The Financial Times
They Are A’changin’
Change is never easy
and extreme change is the most difficult of all
Twelve years ago, the esteemed
Financial Times in an editorial announced The Death of Gold; and, in
2004, another contributor to FT noted, the end of gold as an investment
has come a little closer.
Recently, however, on January 5,
2009 the Financial Times published David Hale’s There Is Only One
Alternative To The Dollar. Long-time subscribers to FT may be surprised
to find that alternative to be gold—or, then again, they may not be
surprised at all.
Prevailing and commonly-held
beliefs do not have to be right. They merely have to prevail and to be
common; and in the 1990s, the prevailing and common belief was that gold as
an investment was dead. But as in the Bible where Jesus and Lazarus arose
from the dead, so, too, in this new millennium, has gold.
THE ASSASSINATION OF
GOLD
THE MIRACLE OF THE
RESURRECTION
The question, what caused
gold’s resurrection, cannot be considered without first considering,
what caused its death. If the truth be someday known—for today it
isn’t—gold did not die of natural causes in the 1980s and 1990s. Gold
was murdered.
The most successful murders are
done in plain sight. If hidden, suspicion naturally arises. But if done in
daylight and in plain view, the murder instead can appear to be a result of
natural causes, much to the delight and relief of the murderers.
Like the assassinations of
Julius Caesar, JFK and Robert Kennedy and Martin Luther King. the murder of
gold was planned and carried out by a conspiracy of powerful men: and, like
most conspiracies, power and profit were the underlying motives.
Also, like most conspiracies,
the conspirators were other powerful men who viewed the power of others as a
threat to their own. The more power and profit at stake, the greater the
incentive to act.
Usually, and certainly in the
case of the above, the guilty are never brought to justice although sometimes
a convenient patsy takes the blame; instead, the assassination successful,
the conspirators are rewarded with the continuation of their power and later
rewarded with more.
This is true with political
assassinations and it is certainly true in the case of gold. One of the
central figures responsible for gold’s demise in the 1990s is none
other than Lawrence Summers, now about to take yet another seat at the table
of power as the newly appointed incoming US Secretary of the Treasury.
This is not to say that Lawrence
Summers actually wielded the knife in the death of gold or helped bury the
body—that was done by Goldman Sachs, JP Morgan Chase, Barrick Gold, and
Anglo-Gold Ashanti, etc. Mr. Summers was only responsible for supplying the
written reason to do so.
Those overseeing the modern
global economy are not ignorant men. In fact, the very opposite is true. They
are instead highly intelligent and very quick. They tend, however, to be too
quick for their own—and our collective—good.
Intellect is a
“heady” gift in more ways than one. One of its failings is that
the intellect has great difficulty in differentiating between the truth and
what the ego surmises or wishes to be true—for when the ego’s
interests are involved, the intellect is the last to detect fraud, the
possibility of profit further distorting the process.
In 1988, Lawrence
Summer co-authored a curious paper, Gibson’s Paradox and the Gold
Standard, a paper that posited among other things, an inverse
relationship between the price of gold and the return on financial assets
such as stocks and bonds
The willingness to
hold the stock of gold depends on the rate of return available on alternative
assets. We assume the alternative assets are physical capital and bonds.
Summer’s
assertion of an inverse relationship between the two is somewhat akin to
believing the power of men is inverse to the power of women. That the rise of
one is threatened by the rise of the other (perhaps the reason for
Summer’s later dismissal as President of Harvard University over his
belief that women are intellectually inferior to men).
In Gibson’s
Paradox and the Gold Standard, Summer’s theory of the inverse
relationship between the price of gold and the price of paper assets was like
the smell of blood to the barracudas of Wall Street and The City, a smell
that was as irresistible to them as is the scent of lilacs in the springtime
to the rest of us.
The idea that when
the price of gold falls, the price of stocks and bonds rise, was too good to
be always true (though it is often true in fiat systems); but, nonetheless,
the idea was far too tempting for the financially dissolute and easily
tempted to resist.
In the economically distorted
era after 1980 when it appeared that money aggregates no longer affected the
rate of inflation (an apparency best explained by Peter Warburton’s
extraordinary book Debt & Delusion, see http://www.amazon.com/Debt-Delusion-Threaten-Economic-Disaster/dp/product-description/0977079333), Summer’s
thesis in 1988 found fertile soil; and with greed as the fertilizer,
gold’s demise in the next decade was effectively sealed.
When Summer’s
thesis caught the attention of the investment community, it added fuel to a
fire already well in progress. Central bankers had been trying to suppress
the price of gold since the 1970s in order to protect the “value”
of their suddenly fiat currencies after the US dollar—and consequently
all currencies—went off the gold standard. Now, they had powerful
allies.
Believing that if the
price of gold went down, the prices of stocks and bonds would rise,
investment bankers put their considerable resources behind the central
banks’ war on gold; and, as a result, in the 1990s investment banks
were to reap billions in profits, the price of gold was to collapse, central
banks were to lose most of their reserves of gold and the markets would give
rise to largest bubble in history.
The next decade was
to reveal far more destructive consequences of what central banks and
investment banks had set in motion. In the new millennium, the central
bankers’ search for monetary control and investment bankers’
search for profits was to result in the collapse of the very system that had
given rise to both.
In 2000, the dot.com
bubble created by the mixture of central bank policy and investment bank
greed collapsed; and, in their attempt to resuscitate the markets, the US
central bank drastically cut interest rates to 1 %—and with the
assistance of investment bank subprime CDOs—reflated the markets by
creating yet another bubble, the largest bubble in history, the 2002-2007 US
real estate bubble.
The collapse of the
2002-2007 US real estate bubble worsened an already bad situation, causing
the collapse of confidence in global markets, the loss of trillions of
dollars of wealth and more importantly, the freezing up of credit, the
lifeblood of capitalism (in truth but a poor plasma substitute for gold and
silver, gratis of central banks).
As a result,
attempting to undo the damage they had done, US central bankers have now
again cut interest rates—this time to zero—and preemptively
bailed out their co-conspirators, the investment banks with taxpayer money in
a last ditch effort to save themselves and the system by which government and
bankers jointly profit.
THE EXPANSION OF THE
1980s AND 1990s
THE MYTH THE TRUTH
& THE CONSEQUENCES
Between 1980 and
1999, the price of stocks had skyrocketed as the price of gold dropped. In
January 1980, the price of gold was $850 per ounce. In December 1999, the
price of gold was only $290.
In August 1982, the
Dow was at 777. In December 28, 1999 the Dow was 11,453. The campaign of
central banks and investment banks to lower the price of gold and thereby
raise the price of paper assets had succeeded, but at a tremendous cost.
Over time, the
distortion of free markets by central bank credit and government policy
intervention prevented investors from ascertaining the actual valuation and
risk of assets, a distortion that was to later prove fatal to both the
markets and to the economies upon which they depended.
The increase in US stock prices between 1982 and 1999 was not caused by US
economic expansion as measured by GDP (gross domestic product). What was
heralded as the greatest expansion in this history of capitalism was but an
engineered bubble, a bubble whose collapse set in motion yet another bubble
whose current collapse is now in the process of destroying global wealth at
an unprecedented rate (Warburton’s Debt & Delusion points
out the causal role of central bankers in these bubbles).
THE WISE MAN BUILT
HIS HOUSE ON A FOUNDATION OF ROCK
THE FOOLISH MAN BUILT
HIS HOUSE ON A FOUNDATION OF SAND
In economic terms, a
foundation of rock is a system of money with intrinsic value such as gold or
silver; whereas a foundation of sand is a system such as paper money based on
credit backed by personal, corporate, or government IOUs.
As in finance and as
well as in matters of faith, a foundation is discovered to be of rock or sand
only in times of stress. In good times, all believe their foundations to be
of rock. In bad times, the truth becomes known.
MARKET DISTORTION
POLITICAL COVER & SOCIAL CONSEQUENCES
I have friends both
conservative and liberal who remember fondly the political careers of those
who professed the beliefs they each hold dearly. Conservatives nostalgically
remember Ronald Reagan, the “great communicator”, who ably voiced
their frustrations and hopes while liberals fondly remember Bill Clinton who
did for them what Reagan did for conservatives. What both choose not to
remember is the damage each man did to all of us.
The economic collapse
and carnage now in progress could not have happened without policies enacted
under both Reagan and Clinton. Reagan devotees who are free-market advocates
conveniently forget that Reagan created the plunge protection team that now
intervenes and distorts markets prices with unrestrained impunity while Clinton supporters assiduously avoid the knowledge that Clinton knowingly signed the Graham-Leach-Bliley act repealing the
safeguards of 1933 Glass-Steagall Act designed to prevent another depression.
I care little for
what each said. I care about what each did. The political process in America
is now so compromised by power brokers that “the will of the
people” is but a convenient slogan, used by those in power to achieve
their selfish ends; and until the American people wake up to how they are
kept in ignorance in order to be used by those in power, the downward spiral
of America will only continue to accelerate with the fate of the world in the
balance.
Just as the quality
of restaurants reflect the tastes of their patrons, so too does politics
today reflect the awareness and demands of the electorate. Up until now, the
American electorate has only asked that their fears and concerns be voiced. When
that is done to their satisfaction, they care little about the subsequent
actions of those they voted for.
If restaurant fare
were to be compared to the US political process, the menu, while quite
tempting and accordingly high-priced would actually be composed of slop,
doled out to those who demand little and settle for far less—the
American electorate. Once elected, politicians work for the lobbyists who
provide them with more funds to again solicit the votes needed to for
re-election.
We did not come to
this junction by accident nor will we arrive at another by the current route.
The destruction of America’s economy happened in plain view of
Americans and yet the political process failed to prevent what all could see
was happening.
The present process
serves those in power. This is not to say that all politicians are
compromised. It is to say that all politicians must work within a compromised
system, a system that encourages politicians to lie to an electorate that
will punish them at the polls for telling the truth.
La vérité
est morte. Bientôt, ce seront également les mensonges.
The truth is dead.
Soon, so too, will be the lies.
We are in the midst
of a systemic breakdown, a breakdown not confined to the economy, politics or
other now failing systems, e.g. healthcare, education, etc. Such breakdowns
always occur at the end of eras, when one epoch gives way to another. Such
are the times in which we live.
THE FUTURE
Give me back the Berlin wall
give me Stalin and St Paul
I've seen the future, brother:
it is murder.
Things are going to slide, slide in all directions
Won't be nothing
Nothing you can
measure anymore
The blizzard, the
blizzard of the world
has crossed the threshold
and it has overturned
the order of the soul
From The Future, lyrics by Leonard Cohen, 1992
We are at a great
gate in history. What brought us here will not take us to another destination.
If we want change, we must want the change that will bring the change that we
want. Sound bites and slogans until now how been sufficient for most. In the
future, when food, water, and shelter become more important, the difference
between sound bites, slogans and the truth will become more apparent.
These historic times
have been predicted by some just as the current economic collapse has also
been predicted. Though predicted only by a few, such predictions are the only
road maps we have in these consequential times.
In the 1990s,
American historians William Strauss and Neil Howe made the following
prediction in The Fourth Turning published in 1997:
The next Fourth Turning is due
to begin shortly after the new millennium. Around the year 2005, a sudden spark will catalyze a crisis mood. Remnants of the old social order will disintegrate.
Political and economic trust will implode. Real hardship will beset the land,
with severe distress that could involve questions of class, race, nation, and
empire.
Yet this time of trouble will
bring seeds of social rebirth. Americans will share a regret about recent
mistakes -- and a resolute new consensus about what to do.
The very survival of the nation
will feel at stake. Sometime before the year 2025, America will pass through a great gate in history,
commensurate with the American Revolution, Civil War, and twin emergencies of
the Great Depression and World War II.
The risk of catastrophe will be
very high. The nation could erupt into insurrection or civil violence,
crack up geographically, or succumb to authoritarian rule. If there is a war,
it is likely to be one of maximum risk and efforts -- in other words, a
total war.
David Hackett Fisher
in The Great Wave (published 1996) and Buckminster Fuller in The
Critical Path (published 1981) also predicted this current crisis and
collapse. In the early 1900s, Ludwig von Mises predicted the collapse of
today’s credit-based economies; and, more recently, John
Exter in the 1950s and 1960s warned of the same as did Antal Fekete and
others.
Those surprised by
current events are now in charge. Expect accordingly.
WHY GOLD?
Lawrence Summers, Ben
Bernanke, Alan Greenspan, Henry Paulson, et. al. achieved their positions in
the current power structure because they serve those who profit by the
current system of credit, paper money and paper markets.
The present system
was built on a monetary fraud, paper money backed by irredeemable promises
circulating between savers and IOUs. This system primarily served the
interests of bankers and government. Bankers profited by loaning and charging
interest on money they did not have and governments were able to spend money
that did not exist.
Gold and the gold
standard are the barriers that stood in the way of bankers and government;
and, as such, gold and the gold standard were dismantled and discarded in the
bankers’ search for more profits and in governments’ search for
more power.
Now, at the end of
this remarkable era, the longest running confidence game in history built on
the false promises of paper money is coming to an end. No fiat money system
has every lasted in the history of man. It has been hubris to believe this
time it would be different.
We are between two
eras. One epoch is ending and another has not yet begun. This crisis
predicted by Ludwig von Mises and Antal Fekete was also seen as perhaps the
gateway to a better world by David Hackett Fisher and Buckminster Fuller.
In The Fourth
Turning, William Strauss and Neil Howe wrote:
..this time of
trouble will bring seeds of social rebirth. Americans will share a regret
about recent mistakes -- and a resolute new consensus about what to do.
The regret and
consensus has not yet happened. When it does, a new America will rise on a new foundation, perhaps this time
one of rock instead of sand. When the new America appears, regrets about the old will pass.
Professor Antal
Fekete will be presenting a series of lectures on March 27, 28, and 29th
in Hungary on the topics: “Great Depression II”, “Is There
Life After Backwardation?”, “Basis, Contango and Backwardation:
Beginning and Advanced”, “Will The Gold Standard Be Released From
Quarantine?”, and “The Vaporization of the Derivatives
Tower”. I and others will be speaking at the event. Those interested in
attending, please contact GSUL@t-online.hu.
These are significant
and increasingly difficult times. We are in these times together and
community will become increasingly important. Faith, gold and silver will
help in the transit to the other side of the abyss.
Darryl Robert Schoon
www.survivethecrisis.com
www.drschoon.com
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