The End of The Gold Standard - Nixon Slams the Window Shut on the World

Hugo Salinas Price discusses the gold standard and the destruction going off the gold standard has brought to the West.......read on

Once you have read the article above go on a trip back in history to 1971. In the video below Tricky Dicky takes the USA, and by default the rest of the World, off The Gold standard, in the process making all the World's currencies paper promises backed by nothing.

Some background:

The President of France Charles De Gaulle fearing a future default by the USA on its gold backed dollars instructed the Banque de France to increase the rate at which new US dollars holdings were converted into gold bullion. De Gaulle sent the French navy across the Atlantic to hand over US dollars and bring back gold bullion in exchange. In 1965 alone, the French navy ferried back over $150 million of gold bullion thereby increasing the proportion of French national reserves held in gold from 71.4% to 91.9%.

Due to inflationary pressures on the US$ as a result of printing to many dollars and foreign borrowings to fund the Indo-China (Vietnam) war on August 15, 1971, President Nixon imposed a 90-day wage and price freeze, a 10 percent import surcharge, and, most importantly, “closed the gold window”, ending convertibility between US dollars and gold.

World needs to stay vigilant about active depreciation of the dollar

By Li Xiangyang, translated by People's Daily Online

A currency war is spreading as the dollar's value against major world currencies has continued to decline in recent days. Some developed countries have begun to intervene in their exchange rates. The recovery of the global economy will suffer a negative impact if this trend is not checked.

It is the dollar that triggered the currency war. Seemingly a market move, the depreciation of the dollar is actually active.

The U.S. Federal Reserve's statement that it might restart quantitative easing — a policy central banks use to increase money supply — triggered the depreciation of the dollar. The dollar's value against the basket of currencies has decreased by 7 percent since the U.S. Federal Reserve began talk of possible quantitative easing.

The move nominally aims to further drive down the interest rate in America to prevent the occurrence of a double dip. But it will affect the value of the dollar too, prompting the dollar's devaluation. In light of the history low short-term interest rates in the United States, a further decrease in the interest rate will drive the flow of short-term capital toward markets of emerging economies, quickening the appreciation of their currencies.
　
Second, the U.S. government's strategy to double its exports within five years needs the considerable depression of the dollar. For America, boosting exports is a must in the post crisis era, because it cannot pin its hope for economic growth on the prosperity of its real estate market and consumption based on borrowing money.

Obviously boosting exports relying on the competitiveness of U.S. companies is not realistic in the short term. Nor is it possible to be realized by the strong demand of its trade partners. None of America's trade partners — except those emerging economies — are able to achieve growth independently. Judging from the course of history after World War II, considerable depreciation of the dollar is the sole possible option that enables America to realize the goal. In this sense, driving down the value of the dollar has become an important choice in policy for the United States to recover the sluggish economy..

The last but the most important point is that in the long run the considerable depreciation of the dollar will help America to transfer its debts to others. If we say the international financial crisis nationalized the private debts, then in the post-crisis era, the United State sees an urgent need to internationalize its debts.

A great amount of bad debts of American financial institutions have been converted to government debt through government aid measures. In 2009, America's fiscal deficit stood at 1.42 trillion dollars, 3.1 times the 2008 level. The deficit ratio surged from 3.2 percent in 2008 to 10 percent to a new high since World War II. The debt of the federal government increased to 6.7 trillion dollars, representing 47.2 percent of its GDP. In 2010, the fiscal deficit is expected to be around 1.32 trillion dollars. How America retains economic growth while reducing the deficit is a big problem for the country.

Historic experiences show debt-to-GDP ratio is not directly linked with economic growth and inflation (even devaluation) in most countries. But the United States is an exception because the dollar serves as the world currency. For instance, the ratio decreased from 121.2 percent in 1946 to 31.7 percent in 1974. Of that number, inflation accounted 52.6 percentage points, economic growth contributed nearly 56 percentage points and federal surplus contributed negative 21.51 percentage points. Even if the United States denies its motives to transfer their debts, it will unavoidably happen in reality.

Given a sluggish economy and huge amount of debts, driving the value of the dollar down is in line with America’s interests, both in short term and in long term. The international community ought to stay vigilant about the strong motive for active devaluation under the guise of a market-based move.

The Ultimate Gold Bug - Mr. T

The world's most famous TV Gold Bug appears on Bloomberg TV to talk about Gold. Although he is there representing a gold buy back shop, notice that he thinks gold might go higher and that he hasn't cashed in any of his gold. If nothing else Mr T. demonstrates that gold bugs come from all walks of life and faiths.

Banks' $4 trillion debts are 'Achilles’ heel of the economic recovery', warns IMF

From the UK Telegraph:

More taxpayer support is needed to ensure global financial stability despite the billions already pledged, the International Monetary Fund has warned, as banks remain the “achilles heel” of the economic recovery.

Lenders across Europe and the US are facing a $4 trillion refinancing hurdle in the coming 24 months and many still need to recapitalise, the Washington-based organisation said in its Global Financial Stability Report. Governments will have to inject fresh equity into banks – particularly in Spain, Germany and the US – as well as prop up their funding structures by extending emergency support.

“Progress toward global financial stability has experienced a setback since April ... [due to] the recent turmoil in sovereign debt markets,” the IMF said. “The global financial system is still in a period of significant uncertainty and remains the Achilles’ heel of the economic recovery.”

Although banks have recognised all but $550bn of the $2.2 trillion of bad debts the IMF estimates needed to be written off between 2007 and 2010, they are still facing a looming funding shock that will need state support. “Nearly $4 trillion of bank debt will need to be rolled over in the next 24 months,” the report says.

“Planned exit strategies from unconventional monetary and financial support may need to be delayed until the situation is more robust, especially in Europe... With the situation still fragile, some of the public support that has been given to banks in recent years will have to be continued.”

Although the IMF does not mention individual countries, it is clear it has concerns about the UK. According to the Bank of England, British banks need to refinance £750bn-£800bn of funding by the end of 2012, £285bn of which is emergency support that expires in the same period.

The IMF adds: “Without further bolstering of balance sheets, banking systems remain susceptible to funding shocks that could intensify deleveraging pressures and place a further drag on public finances and the recovery.” .....read on

Keiser Report

This weeks Keiser Report looks at hard assets versus high assets, Hu Jintao bonds, political witches and more bank bailouts. Max also talks to Eric Janszen about his new book, the PostCatastrophe Economy.

Weekend Chill Out

This weekend's chill out is dedicated to the millions of gold miners over thousands of years who have gone to the river to pan for gold. Without them we would not have much of the gold that exists today, meaning civilisation and international trade may never have developed.

The Taiwanese Animators Explain Gold Mania

Uncle Sam’s Mysterious Hoard

The mainstream press still don't seem to get it, Gold is Money - the finest Money for thousands of years and will be ever so whilst humans need to store their wealth in an asset that cannot be created on Earth.

From The Atlantic, by James Picerno:

The Federal Reserve Bank of New York, a neo-Florentine fortress of sandstone and limestone in Lower Manhattan, covers a city block. A battery of structural and technological defenses makes it perhaps the world’s most secure bank; it can be sealed off in less than 25 seconds. On a recent visit to its subterranean vault, beneath 80 feet of bedrock, I walked along a narrow passageway through a 90-ton steel cylinder that can create an airtight and watertight seal. On the other side was a vault with neatly stacked walls of 27-pound yellow bricks—one of the largest collections of gold in the world.

Standing next to this mass of concentrated wealth all but paralyzes one’s sense of financial proportion. But after the initial awe of this King Midas moment, a question nagged: what’s the point?

Nearly 40 years after President Nixon suspended the dollar’s link to gold, the United States still sits on far more of it than any other nation: official holdings total 8,965 tons, or roughly 260 million troy ounces, according to the Treasury Department. (Most of it is stored in Fort Knox, Kentucky; the New York Fed holds about 11 million troy ounces, along with gold reserves from other countries and international organizations.) Gold is easily convertible into cash, and America’s mountain of metal is now worth more than ever: assuming the recent market price of $1,200 a troy ounce, the value of the federal stock exceeds $300 billion. Yet in an age of soaring deficits, our gold reserves earn no income, incur huge storage and security costs, and serve no practical purpose, short of a politically unthinkable renaissance of gold-based money (see “The Tea Party’s Brain,” page 98). Why?

Getting straight answers (or any answers at all) from Washington about our hoard of gold is weirdly difficult. Yes, the government can downsize its holdings, said Congressman Brad Sherman, a member of the Subcommittee on Domestic Monetary Policy and Technology, through a spokesman. No, it’s not a good idea, he added, offering no elaboration. When I called to interview the subcommittee’s chairman, Representative Mel Watt, his office begged off in an e-mail, advising only that he “hadn’t studied this particular issue as of yet.”

Repeated calls and e-mails to the White House press office went unanswered. The Treasury Department referred me to the section on gold in the U.S. Code. When I pressed for more information, a public-affairs official e-mailed back: “Gold? Don’t you have anything better to write about[?]”

“I don’t think that any change in the gold policy is even on the screen,” said Dale Henderson, a visiting professor of economics at Georgetown University. “It’s a bit of a mystery to me.” As a research economist at the Federal Reserve, Henderson co-authored a study in 1997 called “Can Government Gold Be Put to Better Use?” Yes, the paper concluded: selling or loaning out some or all of the reserves is preferable to doing nothing. “It’s an opportunity cost for the government,” Henderson told me. “The country has this gold and is borrowing to finance its activities. If we’re trying to maximize the return on the country’s assets, then we should borrow a little less and sell some of the gold.”

Under current law, income from the sale of gold must be used to reduce the national debt. But nothing would stop Congress from rewriting the regulation to permit other uses. By Washington’s corpulent spending standards, $300 billion may seem modest, but it’s hardly trivial: it could, for example, reduce our $1.3 trillion budget deficit by more than 20 percent; finance Social Security for nearly six months; or fund unemployment benefits for several years—in effect, create a stimulus package without pushing us further into debt.

So why hasn’t the U.S. cashed in, as several European central banks have done recently? For one thing, the Federal Reserve’s ability to print money at will—despite the risk of inflation—makes the case for selling gold less persuasive, explained Martin Murenbeeld, a veteran gold analyst and the chief economist at DundeeWealth. And some analysts worry that selling gold would be seen as a frantic effort by Washington to balance its deficit-laden budget. In turn, the market might demand higher yields on Treasury bonds, thereby minimizing if not overwhelming the revenue gains from liquidating gold.

Barry Bosworth, a senior fellow at the Brookings Institution and a former economic adviser in the Carter administration, said that the wisdom of selling would depend on what the government did with the proceeds. Reducing the nation’s gold stock to finance, say, an increase in the strategic petroleum reserve might be savvy, he said, depending on the future price of oil. But selling gold, or any other national asset, to fund consumption just looks like a “gimmick.”

That doesn’t change the fact that a handsome pile of America’s wealth lies fallow at a time of pressing need. But a few thousand years of history remind us that gold is money that’s immune to government profligacy and all the other hazards that terrorize fiat currencies like our own. Which is why the most plausible explanation for the government’s gold hoarding is political. In a world of rising debt and fears of sovereign default, gold is popular once more—an online poll by Parade magazine in February found that 87 percent of readers believed America shouldn’t sell its reserves. And a sell-off would likely trigger protests from gold investors, whose numbers have grown dramatically in recent years. Owning the commodity, on the other hand, allows the government to enjoy the aura, if not the substance, of monetary prudence—a state of grace otherwise lacking in budgetary matters these days.

As Murenbeeld said, “The best reserve-currency system is gold, because no other central bank can print the damn thing.”

U.S. Currency War is a "tomb maker"

Oct 14 (Reuters) - The United States fired the first shot in the currency war and the rest of the world must be on guard for its deliberate strategy to devalue the dollar, a Chinese economist said in an official newspaper on Thursday.

In a front-page commentary in the overseas edition of the People's Daily, Li Xiangyang described the United States as the conflict's "first maker of tomb figures", a Chinese idiom that means someone who creates a bad precedent.

Li, head of the Asia department at the Chinese Academy of Social Sciences, a top government think tank, said continued intervention in currency markets by developed economies would deal a blow to global economic recovery.

Chinese leaders have warned before that loose monetary policies in the United States pose a serious challenge for emerging markets, but rarely in such strident language, a window onto the rising anger in Beijing.

"The dollar's depreciation may appear to be market-driven. In reality, it is a depreciation coloured by very strong, deliberate actions," Li said in the paper, which serves as the chief mouthpiece of China's ruling Communist Party.

The overseas edition of the People's Daily is a smaller offshoot of the domestic edition.

Li said the Federal Reserve's announcement that it might soon launch another round of quantitative easing by buying bonds and other financial assets had been the key factor pulling down the dollar.

The motives were plain enough, he said.

Without a weaker dollar, the United States would have no hope of meeting President Barack Obama's goal to double exports in five years, Li said.

Dollar depreciation will also serve longer-term interests by generating inflation and easing the debt burden that the financial crisis dumped on the U.S. government.

"If the global financial crisis was about nationalising private debt, then in the post-crisis period the urgent need of the United States is to internationalise its national debt," he said.

Marc Faber sees interest rates going up within three months

From ArabianMoney.net:

One of the wisest and most trusted investment advisors in the world, Dr Marc Faber says that interest rates will be going up within three months after the bond market passes ‘an important inflection point’.

This is exactly the opposite of what the US Federal Reserve is promising, and is bound to turn global financial markets upside down. Higher interest rates will strengthen the dollar rather than weaken it, while the value of bond holdings all over the globe will be decimated.

Stock market impact

Stocks look to be a winner until you consider the impact of higher interest rates on an already weakened global economy, particularly the US, Japan and Europe. For one thing real estate prices will fall sharply and bank balance sheets will be once again seriously impaired. Stock markets will therefore come down. Rising interest rates are not good news for equities.

A rise in the cost of money is the last thing that the US central bank wants to achieve right now. However, interest rates can only be artificially held at record lows for so long. Eventually the weight of new money entering the system becomes too much for it to bear any longer and there is a tipping point for bonds.

Professor Niall Ferguson, the celebrity historian is another leading financial pundit to take this view, and it is no surprise that Dr Marc Faber is also an ardent student of history. For this bond market reaction is nothing new. It has happened many, many times before.

Basically money creation will always eventually overwhelm the very instrument used to create it. The pattern that follows is first a very sharp deflation of real asset prices and then later a hyperinflation of asset prices which in extreme scenarios – like Weimar Germany – requires the issuing of a new currency.

Faber’s usually right

Dr Marc Faber’s track record for calling such major market moves has been outstanding in the decade that he has been known to ArabianMoney. Sometimes he is like the boy in the parable of the emperor with no clothes, and what he says should be blinding obvious but nobody will admit it.

Today the bond market is an obvious bubble. Interest rates are perilously low and this completely distorts the investment world leaving savers with little income. But this sort of financial conjuring trick only works for so long and the saucerer’s plates eventually all come tumbling down.

Then savers get their interest again. Real estate, stocks and bonds take a big hit from higher interest rates. The dollar at first will surge in value, probably depressing precious metal prices too in the process, although they are increasingly just another currency, albeit one that pays no interest.

Fed response

But the Fed response to this crisis will be to learn nothing and print even more money, and that will finally result in runaway inflation. Only then will you want to be invested in stocks to rise with this tide.

This looks like being a very tough phase to be invested in any major asset class so the main advice seems to be to stay liquid, ironically being long the dollar seems the best defense against Fed action specifically designed to weaken the greenback.

But you would want to convert that cash back into real assets like gold, silver, houses and stocks before the great inflation. In any case that is ArabianMoney’s interpretation of how rising interest rates will play out, assuming that Marc Faber is right again.

However, for the record Dr Marc Faber has stock markets correcting in October/November in his latest newsletter and does not see stocks as a good investment now as suggested in an inaccurate Bloomberg report yesterday.