Here is tomorrow's news

An online newspaper from the Northern Marianas (south-east from Japan), dated Friday, gives some quotes from Peter Schiff, including this startling (and measurable) one:

"People call us the biggest economy in the world but it’s false, we’ll be lucky to be in the top 20 in two years’ time."

According to the World Bank and ranked by 2006 GDP, the 20th country is Switzerland; by purchasing power parity, it's Iran; by Gross National Income (Atlas method) it's Turkey. Doesn't look likely, so far.

But by gross national income per capita, on a purchasing power parity method, the 20th country is Belgium; and by GNP per capita (Atlas method), it's Germany. Maybe we're getting somewhere now.

In this list of countries by external debt, the USA comes top (over $10 trillion), with the UK in second place (over 8 trillion), and I'm sure we'd rather swap places here with Greece in 20th position ($301.9 billion); but that doesn't take into account the relative sizes of our economies. I'm still searching for a list of countries by net external debt, related to GDP. Help would be appreciated!

On a list of public debt to GDP, the USA is in 32nd place (64.7%), and the UK is in 61st place (42.2%). The Lebanon (209%) and Japan (175.5%) are the top two on this sinner's list.

As they say, comparisons are odious.

More on Dow stock valuation

Further to the assertion that stocks are reasonably valued, and Marc Faber's answer that we have an "earnings bubble" that is skewing p/e (share price compared to earnings, i.e. dividends) calculations, here is an essay by David Leonhardt in the International Herald Tribune (14 August) on historical p/e ratios.

A couple of extracts:

...the stocks in the Standard & Poor's 500 have an average P/E ratio of about 16.8, which by historical standards is normal. Since World War II, the average ratio has been 16.1. During the bubbles of the 1920s and the 1990s, the ratio shot above 30...

Graham and Dodd argued that P/E ratios should compare stock prices to "not less than five years, preferably seven or ten years" of profits...

Based on average profits over the past 10 years, the P/E ratio has been hovering around 27 recently. That's higher than it has been at any other point during the past 130 years, except for the great bubbles of the 1920s and the 1990s. The stock run-up of the 1990s was so big, in other words, that the market may still not have fully worked it off...

In the long term, the stock market will almost certainly continue to be a good investment. But the next few years do seem to depend on a more rickety foundation than Wall Street's soothing words suggest.

A drop from a p/e ratio of 27 down to 16.8 would imply a share price drop of 37%.

Thanks to Michael Panzner for spotting this and putting it onto his Financial Armageddon site.

Weakness of UK M3 relative to gold

Relating total national money and credit to gold holdings, we've seen that the USA would price gold at around $45,000 an ounce, Germany at maybe $14,000 an ounce.

World Gold Council June 2007 figures say the UK has 310.3 tonnes of official gold, and Mike Hewitt's table shows UK M3 at $3,532.1 billion. Using the same gold value per kilo as with the other two countries, if the UK's M3 were entirely gold-related, this would imply a price of about $35,4046 per ounce.

From this perspective, although Britain's economy is much smaller than America's, its currency weakness is much closer to America's than to Germany's.

Dow and FTSE lows

The Dow had its lowest close yesterday since 19 April 2007; the FTSE is currently below 5,950 - the most recent lower closing figure was on 3 October 2006. Why we're suffering more, I have no idea.

More on gold and the money supply

At last, I've found something to help me see currencies in the context of official gold reserves - a brilliantly useful essay by Mike Hewitt in The Market Oracle (July 31).

The above chart (one of several in his exposition) shows that the Euro zone has a better ratio than the USA of gold to currency, and as I tried to demonstrate yesterday, within Europe Germany is particularly strong. And Europe's economy is also of a size to make it a possible reserve-currency contender.

As a footnote, my fellow Brits must be dismayed at the UK's pathetic weakness.

Sprechen Sie Gibberish?

Most days, I read something that reminds me how little I know. And then I read the financial pages.

Let's look at the UK's Daily Mail today, Money Mail section (pages 38-39). The headline is "Storm Warning" - anything from a week to seven years late, depending on your analysis of the underlying trends.

Sub-section: "Will it continue?" Answer: volatility "for the next few months", but "the markets are fundamentally sound in that that they are not over-priced". Yet we've only just heard from Marc Faber, saying that he expects "earnings disappointments" which will show up in the dividends and so alter the p/e ratio for the worse. And on page 66 of the same paper we see disappointments at UBS, Wal-Mart, Home Depot.

The chairman of a large financial advice firm is quoted saying, "You must put this sub-prime mortgage meltdown into perspective. We are talking about £100 billion of losses. [Wait for the punchline.] This sounds like a lot, but it is just one-tenth of the size of the public sector pension liability in this country." Very large, and mostly unfunded, pension liabilities.

Usually, I throw away the money sections of newspapers; I only read them today to see if they'd noticed what was going on. But then I remember that journalists told us for years not to bother with financial advisers, when we could buy our pensions direct from the six-figure wagemen at Equitable Life.

Could the German DM be stronger than the US dollar?

Another thought experiment. We've seen that if the US stock of gold (if it hasn't been replaced by IOUs) had to back all of its M3 money supply, then this would imply a gold price of something like $45,000 per ounce.

I've tried to find equivalent figures for Germany. The latest I can find is from May 1998, when M3 was then estimated at 3,243.70 billion DM. The Deutschmark is pegged at 0.51129 to the Euro, and the US dollar currently buys around 0.73581 Euros. So in dollar terms, German M3 is/was in the region of $1,559 billion.

The World Gold Council's June 2007 figures show Germany holding 3,442.5 tonnes of gold, and there are 31.1034768 grams to the troy ounce, so that's 110,678,945 ounces. If this gold covered all of Germany's M3 at the latter's 1998 estimate, it would imply a gold price of $14,085 per ounce.

Granted that German M3 must now be greater than in 1998, it still suggests that in terms of the ratio of gold to money supply, Germany's currency is around 3 times stronger than the USA's, or one-third as vulnerable in case of hyperinflation.

Silver to ride high?

Jason Hommel, in this 2 August report on SilverSeek.com, points out that, because of its industrial uses, silver is actually more scarce than gold.

He confirms my recent mathematical estimate that gold "ought" to equate to "$45,000/oz. to fully back all the M-3 created money supply", and repeats the market-manipulation theory:

...we have strong evidence of government manipulation in the gold market that has been going on since the 1990s. It is strongly suspected that the world's central banks have sold about one-half of their combined "reported" 33,000 tonnes (1 billion ozs.) of gold into the market to depress prices. Were it not for this selling, the gold price could well be $2,000 to $3,000 now!

He's predicting silver at $8,000 an ounce within 15 years - mostly because of hyperinflation, rather than real appreciation. In the nearer future, he thinks:

I see silver easily at $30 by early next year. Gold should be over $1,000 maybe $1,200.

That's something we'll be able to test more easily.

Gold going cold?

The gold price seems to have pretty much frozen, despite currency worries and stockmarket volatility. Peter Schiff is mystified, too though he expects "an explosive move for gold any day now". Yesterday's IHT article notes that "central banks in Europe have increased sales of reserves this year by 7.3 percent", continuing our theme of market manipulation, and a futures trader called Ron Goodis points out, "In times of a liquidity crunch, people want cash, and that's Treasuries, not speculative stuff like gold."

This is the problem for doomsters: the 'true' value of gold is most likely to be seen, not in moderately inflationary times, but when faith in paper currency has collapsed and hyperinflation is roaring through the system. It's not something one should wish for, even if it is needed to prove one's theory.

However, there's still the question of how much longer the market can be bought off with these gold stock sales. Eventually there will be nothing left to throw off the back of the troika at the pursuing wolves. And how much has been 'loaned' from stock already?

The article says, "Central banks are the biggest holders of gold, controlling about a fifth of all known supplies." So four-fifths is now in private hands, presumably. You may not feel the time is right to buy gold as a speculation or hedge, but if you had some already, would you sell it now?

Subprime update, plus Dow and gold

Here's iTulip's scathing video on the sub-prime lenders and special pleading from Jim Cramer; and according to this, it was $323 billion pumped into the banking system in 48 hours, not $266 billion.

The Dow closed down 207 points yesterday, anyway. Perhaps you can't pump up a burst balloon.

And gold, which one would think should have an inverse relation to the market, has lost $5 an ounce, too.

Things do look a little concerning.

Gold: a shell game without the pea?

If the gold bugs are right, why hasn't gold rocketed already? Maybe this presentation by Frank Veneroso, dated May 2001, explains it. It makes the case that there is more demand for gold than is officially recognised. This demand cannot be fully satisfied from the declining yields of gold mines, or reusing scrap.

Veneroso thinks that central banks have loaned out or sold much more gold than they admit. The World Gold Council states 30,374 tonnes in holdings (June 2007). This is down from the nearly 33,000 in mid-2001 when Veneroso was speaking, and even at that time he estimated 10,000 - 16,000 tonnes out on loan. Much of this will have ended up on ears, fingers and necks.

This theory of market intervention by surreptitious supply, implies that banks must eventually run down their stocks and be unable to continue with this tactic.

Veneroso speculated: "If the official sector is rational, it knows what will happen to the gold price when this large flow that is depressing the price abates and ultimately ends---the price will go up by a lot. Therefore, some rational central banks will not sell and lend down to the last ounce. Instead they will start to buy. So regardless of what has been happening in the gold market, if our data is correct, then, within a couple of years, whatever the official sector is doing, it will terminate and the gold price will rise."

His prediction was correct: gold has doubled in value since 2005. But as demand continues to grow over time, against a more limited supply, we should see further gold appreciation, which is what Marc Faber has predicted.

But some would go much further - Doug Casey, for instance. If we see the emergence of a very strong currency run by a country or cartel that controls a vital commodity like oil, the inflation in all fiat currencies will be cruelly exposed by contrast. Is it not possible that some might seek to use gold, in conjunction with other commodities, as an economic weapon?

And is it not interesting that the world's second largest gold hoarder, Germany, has disposed of hardly any of its stock in the last 7 years, when the average official reduction has been about 9%? Maybe Germany is taking a longer view and rather than buying gold, is being more discreet and simply not selling it. I wonder how much of its own stock Germany has loaned out?

UPDATE

Please see Monday's essay by James Turk, on Financial Sense. He thinks that the market must ultimately win against the official manipulators.

$42 gold: what is the future of the dollar, and central banks?

German 1,000 Mark note - overprinted to make it one billion Marks

I think I was right to puzzle over the footnote (in 6-point type!) to the US reserve accounts, which states that gold has been valued at $42 dollars an ounce and that certificates on that basis have been issued to the Federal Reserve.

It looked like dodgy accounting to me, and searching for some further clarification, I found this article in Gold-Eagle.com, dating from 2003. It's by Alex Wallenwein and the style hyperventilates somewhat, but here's some edited highlights:

[France and Germany's] new common currency, the euro, has taken on a characteristic that puts it into direct conflict with the US dollar.

The dollar is a purely debt based currency with an adverse relationship to gold. Gold is the dollar's nemesis. When the gold price goes up, confidence in the dollar decreases and people start selling dollars.. It's usually a sign of impending or prevailing inflation.

The euro, on the other hand, has a "positive" relationship to gold. The European Central Bank, and all the euro member's central banks, value their gold reserves quarterly at actual market prices. That means, as the price of gold goes up, the value of their currency goes up as well, and by signing the "Washington Accord" in 1999 they have announced to the world that the dollar's gold-suppression jig is up.

The dollar is still hamstrung by being tied to an artificial, government-decreed, quasi-official price of gold at the whopping rate of $42.222 per ounce. [See Title 31, United States Code, Section 5117(b).] Obviously, with the market price of gold currently above $330 (i.e. in 2003), that "official price" has nothing to do with the realities of the gold market. It is actually a remnant of the gold standard days when every dollar was immediately convertible into gold on demand, at a stated rate.

Being thus tied down, the US government and banking elite can never afford to let the price of gold float freely according to actual market forces...

This little difference in the valuation of gold makes the euro the undisputed, hands-down future winner of the euro vs dollar conflict... free market forces can never be violated with impunity for a very long time. They always reassert themselves - sooner or later.

The euro was constructed to take advantage of free market forces - especially the free market of gold. The dollar is anchored in a useless, repressive scheme that cannot allow market forces to prevail vis-a-vis gold.

Ergo, the dollar is doomed...

Once it is replaced as the world's reserve currency, the dollar - and with it the United States - will cease to be a world superpower... And all of America's current military might will [be laid to] waste when the international currency reserve dollars return home, causing hyper-inflation and economic havoc...

As the dollar crumbles and loses its control of the price of gold, the yellow metal will soar to heights heretofore unimagined. Nothing will stop it. All economic forces will aid it in its ascent... including... the world's most powerful central banks.

For then, a rising gold price will boost their collective reserves, and therefore their currencies' values, not undermine them as has been the case before the euro's advent.

Gold will be free, and the dollar will be dead: so be careful where you put your money !

The official US price above (still current) is about one-sixteenth what its gold would now fetch on the market. And as I figured late last month, even at open market prices, America's gold reserves only cover around 1.5% of the dollar money supply defined as M3.

In other words, the official price of Treasury bullion makes its total holding worth over 1,000 times less than the amount of money it has in circulation. If ever the world should divorce from the dollar standard, the results could indeed be chaotic.

Now, Iran wants yen from Japan in exchange for oil; the Chinese re-pegged the yuan in 2005 to a "basket of currencies" instead of exclusively to the dollar; the Euro has the potential to be backed by significant national holdings of gold, especially Germany's; an Islamic gold dinar is making its appearance (in Kelantan, Malaysia). I understand that Malaysia is even beginning to entertain the notion of doing away with central banks altogether and taking direct control of its own currency - a financial revolution could be brewing.

Before I get accused yet again of being a gold bug, let me say that I'm not - gold doesn't do anything much except look beautiful, same as our local stray cats. This is not about gold, but about the fiat currencies' potential for real catastrophe, on a Germany-in-1923 scale.

Marc Faber update

.............................................. Real growth: farmland

A most interesting and informative interview with Marc Faber on Bloomberg TV, last Friday. He thinks we've seen, not a correction, but the start of a bear market. In his opinion, the central banks intervention is inappropriate and will cause inflation. He thinks they "should let the crisis burn through the system, and eliminate some players". The Dow should correct by 20 - 30%; and as hedge funds "de-leverage", i.e. reduce their borrowings, the prices of most assets will drop.

In answer to the defence that p/e ratios are still good (i.e. the share price divided by the dividends, one way to test whether shares are over-valued), he says that at the peak of a market, there is a bubble. In 1999 it was a share price bubble, but now there is a bubble in earnings, and we will see "earnings disappointments" in the near future. So the p/e ratio is misleading and shares are not reasonably valued.

He points out that around the time of Dow peaks in July and August, we were also seeing several hundred shares hitting yearly lows, so underneath the surface a recession has already begun. The Dow has held up because of certain areas, such as oil stocks; but in present conditions, he thinks it will be "very difficult for the market to make new highs". Faber says that realism will return when we see a fall in popular stocks such as Research In Motion, Apple and Google.

The fundamentals of emerging markets are sound, and he foresees their economies de-coupling from the fortunes of the USA; but currently their stockmarkets are also over-valued and may correct when deleveraging causes money to flow back out of them.

As to the dollar, he thinks that if the Fed resists the temptation to cut interest rates, the dollar could strengthen against emerging market currencies. Against the Euro and the yen, he's not so sure. "I think against gold, all currencies will depreciate over time".

In relation to property, he says depressed areas like Detroit probably can't fall much further, unlike Miami and Southern California. Asian property looks promising - he mentions cities like Manila, Jakarta, Kuala Lumpur, Bangkok, Hanoi and Ho Chi Minh City. And relative to financial assets, farmland is depressed.

Accused of bearishness, Faber counters that to be bearish about assets is to be bullish about cash, which he has made plain for several months now. He even thinks that US Treasury notes and good-quality commercial bonds are a good investment.

I'm amazed how much valuable information this generous man gives away for nothing.

..................................................... Modern Manila

Which one's rich?

....................... Who's flying high now?

Let's see how we're doing.

America's reserve assets at April 2007 were $66.72 billion, of which about $11 bn in gold and $42 bn in foreign currency. The USA's estimated population is 301,139,947. So reserve assets per capita are $221.55.

China's foreign reserves minus gold were $1,202 billion in March. The World Gold Council says China has 600 tonnes of gold, and at today's price of $21,471.23 per kilo that's worth another $12.88 billion, making a total of $1,214.88 bn. China's population is estimated at 1,321,851,888. So China's reserves per capita are $919.07.

Using income statistics I quoted on August 9, an American's share of his/her country's reserve assets is worth 0.5% of per capita GDP; the equivalent value for a Chinese is 45.95% of nominal per capita GDP. But a dollar buys more in China: adjusted for purchasing power (PPP), Chinese reserve assets are worth around $5,254 per head.

So comparing national reserves only, China is 18.2 times richer than America in absolute terms, 4.15 times richer per capita in nominal terms, and 23.72 times richer per capita in terms of purchasing power

They worked for it. But, now what?

UPDATE

Here's a note to the US reserves statement that confuses me:

Treasury values its gold stock at $42.2222 per fine troy ounce and pursuant to 31 United States Code 5117 (b) issues gold certificates to the Federal Reserve at the same rate against all gold held.

Can I buy some at this price, please?

Don't get mad

Adrian Ash in the Daily Reckoning Australia today, passes on some facts about the drop in US mortgage underwriting standards:

...mortgage underwriting changed beyond recognition between 1998 and 2006, as First American Financial recently reported:

* Adjustable rate mortgages as a percentage of new mortgages rose from 0.7% to 69.5%;
* Negative Amortisation loans - where the principal owed actually increases over time - rose from 0% to 42.2% of the market;
* Interest Only home loans - where the borrower only has to cover the interest due, leaving the principal for repayment sometime in the far future - rose from 0.1% to 35.6%;
* Silent Seconds, issued on the back of outstanding loans to the most vaguely-related people, rose from 0.1% to 38.7%;
* Low Documentation - where the greater the lie, the greater the loan - rose from 57% to 79.8%.
In short, the US mortgage market switched from cautious Fixed-Rate borrowing to head-in-the-sand ARMs...while the underlying debt was left untouched or actually grew larger...as borrowers struggled to meet just the interest alone after fudging the numbers to bag a loan they could never repay.

Most shocking of all, as Robert Rodriguez of First Pacific Advisors has noted, "is that the origination volumes for the last two years, when the most egregious deterioration in underwriting standards occurred, total more than the previous seven years of originations combined."

And this poor-quality debt has been sold to pension funds, very carefully staying just under a crucial limit:

"24% of all the hyper-leveraged assets managed by large hedge funds (US$1 billion or more) internationally, belong to pension funds and endowments," says a June 18 report from Greenwich Associates, as quoted by Paul Gallagher in the Executive Intelligence Review. "This average is just below the 25% limit at which an individual hedge fund, under the [US] Employee Retirement Income Security Act (ERISA) as modified in 2006, becomes an investment advisor with fiduciary responsibility for the pension fund doing the investing - something hedge funds obviously do not want to do."

More than that, pension funds have also stumped up one-fifth of the money held in 'hedge funds of funds', the aggregating super-funds run by many large banks. In first-half 2007, around 40% of current flows into the hedge fund industry has come from pension funds. And "as pension fund money is coming in," says Gallagher, "it's allowing 'smart' money to get out."

...Numerous reports, including a new one from Chicago-based Hedge Fund Research, Inc., have shown 'high net-worth individuals' reducing their net hedge fund investments by half, between 2006 and 2007 - investing instead into real property and stocks. They now account for only about 20% of the assets of hedge funds, which were supposedly made for them."

Instead of high-net-worth billionaires, it's now Joe Public left holding this junk, thanks of course to his well-paid retirement fund managers...

Giving control of your money to a financial "expert" might indeed prove the most foolish decision of all.

To me, this is outrageous. I've written earlier about a brokers' meeting I attended in 1999, where a rep from a technology fund burbled enthusiastically about the "super-boom" to come, and how I felt that the smart money was looking to use us to sell their holdings to suckers. And I think the same happened with the Lloyds of London scandal - advisers were encouraged to help their clients get a seat on what they thought was the gravy train, when the insiders knew it was the vinegar bottle. Now it seems we've seen effectively a raid on pension funds.

I sometimes suspect that the money system is not for storing wealth, but for stealing it.

The authorities should be busting the offenders, not bailing them. We should pay off depositors so they can put their savings elsewhere, re-educate naive financial advisers and institutional fund managers, and bankrupt the swindlers.

Here in England, London's Central Criminal Court has a motto above the entrance:

"Defend the Children of the Poor & Punish the Wrongdoer"

If I were an American, I'd be asking questions about justice and the rule of law: does the nation still protect the weak against the strong? Meanwhile, now that you know how the game is played, find a way to win honourably.

.................... A South Sea Bubble playing card

Thirty donkeys and a boiled frog

The Mogambo Guru (Richard Daughty) says that a modern US dollar buys what you could have got for about 2 cents in 1913. The same is true of the UK.

The question is, can this go on indefinitely? Is it like slowly boiling a frog, or will the frog never die? Doomsters are looking for a final cataclysm, but there have been periodic bubbles and busts for a very long time.

Maybe inflation is simply a slow crime, openly and unendingly committed against savers. We worry about interest rates, market crashes, insolvencies and unemployment, and miss the big story because it's so obvious:

The smuggler

Every first of the month the Mullah would cross the border with thirty donkeys with two bales of straw on each. Each time the custom person would ask the Mullah's profession and the Mullah would reply, "I am an honest smuggler."

So each time The Mullah, his donkeys and the bales of straw would be searched from top to toe. Each time the custom folk would not find anything. Next week the Mullah would return without his donkeys or bales of straw.

Years went by and the Mullah prospered in his smuggling profession to the extent that he retired. Many years later the custom person too had retired. As it happened one day the two former adversaries met in a country far from home. The two hugged each other like old buddies and started talking.

After a while the custom person asked the question which had been bugging him over the years, "Mullah, please let me know what were you smuggling all those years ago?"

The mullah thought for a few seconds and finally revealed his open secret, "Donkeys."

From UKSufi.co.uk

I think the ultimate-crash predictions are an expression of the desire for Justice to arrive, like a deus ex machina. Perhaps it's better simply not to be the victim oneself.

Or saddle 'em up for the Gold Rush?

Illustration from THE GOLD RUSH DIARY OF FRANK McCREARY (1850)

More old news

Thomas Nast: "The Comet of Chinese Labour" (1870)

The use of cheap foreign labour to undercut unionised American workers and benefit big business, is not new. But as this cartoon shows, it is easy, perhaps politic, to focus on the foreigner, who after all is merely trying to earn a living like the rest of us, and deserves decent treatment, out of common humanity.

"Pacific Chivalry" (August 7 1869)

How do we get a balance between the advantages of international trade, and the obligation of each State to look after its own people?

Dow predictions revisited

I wondered recently about the growth of the Dow relative to the FTSE since 1987, and speculated that it could fall by anything up to 50%. David Tice of Prudent Bear thought the same back in May, so maybe I'm not crazy.

Robert McHugh in Safe Haven predicted on 9 July that the Dow could be heading for 9,000 points, "although if the PPT responds by hyperinflating the money supply, it could be 9,000 in real dollars (gold adjusted), not nominal." The London Gold fix on Friday 6 July 2007 was $661.25 and the Dow at close on that day was 13,649.97, i.e. 20.64 times the gold price per ounce. Dropping to 9,000 as defined would mean a "gold multiple" of 13.61 times, or a 34% relative reduction in share prices.

Perhaps it could happen as a combination of nominal share price reduction, and a devaluation of the dollar.

Not so funny money

"By inflation you will burst - let well enough alone, and don't make it worse" (Thomas Nast, 20 December 1873)

Captions: (1) UNCLE SAM-"You stupid Money-Bag! there is just so much Money in you; and you can not make it any more by blowing yourself up." (2) Money is tight, but let it recover itself naturally, and then it will stand on a sounder basis. (3) Stimulants or inflation only bring final collapse.

The Contrarian Investor reviews the central bank intervention figures from Thursday and Friday. Totting them up, I see that's over a quarter of a trillion dollars added to the system in two days.

I cannot imagine that kind of money. But if you now invested that two-day $266.65 billion spree in US Treasury 10-year bonds at the current yield of 4.51%, it would create a secure income of over $12 billion a year.

The world's most expensive house used to belong to the king of yellow journalism. Randolph Hearst's spread is now going for around $160 million dollars. The interest on this central bank splurge would buy six of these houses every month. (At least that would be a solid support for house prices, at the top end.)

But let's put it another way. According to Jerry Bowyer in National Review Online yesterday (reproduced by CBS), the average sub-prime mortgage is for $200,000 and there are 254,000 mortgages currently in foreclosure. This works out at $50.8 billion dollars. It also means that the latest central bank cash injection is sufficient to buy out all current US mortgage foreclosures - five times over! Seemingly, it would be far cheaper for the central banks to take over this housing and rent it out.

So the real damage has been caused by the insane, or maybe one could term it criminal, leverage and speculation. The money experts are responsible for this debacle and the authorities are rushing to save them (and us) from the full consequences of their actions. This is almost a perfect example of creating a moral hazard.

Doug Casey: sounding grim and clear

A trenchant interview with Doug Casey in Financial Sense today. Some highlights:

At some point there’s going to be a panic out of the dollar. When it happens, it’s likely to be the biggest financial upset since the 1930s. Part of the question is what they’ll panic into. The euro? As I have said many times, if the dollar is an “I owe you nothing,” the euro is a “Who owes you nothing?”...

If an American doesn’t get significant assets outside the U.S. now, it may be impossible in the future. The best thing to do is buy real estate abroad, since it’s currently not reportable, like bank and brokerage accounts, and they can’t very well make you repatriate it...

We’re now experiencing a lot of monetary inflation, which eventually will be reflected in price inflation. What’s really going to tip this over the edge, however, is the rest of the world deciding to get out of dollars. A lot of those $6 trillion abroad are going to come back to the U.S., and real goods are going to be packed up and shipped abroad. Inflation will explode...

Markets are about trade... At some point the Chinese will want payment in something other than dollars. In the meantime the yuan will go higher...

What do I think is likely? Certainly a depression, probably of the inflationary type. But if there are widespread defaults in the mortgage market because of a housing bust, hundreds of billions of dollars worth of buying would disappear, which is deflationary. You could have both things happening at once, in different parts of the economy...

I hate making predictions, but if things continue down this path, I think we could see gold going over $1,000 within the next 12 months, and maybe even before year-end. And then the mania starts for the mining stocks.

Funny money to the rescue

Stanley Berkeley's "Gordons and Greys to the front", also known as the Stirrup Charge at Waterloo; a deed to stir any man's heart. Apologies for the trivial use.

Friday: what looked like a hairy day on the Dow saw a rescue in the last hour of about 80 points. Was it the vast volumes of cash shovelled into the system by central banks, or the fabled Plunge Protection Team (aka Ronald Reagan's Working Group on Financial Markets? If only we all had such understanding bankers.

Could the Dow drop 50%?

"Two views make a market," goes the adage, so there's no "right" value for the Dow. But as I showed yesterday, the Dow has had an extraordinary rise in the last 20 years, about double what has happened with the FTSE.

It doesn't seem related to average income (American average earnings have grown more slowly than in the UK); if it relates to greater inequality of income, then presumably if the market turns, rich bears will be capable of pushing it down as fast as it rose. And I doubt that American multinationals have exploited subsidiaries in the Far East that much more than British-based multinationals - or have they?

Or is it money invested through the carry trade, borrowing cheaply from Japan? Then maybe it will unwind when Japanese interest rates rise. Is it the benefit of low American interest rates, thanks to huge foreign support for US Treasury securities? That love affair is coming to an end.

Let's do a thought experiment. 1987 seems a reasonable base year for our measurements, since the markets weathered the "Crash" of October and still ended up ahead by the end. From the end of 1986 to close of business this last Wednesday, the FTSE had grown by some 280%. That works out at around 6.7% capital growth compound per annum, for the whole period; add-in dividends and the reasonable investor should be satisfied.

If the Dow had done exactly the same as the FTSE, it would have grown from 1,895.95 to around 7,200. Instead, it closed on Wednesday last at 13,657.86.

Maybe there's still a lot of air in that balloon.

Reading the signs

I have often wondered about chartists - investment analysts who look for patterns in trading to predict future developments. Here's a video posted on YouTube by Inthemoneystocks.com, an outfit set up this year. The report comments on yesterday's dramatic drop in the Dow.

Sometimes I think it's like astrology; but there may be a grain of truth in it. If relevant market information is already known, then (barring catastrophic surprises) some change happens because of the variable mood of the investors and their predictions of each others' behaviour. Perhaps this chart-reading is less a science and more a pragmatic art related to mass psychology and game-playing strategies.

It's an ill wind... Marc Faber cheers up

As the stockmarkets gyrate, Marc Faber is still optimistic about Asian real estate. Tientip Subhanij, in today's Bangkok Post, says:

The optimism over Asian property has been tested in recent months following the volatility in the global equity markets. The woes of the US sub-prime market have already started to shake confidence. Experts have predicted a major crash in US real-estate prices that would trigger defaults and spread the contagion to most emerging markets.

Many with true faith in Asian property, however, dispute any suggestion of an overheated market in the region. Their contention is that the party has just started for regional property, given that prices in many areas have yet to exceed the peaks they achieved before the Asian financial crisis in 1997.

Marc Faber, the well-known author of Tomorrow's Gold: Asia's Age of Discovery, also believes that while stock markets are vulnerable, Asian real estate presents tremendous opportunities. He thinks that most property assets in Asia are still far below their pre-1997 highs.

Sound counsel

Today's Daily Reckoning (I've just received it by email) offers some tips for managing your wealth in the current circumstances:

When trends turn negative, it is better to buck them...to head in a different direction. This is particularly so when the bad trends approach their inevitably catastrophic consequences.

That is what we think may be coming soon - with falling asset prices and falling standards of living in America, and probably in most of the other Anglo-Saxon countries. This is not a time to 'go with the flow,' in other words. The flow will not be going where you want to get.

As a practical matter, the course of action that is best in easy times is essential in hard times. Here, we spell it out for you:

First, you should focus on your own private business...or your own source of revenue. (Bonds, rents, retirement fund, dividend yields...whatever.) Make sure it is solid, protected, efficient and productive. Make sure it is something you understand...something you can see with your own eyes, run by people you trust. If you don't really understand it...or if it involves any form of "enhanced leveraged credit"...dump it.

Second, own the property you want to own, not the property you're hoping will go up in price. Begin, of course, with your own house. Is it the house you really want to live in for the next 5, 10, 20 years? Think long-term; the housing slump could easily last 10 years or more. Then, think about the other property you own. Would you still want to own it is if it went down 30% in price? If not, you might want to reconsider.

Third, make sure your savings and investments are diversified out of the dollar. Most experts now expect the buck to stabilise, but you can't be sure. Ten years from now, the dollar could easily be worth only 10% of its value today. Put some money into euro and yen deposits. Put some into gold too.

Fourth, once your finances are secure you can begin to think about speculating. But don't confuse speculating with investing. You speculate for entertainment, not as a serious way to finance your family. Are stock prices going up or down? You can't know. Nor can you know what prices land, commodities, currencies or anything else will sell for in the future. Don't speculate with money you're not prepared to lose.

This all seems pretty sensible to me, especially since the Dow's dropped 300 points.

UPDATE

Dow down 387 at close.

Is the Dow more overvalued than the FTSE?

I've compared the growth of the Dow and the FTSE with the increase in national annual average earnings in each country. As you see, the Dow has advanced much more rapidly.

UK earnings are calculated as 52* weekly wages. UK stats here, USA stats here. Dow and FTSE stats from the Yahoo! finance website - see sidebar.

Globalisation - a race we can't win

To put it another way, how much more does a Chinese have to earn, to live well and still undercut America?

In the sheet below, I compare six countries in terms of nominal per capita GDP (in US dollars equivalent). These have to be reinterpreted in terms of purchasing power parity, i.e. if local prices are lower, you can enjoy the same things for less money. (Nominal and PPP terms are taken from slightly different IMF surveys, but you get the idea.)

The last couple of columns answer the question, "How much income would each national need, to match America's standard of living?"

Doubtless there's problems with the methodology - PPP may well change as each country's nominal GDP increases. And it seems clear that the whole world can't live exactly like Americans do today. (It's also interesting to note that pricey, high-tax countries like the UK and Japan can't catch up with the USA without exceeding the latter's per capita GDP.)

But on these figures, China could match American living standards, on a quarter the income. So the low-pay trading advantage it enjoys is huge now, and is likely to remain so.

And look at India and Vietnam - they'd only need about one-fifth American per capita income to have the same in PPP terms. In fact, they could out-compete China in labour costs, which is one reason for China to move away from labour-intensive work like trainer-stitching, and towards heavy industry.

So Vietnam undercuts China undercuts America...

And given India's enormous population, its higher proportion of cultivatable land (compared with China), its well-established political and legal institutions, and its many millions of English-language speakers, it may be that India is the economy to watch this century.

IMF per capita GDP figures quoted from Wikipedia here (nominal) and here (PPP).

Subprime worrying Europe

Looking at the German stock exchange (^GDAXI in the sidebar widget), the market has opened lower. For Reuters comment, see here.

UPDATE (10.08 a.m.)

The FTSE is looking skittish, too. As Reuters reports: "Richard Hunter, head of UK equities at Hargreaves Lansdown [says], "... as a general rule of thumb, we've certainly been following (Wall) Street on the way down although not necessarily on the way up."

Income inequality rising in China

As China industrialises, the difference between rich and poor is rising, as measured by the Gini Index. (The above chart is from the Wikipedia entry. 0 is perfect income equality, 100 means all the income is held by one person. ) The Gini score for China is around the same as for the USA.

By contrast, China's very rich neighbour Japan has the lowest Gini rating in the Far East, similar to Australia's. It seems possible to achieve prosperity without great inequality.

Speaking of neighbours, see how France's very high score in the 1950s has plunged, whereas the UK's has risen steadily since the 1980s. We in Britain are now significantly more unequal than the French, and far more so than the Belgians and Italians.

Gold and other commodities?

For those who want to hear from the bears on their bullish attitude to gold and natural resources, here's Monica Day in The Rude Awakening last Friday:

Be Fearful, Be Brave - By Monica Day

There's a fundamental rule about investing - you've probably heard it before: Be brave when others are fearful, and fearful when others are brave.

Bill Bonner, editor of Daily Reckoning, opened the Eighth Annual Agora Financial Investment Symposium by suggesting that most people are braver than they've ever been. And that means the rest of us should be very, very afraid.

He's right, of course. Hedge funds are taking in more money than ever…despite the questionable nature of their holdings. Twenty thousand new condos are under construction in Miami…despite the current crisis in the housing sector and the ticking bomb that is subprime lending. The Dow is hitting new highs…with some mainstream commentators calling it the greatest economic boom ever.

Indeed, Bonner agrees it is "great." But more like how the "Great War" and the "Great Depression" were great.

It begs the question - what should you do when you're fearful?

"Nothing," Bonner explains. But that's hard when you have money.

So what exactly constitutes nothing?

If you're a regular reader of these pages, Bonner's answer won't surprise you a bit: Buy gold.

Doug Casey…the Mogambo Guru…and a number of speakers have agreed. Although gold is already up to a 27-year high, it still seems cheap compared with the state of the economy - and the risks the market is facing - right now.

Doug Casey ran through a list of other asset classes and gave his reasons for not wanting his money in them, and he came to this conclusion:

"Where should your money be? GOLD! That's it. Honestly. I've looked at everything and anything - I'll buy anything if the price is right. Gold isn't just going through the roof - it's going through the moon. Mark my words, the gold bull market hasn't even really started…."

And of course, the Mogambo Guru had his own unique way of making a gold recommendation:

"Run out and load up on gold…and in the future when gold prices are astronomical and there's chaos all around you…you'll look around you and notice that you're rich and everyone else is poor and you'll say, wow, that Mogambo dude was right. It's a shame he was such a hateful, detestable little man. And you'll be right…but you'll be rich! So who cares…"

Of course…the "buy gold" line of thinking was not unanimous. Some of the experts and analysts at the Symposium offered worthwhile alternatives to simply buying gold. Natural resource expert Rick Rule was one of them.

Rule believes that you must be brave if you're going to invest in natural resources. Not crazy, mind you. But brave. Meaning you have to be a discriminate investor. You must buy when others are selling, sell when others are buying. This tactic, Rule admits, "is psychologically hard, but functionally easy. And it's the only way to make money consistently in the volatile resource markets."

Byron King, editor of Outstanding Investments, examined investment opportunities among oil and gas stocks. Because the world is no longer awash in oil, King declared, the energy sector - both traditional and alternative - will be awash in great opportunities.

The "cheap oil" days are over, he warned, which means the energy-dependent American lifestyle will become costlier to maintain…maybe much costlier. "We've invented the cheap-energy system that has given us prosperity and freedom," King explained, "now we begin the descent. We'll either have to invent our way out of it, or go back to the way it was before."

He was talking, of course, about our petroleum-based economy… in the face of Peak Oil. Once mocked, denied and ridiculed, the realities of Hubbert's theory are now coming to pass as, one by one, the world's oil fields pass their peak production rates and ease into decline.

If people like Byron King and Bill Bonner are right, the shock of recognition is going to come. But the flip side of this looming societal trauma, says King, is that all kinds of energy companies will make all kinds of money.

Our resident Maniac Trader, Kevin Kerr, also banged the natural resource drum - but to a slightly different beat: Food.

More specifically - how in the world is China going to feed all those people? Even with its one-child policy in place, the population of China is expected to go from 1.3 billion today to 1.49 billion by 2025. But only 11% of China's land is arable farmland. Compare that with 26% in the U.S. to feed a smaller population and you can start to see for yourself: China is in desperate need of a solution.

Plus, it is struggling with other issues. Combine factors such as soil erosion, inadequate water supply, lack of qualified labor for farming, lack of modern farming equipment and methods and extreme weather patterns, and you've got a darn good crisis in the making. But crisis spells opportunity.

A lot of bad things might happen in the world. Some we can foresee, while others will be like the proverbial Black Swan - completely unanticipated. But if you pay attention…and play your hand right…the bad things shouldn't happen to you.

Doug Casey said it best…

"Internationalize yourself. Keep your citizenship in one country, your bank account in another and live in another…treat the world as your oyster."

Why gold?

The Market Oracle yesterday and Gold Seek today both feature an article by Michael Kosares from his own site (USA Gold) on why he thinks you should own gold.

One reason is the fecklessness of the US Government:

"...the national debt stands at $8.9 trillion - nearly $30,000 for every man, woman and child in the United States. And there appears to be no end in sight to the fiscal madness. The debt clock ticks non-stop at the rate of about $1.3 billion per day.

I should point out that there is a difference between the "deficit" and "additions to the national debt." The deficit often quoted by politicians and the mainstream press is discounted by borrowings from the social security fund - a machination meant to dilute the real budget deficit which is the actual addition to the national debt."

I only knew recently about this business of putting their hands in the social security till and leaving an IOU. That is disturbing, because of the desperation it implies. Wasn't it the financial cost of the First World War that led to the raid on British social security funds and the switch to a rob-Peter-to-pay-Paul system?

Kosares starts his article with two quotes (I've added the sources):

"[U]nder the placid surface there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it. . . We are skating on thin ice." - Paul Volcker, Former Chairman of the Federal Reserve (Washington Post, 10 April 2005)

"[W]e live in a globalized environment and in a country which has enormous fiscal and external deficits. So you have to figure out some way -- which I have not done I might add -- to protect yourself if we should have a real currency problem here." - Robert Rubin, Former Treasury Secretary (interview with Kim Schoenholtz, Citigroup New York, 10 October 2006)

He discusses 6 trends: the US National Debt, the trade deficit, dropping real rates of investment return, derivatives, debt to foreigners, the US dollar's decline.

The conclusion, obviously, is that in times of doubt and distrust, gold will act as a haven for real wealth, as it has done in the past. "Price appreciation... is a sidebar to gold ownership. The main story is gold's asset preservation qualities."

More on Brad Setser

Further to the last, it's worth struggling through Brad Setser's presentation to the Congressional committee even if (like me) you're not an economics buff.

In essence, he says that America has gotten away with its continuing trade deficit over the last few years, for several reasons:

• the effective interest rate on foreign debt held by the US, is higher than on loans made by foreigners to America


• foreign equities have had higher yields and better capital appreciation, so US overseas investment has done better than foreigners' share holdings in America


• the weakening dollar has amplified the effects in both points above


• foreign central banks' willingness to buy US debt has kept US interest rates low, making Americans' debts easy to service and fuelling share and property booms

But it can't go on for ever. Either America's debts will continue to increase, or foreign sovereign wealth funds will buy more and more equities, or both. If foreigners slacken in their support for US debt, interest rates will rise; and losing equities to foreign owners takes away from America's future wealth and income.

Setser concludes:

The US will likely both have to sell more equity to the rest of the world and pay a somewhat higher interest rate on its external debt than it has recently...

While rapid central bank reserve growth and large official financing of the US deficit can help the US postpone the necessary adjustment, the longer the adjustment is deferred, the greater the long-term risks...

Bringing the US deficit and emerging economy surpluses down without tremendous costs will also take time. If the US and the world are to adjust gradually, they need to get started.

Yet again, I wonder whether the UK's enormous purchases of US dollar-denominated securities since June 2006 make sense for Britain.

Another thought: seeing two late market interventions last week, Dan Denning in The Daily Reckoning Australia (3 August) speculated that there may be "...in the financial market a buyer of last resort who comes in to goose the indexes at critical times, when investor confidence is especially fragile."

Rather than the Plunge Protection Team, could it be foreign sovereign wealth funds buying-in on the dips? Maybe that's why the Dow has bounced back 286 points today, as I write.

China close to owning $1 trillion of US assets

This graph is from evidence given by Brad Setser (of Roubini Global Economics) to Congress on June 26. His presentation was on US debt to foreigners and the economic vulnerability that it implies. The full PDF document can be found here.

Noriel Roubini himself theorises that the US is approaching a Minsky turning point - i.e. a credit crunch - as reported in FXStreet last Friday.

Which US Presidential candidate is the best hope for the American economy?

Looking at the current field for the 2008 US Presidential race (and trying to set aside other important issues), which candidate's economic ideas make the most sense for America? Unless the questions are asked, they won't come high on the agenda.

I have tried to use Blogger's new poll facility, which allows for more than one answer, but there's a glitch at the moment, so it's a one-shot question for now.

Your comments on the candidates, their ideas and the issues are welcomed.

An alternative reserve currency?

As America's balance of trade continues to weaken it, and the dollar's value erodes, the question arises, what could replace the greenback as the world's trading currency?

Assuming that gold reserves are relevant to trust in the currency, it's interesting to note that Germany has almost half as much as the US, and its balance of trade is not so unhealthy. Interesting also that the German mark, although currently in a fixed exchange rate with the Euro, still has a nominally separate existence.

Julian Phillips (GoldForecaster.com) says in his 29 June article, "Germany is aware that the times they are a-changing, and so it is keeping one eye on the future of the global economic and monetary order – and guarding against it."

Here are the four greatest world holdings of gold (June '07 World Gold Council figures):

United States 8,133.5 tonnes
Germany 3,422.5 tonnes
IMF 3,217.3 tonnes
France 2,680.6 tonnes

France has a negative balance of trade, and has reduced its gold hoard by around 11% since 2000, but nevertheless, between them the last three on the list above have gold reserves totalling 14.5% more than the US. Politically, France and Germany are the Western core of the EU. If things change radically, who knows what the new world order may look like?

The gold question

Here's a couple of articles by Julian D. W. Phillips at GoldForecaster.com. They're extracts and the entire text is only available if you subscribe to the site.

But because they are freebies, and have much interesting and relevant information, I reproduce the extracts here. The first is a response to the recent sale of some gold reserves by Switzerland. It appeared in BullionVault on June 29:

WITH THE Swiss central bank selling 250 tonnes of its gold reserves, the classic question has to be asked again, what is the price of gold? If we answer that it's worth a certain number of Dollars, then we have to ask the next question:

Just what is the price of a Dollar?

Is the US Dollar such a reliable a store of value that it can be used as a measure of gold's value? To ask would be to question the very foundation of the paper currency system. Can one trust the Dollar or even the international monetary system? It’s all a question of degree.

The US government itself holds mainly gold in its reserves, because it is the issuer of the world’s reserve currency. This does imply that it is completely dependent on its own currency, the Dollar, in the global economy. As the foundation of the world’s monetary system, should this currency lose the confidence of its own or other nation’s citizens, the international money system – and trade relations across the world – will be damaged severely. It is thought that this process is well under way.

The Eurozone community’s Central Bank drew off 15% of its reserves in gold from its members. This does not mean it intends to only hold 15% of its reserves in gold, nor does it imply that there is a rigid exchange rate between gold & the Euro. But the question of how to measure 15% of reserves is raised.

From the beginning of the Central Bank Gold Agreement, the European Central Bank decided to sell a fixed tonnage of 235 tonnes of the reserves it inherited from its member banks in return for paper currencies. Ostensibly, this was to keep gold's proportion in the ECB's reserves roughly fixed. The ECB is fully aware of the dangers of measuring gold in the Dollar – and in the Euro for that matter – but for the sound functioning of our paper-currency world, it is crucial that gold be subject to measurements in paper currency terms, and not the other way around.

With gold now higher from seven years ago, bullion is now around 25% of the ECB's reserves. Perhaps that's a level the Frankfurt policymakers prefer?

Germany, who gained the right to sell up to 500 tonnes of its gold under the CBGA, has not taken this option yet, citing that “gold is a useful counter to the swings in the Dollar.” Of course, a doubling in the price of gold since making this decision is paying off handsomely. We commend the pragmatism of the German Bundesbank; its reserves are there for a rainy day. They are not a pension fund scheme requiring profitable investment.

Certainly, growing a nation's reserves through investment and trading can be a secondary objective, but it should never take over first place. The reserves have to be credible in times of distress, and they have to acceptable to all trading partners.

Germany is aware that the times they are a-changing, and so it is keeping one eye on the future of the global economic and monetary order – and guarding against it.

Italy has no plans to sell any gold, which is unsurprising given the very poor history of the Italian Lira. They too have seen several currencies come and go in the last one hundred years, so they have few illusions about the joys of compound interest. After all, adding noughts to a currency doesn’t make it more valuable. It’s only the buying power that counts.

So will the Dollar today, with interest added over the next decade or two, be worth more than today’s equivalent in gold in a decade or two?

The Swiss Franc has always been one of the most stable of the globe’s currencies, based upon one of the most stable and constant of economies. In times of global war or uncertainty, this peaceful anti-war country becomes itself a ‘safe haven’ for foreigner’s savings. So it is almost a source of safe money and financial security in itself.

The Swiss concept of a rainy day contains far less moisture than most other countries fear. Switzerland is therefore financially more secure and less dependent on its reserves than other countries, whilst also being small enough to adjust its reserve holdings within the foreign exchange markets capacities at present. With the mix of gold and currencies in the Swiss National Bank's portfolio, you can be sure they have covered their backs on the risk front and stand to gain either way the cookie crumbles.

It is of little account whether the Swiss sell some more gold or not. We see their latest move – announcing the sale of 250 tonnes by 2009 – as a gesture of support for the paper currency system. The SNB no doubt sees it as a gesture to protect its overall reserves portfolio.

Again a key question: Why sell gold at all – or more pertinently, why sell a little gold and retain sufficient for rainy days ahead? It is to ensure the retention of value in the overall portfolio. The SNB is not the getting rid of the gold content therein.

Clearly Switzerland – with its constantly sound position as banker to the wealthy of Europe, alongside its dependence on the banking industry – has a vested interest in a mix of global paper currencies. It retains a greater vested interest than those nations with an unsound Balance of Payments, smaller reserves, and facing greater economic risks in the global economy. Besides the United States, nations now suffering a poor balance of payments include Australia, New Zealand, Britain, France, Italy, Greece, Spain, Czech Republic, Poland, India, Pakistan, Colombia, Mexico, Hungary, Turkey, South Africa and many others.

The big question: will gold have a greater real value in times of distress than yield earning national currencies? In the last world war, what value did the Deutschmark – or indeed the US Dollar –have internationally? Remember, forgery is one of the acceptable weapons of war. And what value did gold have? No contest.

With economic power shifting Eastwards, and the Asian nations growing away from their dependence on the US economy, it is inevitable that reserve currency dependence such as we are used to with the Dollar is now changing. It is fragmenting, with other currencies coming onto the scene and with national interests clashing and exerting pressure on the different leading world currencies.

Should these pressures grow beyond a certain almost indefinable point, then paper currencies will not garner the same level of confidence as they do now, and the unquestionable international reliability of gold as a measure of value will ascend further still.

Prime Minister Brown of the UK went the same way that Switzerland is, once again, going to go. Looking for a more profitable content to the UK’s gold and foreign exchange reserves in 1999, the UK paid a heavy price that continues to grow as the gold price rises. Did Brown act for political reasons in support of the Euro and the more controllable paper currency system? We believe Switzerland may be following the same line of reasoning as Brown did then.

After all, if we measured the proceeds achieved from the last sale – and the total value plus the interest thereon – what would the shortfall be against today’s value of gold?

The mix of foreign exchange and gold reserves is essentially a gamble on the future.

The second is issued today on GoldSeek:

As the move to keeping what nations have already Protectionism is in full swing. This will inevitably disturb the currency world, who quite rightly will look to something that will protect them from the rising volatility in the currency markets alongside seeping confidence from the U.S $. This ‘something’ will include gold and gold investments. Both Protectionism and Capital Controls will enter the scene as this happens as testified to by history.

Will the States do such a thing? Of course it would. The games played to prevent China acquiring U.S. oil companies with reserves in Central Asia demonstrated this aptly, last year. U.S. patriotism will ensure this happens wherever it is obvious. The necessary legislation is in position already, albeit in a seemingly unrelated form. It is always hard for Politicians to pass unpopular or freedom-inhibiting measures, so they are best attached to causes that persuade individuals and Congress to accept such limitations, such as the recent powers over troublesome individuals in Iraq. This paves the way for full control over financial markets of all types. Here is an example of how a popular cause can be used in this way from the White House itself.

“Pursuant to the International Emergency Economic Powers Act, as amended (50 U.S.C. 1701 et seq.)(IEEPA), I hereby report that I have issued an Executive Order blocking property of persons determined to have committed, or to pose a significant risk of committing, an act or acts of violence that have the purpose or effect of threatening the peace or stability of Iraq or the Government of Iraq or undermining efforts to promote economic reconstruction and political reform in Iraq or to provide humanitarian assistance to the Iraqi people……….. In these previous Executive Orders, I ordered various measures to address the unusual and extraordinary threat to the national security and foreign policy of the United States posed by obstacles to the orderly reconstruction of Iraq, the restoration and maintenance of peace and security in that country, and the development of political, administrative, and economic institutions in Iraq.

My new order takes additional steps…………by blocking the property and interests in property of persons determined by the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Defense, to have committed, or to pose a significant risk of committing……… The order further authorizes the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Defense, to designate for blocking those persons determined to have materially assisted, sponsored, or provided financial, material, logistical, or technical support for.

I delegated to the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Defense, the authority to take such actions, including the promulgation of rules and regulations, and to employ all powers granted to the President by IEEPA as may be necessary to carry out the purposes of my order. - “ GEORGE W. BUSH “

Such moves seem reasonable in this case. Our reason for the inclusion of this quote is to clarify just how quick and easy it is to impose restrictions on the spending of the U.S. $ in the hands of any person, institution or nation, not acceptable to the U.S. Administration, [whether he be a foreign national or a U.S. citizen, just as it is in any other nation’s hands [Whether it be Germany, or China itself or any other nation – this is the power a politician has always].

Capital Controls

In all the historic instances of either Protectionism or Capital Controls, but in particular Capital Controls, such measures were and can be imposed overnight and became an instant unchangeable reality. Protectionism appeared to be the most reasonable and less dramatic but produces softer but similar consequences in each case. Applied globally [and nations hit, usually respond by imposing their own protectionist measures] they rupture the smooth flowing of trade and finance.

Capital Controls are more draconian than Protectionism however broadly spread, causing huge swings in currency values, so are halted as quickly as possible so as not to damage what is left of a nation’s economy. However, in the case of Britain, where a dual currency system was instituted it stayed for a couple of years. In South Africa where Exchange Controls have been present for more than 30 years now, the Capital Control component lasted for around 20 of these years. In both cases a main component of these controls covered investments of all kinds, loans and any transaction of a Capital nature. In both cases the “discount” on the value of the sales of shares for the repatriation of Capital reached 30%.

Bear in mind that as far as we can see ahead Asian and other nations’ surpluses will continue to burgeon. As they become so bloated that they pose a threat to the $ by the sheer risk of their movement from the U.S. Consequently the possibility of even a partial exit of foreign nation’s surpluses from the $ becomes almost inevitable. So, the nation will, at some point, just have to impose Capital Controls, if only over the removal of foreign nation’s surpluses from the Treasury market.

If such Capital Controls were imposed in the U.S., which would be an almost certainty at some point in the future as money floods from the country, the entire global money system would be irreparably damaged and a flight to hard assets [lead by gold, silver and other precious metals] certain. The break in confidence in currencies themselves would be savage.

Much to chew on here.