggest it is unlikely there will be a return to the trend of the past decade, when CBGA signatories sold on average 388 tonnes a year.

The central banks of Sweden, Slovakia, Ireland, and Slovenia said they had no plans to sell, while Switzerland reiterated a previous statement to the same effect.

The CBGA was first signed after gold miners protested that central banks' rush to sell was depressing prices.

In previous years signatories haggled for individual allowances to sell under the CBGA, but the most recent renewal of the agreement in 2009 contained no such quotas, according to Darko Bohnec, vice governor of Slovenia's central bank.

For further reading:
"Germany's Central Bank Plans to Cap Gold Sales to 6.5 Tons Under Accord", Bloomberg, September 27, 2010