By Mark Rogers

Welfarism undermines democracy: this is one of the manifest lessons of the eurozone crisis, and is seen in many ways, the most recent being the Greek elections in the fissipiration of the political system, with the running being made by minority parties with unrealistic and self-aggrandizing agendas. Instead of there being any attempt at shrinking the state, more, and more aggressive, groupuscules want more of the same: “Syriza’s idealistic economic programme calls for providing students with free meals and doling out pensions equal to final salaries. Mr Tsipras says the state should hire 100,000 more workers to help reduce unemployment.” (The Economist, May 12th 2012). Is this “idealism” or ignorance (though the latter is, of course, the handmaid of the former)? After all one of the things that brought the Greeks to their knees was the number of people entitled to government largesse.

When the Greeks received the first bailout from the Germans, Papandreou publicly thanked the German government and people for their largesse and acknowledged that as a result the Greeks would have to do some serious cleaning up, starting with an attempt to find out how many people worked for the government. They didn’t know! This is welfarism with an insouciance.

Democracy and accountability

The idea that democracy is a device to hold government to account implies a responsible, independent citizenry and limited government. One of the things that the government is to be held accountable for is limitations on its growth. The welfare state, instead, thrives on factional interests which seek to carve out niches for themselves at the expense of others, with the state as overlord and facilitator – and therefore at the mercy of being captured by the bolder interest groups.

The Founding Fathers of the American Constitution wanted to strike the right balances between majorities and minorities, while recognizing both that majorities could become tyrannous and that minorities could descend into factionalism. The balances that the Founding Fathers sought were to prevent majorities from dealing with minorities in the old-fashioned European way – i.e. simply eliminating them, whether through exile or execution. This meant allowing minorities a functioning place within the body politic accommodating their ways where they were beneficial without creating vested interests which might put the public order at risk.

While it is self-evident that the Constitution of the U.S.A. has not prevented the growth of big government or the gradual assimilation of the American people to welfarism, it is also clear that modern government’s most serious derogation from constitutional principle is the emergence of the centralized state as a faction in itself. Large civil services become an end in themselves; the purveyors of welfare form a huge vested interest group, averse to change that may damage their own position however it may benefit the taxpayers who fund them.

While it is usual to equate freedom with democracy and welfarism with fairness, in fact there is no logical or historically necessary connection between freedom and democracy, nor is welfarism necessarily fair. In fact, the larger the state’s involvement in wealth distribution, whether it is by cash transfers, or manipulations of the educational and health systems, the more that the least admirable moral qualities are promoted in the welfare state: envy and greed.

Entitlement

The welfare state encourages the vice of entitlement, actively encouraged by the administrators of the welfare state – through education, through multiculturalism and through the benefits system. If bankers are thought to be too quick to justify their salaries, it is only done in the language of the welfare state which all are encouraged to use. (An aside on bankers: while, as has been maintained here, here and here,their remuneration is an utterly inadequate basis for the crisis, bankers at least operate in a world of more immediate accountability: recently shareholders have risen to the task of curbing pay in relation to poor performance.)

Envy in the East?

I grew up in Hong Kong (my political and economic gold standard). That there were exceptionally wealthy people was well-known, but they tended not to live celebrity lives and had risen to their riches, in many cases from extreme poverty, through hard work and good judgment. That everyone had a chance to better themselves to the extent that they were prepared to work for it because the tax system was simple and equitable, meant that envy was at a discount in Hong Kong – people tended rather to admire the rich because they were hard working and philanthropic, and because each and all had the opportunities open to them to advance to similar riches. A breeding ground for hard work, thrift and imaginative enterprise rather than envy, greed and carping.

By Mark Rogers

One day.

The “sarkozy” in question? Bashing the City of London. So nothing has changed on the despising of the Anglo-Saxon economic model front, then. What else has changed as a result of the French and Greek elections?

While the Times has reported that there is a capital flight out of Greece (The Times, 8 May 2012) – which is hardly surprising – the answer to the above question is: nothing, politically.

The fireworks will be different colours after the French and Greek elections, but the unwillingness to recognise and to deal with the political death of Europe will continue: there is still no political will to recognise the failure of the euro and all the difficulties that that entails for the “union”. Not that there is much show of unity; there is little love lost on the continent for each other, but there is a determination to keep the bone of contention alive – not even the faux-radicals who have been elected to the Greek Parliament, while perfectly content to call their Northern neighbours barbarians, want to pull out of the euro! (Bloomberg here.)

“Voters shy from hard choices.” Thus Lexington in the Economist, April 28th 2012, page 42. “…voters everywhere … want many impossible things before breakfast, including low taxes and all the things that high taxes pay for.” He is, after a fashion, taking issue with Grover Norquist of Americans for Tax Reform, who concedes that the argument for small state-low tax politics is yet to be won: “Too many voters continue to like some of the things their taxes buy, such as entitlements and government jobs. If those things can be shrunk, [Mr Norquist] believes, so can their fondness for the state. Good luck with that, Mr Norquist.”

Well, Mr Norquist is perfectly entitled to point to Europe, where fondness for the state was invented and has become inbred, and in particular to Greece.

Greek voters wanted low taxes, so they simply didn’t bother to pay their taxes at all – and the tax collectors went on strike in sympathy – and they still wanted the things that high taxes pay for. A price system this is not.

The idea, fantastic as it seems, that tax collectors would go on strike against changes to their salaries would beggar belief were it not yet another strong reminder that those who advocate that the state simply pays it way out of trouble (which is what got us into the trouble in the first place) forget that the state has no money.

Even the editor of the Economist has advocated that the state in the UK should build more infrastructure (which, he says, “incidentally” provides more jobs) as a way of spending its way to recovery. This is the same Economist which considered the Socialist candidate, now victor, in the French presidential elections, M. Hollande, “rather dangerous” (April 28th) – even though he promises just such spending…

The tax collectors of Greece went on strike because they do not want their salaries cut, but in striking, i.e. refusing to do their job which is to collect the taxes out of which their salaries are paid, they are in effect cutting their incomes to zero.

The state has no money of its own: all that it spends is ultimately derived from the taxpayer: either directly, or by borrowing, which is then paid back by further despoliations of the taxpayer.

Ah! but what about Quantitative Easing? Apart from sounding like what Gargantua did after arriving in Paris, it has pretty much the same effect on the average saver: deluging the economy with printed money simply attacks the taxpayer from another angle – those who have saved see their savings and pensions eroded. Without savings, where is investment, and therefore growth, to come from?

Too much liquidity, and fake at that: QE seems to me to be essentially the government forging its own currency…

Translated from an original article by Charles Sannat, Director of Economic Studies, AuCOFFRE.com, Paris

The Fourth Summit of the BRIC nations, a major political event.

This is a huge story and yet has gone largely unreported by the major western media. On the 29th of March in New Delhi, the Fourth Summit of the BRIC nations took place (Brazil, Russia, India, China).

“The BRIC nations (Brazil, Russia, India, China and South Africa) should no longer use the US Dollar in their bilateral exchanges. That is what was decided on Thursday the 29th March, 2012, during the Fourth Summit of leaders of these five nations in the Indian capital”.

Source: algeriedz.info and rian.ru

The following was decided during this meeting: an essential step was taken towards a “multipolar” global monetary system. March 29th 2012 will undoubtedly not be the date remembered in history as marking the end of the era of the Dollar. Nonetheless, the change is major.

Towards an overhaul of the IMS

We are entering a phase of disintegration of the International Monetary System as we know it. Our monetary system dates back to the Bretton Woods agreement of 1944 which was brought to an end by the Jamaican agreement of 1976 (this ended the gold standard).

So what will happen now? Stock markets are starting to fall because the issuing of European bond funds is doing badly or is disappointing (depending on your degree of optimism about the outcome of this policy), which is the case for Spain and now Italy.

What one must understand is that according to the current economic system it is the surpluses of some which finance the deficits of others, thus creating a balance. In other words, western countries are in a chronic deficit which has been, and I stress has been, financed by the major Asian exporting nations on the one hand (China and India) and the oil-producing nations on the other.

For the last few years, nobody was lending to western states (by this we mean the US and Europe) which now find themselves in an irreversibly compromised situation.

It is this lack of external funds which is pushing the central banks, the FED and the ECB to massively intervene in the markets. The only option that remains for us is indeed the use of the printing press and the creation of money with all the negative consequences that follow.

Though this Fourth Summit of the BRIC nations is a founding step towards the overhaul of the IMS this is certainly not the ultimate goal.

Ground-breaking events in international relations

Discussing the topic of the monetary system without mentioning the political dimensions would be a mistake. The future International Monetary System will be shaped by the international balance of power and alliances between the major players in the context of the fight for access to energy and agricultural resources and in the broader sense to raw materials. A strong axis is taking shape amongst the BRIC countries, and Iranian diplomacy is also far from insignificant.

The trans-Atlantic relationship remains strong despite the strains and divergences. Lastly, one should not imagine that the United States of America will let their status as world leaders slip away without a colossal “fight”. American policy has always been based on a simple concept: “America First”.

We are thus entering a new phase in the current crisis:

In 2007, the subprime crisis led to a financial and stock market crisis.

The financial crisis led to an economic recession.

The economic recession lead to massive state intervention in the form of stimulus packages which resulted in massive debts for these states.

The debt crisis can only lead to a major monetary crisis.

The monetary crisis (which is on its way) will lead to the restructuring of the International Monetary System.

And… the manoeuvres have already begun. The global repercussions will be deeply felt, as the International Monetary System is to the global economy what tectonic plates are to geology. We are touching upon the essential part. The tremors will truly be felt.

Will you be ready?

We here at Goldcoin.org have had the pleasure to interview Señora Lizette Paternina, the editor of LingORO.info, a blog dedicated to gold investment, gold coins and the unstable economics of our time. Her story has an interesting evolution based on the response she had to her blog articles. The popularity of her blog has paved the way for the launch of a commercial website, LingORO.com, which enables the Spanish speaking market to have access to a proven, reliable method of gold investment.

Editor: When did you first launch the blog LingORO.info?

Lizette: In March 2011 I posted my first article on line having spent some months previous immersed in the research of blog content. The first article is always special and I remember the feeling of excitement when I saw the visits to my blog and knew that people were reading my article. I was encouraged to continue producing and evolving content that was obviously attracting a growing audience.

Editor: What do you look for in an article?

Lizette: A story that tells a truth, with substance, meaning, logic and often on a subject ignored by the mainstream media. My articles present information to readers regarding the current economic climate and its impact on all of us. Many things are left unsaid that need expressing and this can be particularly true in the gold industry. I am originally from Colombia and so issues regarding “ORO VERDE” that could be so important for the survival of whole communities & their livelihoods need highlighting. Similarly I fully support the Clean Extraction initiative for 100% traceable gold that respects people and the planet. It is also important to have an historic perspective on the economy and gold investment as well as for the evolution of everyday changes in the economy. To this end I like to combine numismatic and historical facts about gold coins as well as the story of certain important coins that have a particular place in Spanish or Latin American history.

Editor: Why have you launched LingORO.com now?

Lizette: This is the ideal moment to launch an alternative method of Gold Investment to the Spanish and Latin American markets because there is no similar offer currently available. The current market is based more on jewelry and physical possession of gold bars and coins. However, our experience suggests that this is not the best way to invest in gold as it is difficult to realise a good value at resale when you inevitably have to sell it back to a dealer. Our business model allows Members to freely trade between themselves, therefore maximizing the opportunity to realise the full potential of their gold coins. It’s easy, practical, logical and has a proven track record in the French and the English speaking worlds as demonstrated by our sister sites AuCOFFRE.com & LinGOLD.com.

The advantages of LingORO are that investors can buy and sell on-line 24/7 from anywhere they want and also that we offer vault storage – this model allows ease of resale.

Editor: What type of products are available and why? Where do they come from?

Lizette: Only professionally sourced investment quality gold coins are available – these are all verified and sealed in cases. We also have a focus on certain Spanish and South American gold coins which are of great interest including the 25 Pesetas, The 50 Pesos and the Soles and Libra from Peru.

Editor: Why should we invest in gold?

Lizette: Gold is an excellent way to save, it is an alternative to the traditional bank products which have proved to be unreliable (particularly during the current crisis) and of course it is a diversification of a portfolio. Perhaps most importantly Gold is the safe haven currency when all other currencies are failing and losing value.
It is worth noting that most investments have a risk attached – that is to say a risk to the counterpart offered in the investment. If these are shares, certificates, funds etc there is a possibility that the counterpart to your investment ie. the shares or assets supposedly backing funds could fall to zero in a crisis due to company failure, the debt cycle or unscrupulous traders who have oversold their funds such as is the case with ETFs (less than 20% physical gold to back the certificates sold).
Gold can never fall to zero as it has consistently had value for 6000 years which is better than any modern day currency or fund.
Finally, we should think of gold as an insurance against economic crisis. It will protect your wealth against inflation and it will always maintain purchasing power whatever happens during the crisis. No other product can offer this. If you have a house you usually have fire insurance in case one day the unthinkable happens. At least you have the peace of mind that you can rebuil it.
If the crisis deepens as is largely expected our whole way of life could be challenged – therefore it is prudent and wise to take out an insurance against the effects of crisis.
As in the case of fire insurance it is wiser to buy insurance before the catastrophic event!

Editor: Do you have a message to the people?

Lizette: Choose a good option that helps you save not only in a moment of crisis but which will also work for them during normal situation.
Gold protects money and the people can have a real savings to leave for the family or indeed help them with the costs of life, houses, holidays, cars, university fees etc.
We have a beautiful collection of professionally certified coins that are designated as investment quality which is not always the case elsewhere. We offer quality of service as well as trust and confidence with our Members.
My message to investors is to look at what we have to offer and then compare this to other methods that they have traditionally used and evaluate which is the better option for you – that way I know I will be welcoming lots of them real soon.

Editor: Many thanks for your time and best of luck with LingORO.com

Lizette: You’re very welcome and thank you. I am a regular reader and fan of Goldcoin.org because there are so many interesting facts and articles that are pertinent to the economic situation and the gold market. I often post links to your articles and sometimes translate quotes made by economists and commentators about the gold market. I wish you continued success with your blog and hope to see you in Spain soon.

By Mark Rogers

Is there a necessary connection between gold coins and politics? The short answer is: yes. Undoubtedly over the course of the last century, and beginning fairly early on, gold became, and still remains, a highly controversial political subject. The most influential economist of the century, John Maynard Keynes disparaged not just the gold standard but the metal itself: he thought wealth creation a sort of secular sin, and considered those who saved to be selfish. In 1933, President Roosevelt banned the private ownership of gold, and passed measures to confiscate privately held gold – something that may be about to occur in places as widely diverse as the European Union, Turkey and Vietnam, with a suspicion that the same is afoot in China.

Not surprisingly, these animosities towards gold have gone in tandem with the creation and expansion of the Welfare State, the political entity that is utterly bankrupt and is the prime cause of the financial crisis.

So, yes indeed gold, whether in the form of collectable coins or other types of investment, is very political indeed, but not just because it is seen as a store of selfish wealth, or, as its enemies derisorily call it, “hoarding”.

Ray Vicker in The Realms of Gold (published by Robert Hale, London, 1975) makes this very important point:

“The deeper one gets into monetary matters, the more one realizes that the whole argument about gold’s monetary role, or its inability to perform it, involves fundamental emotional attitudes toward man and his environment.

“Not only technical monetary systems are at odds when the chrysophilites and the chrysophobes argue money. This is cash versus credit. Sound versus easy money. A balanced federal budget versus deficit spending. Rugged free enterprise versus government economic management. A black-and-gray world versus utopia. The belief in sinful man meeting the conviction that man is essentially good. The idea that progress only comes through individual gain clashing with the contention that communal efforts spell forward movement.”

Gold, therefore, is not only a measure of prudence, it is also the summation of the political arguments of the last century – and even a repository of some of the profoundest truths of human existence.

Those who invest in gold are, in the long run, realists, as the following account by Vicker of what happened in the 1960s and 70s makes clear:

“When sense and nonsense are being evaluated the chrysophobes must explain how come they erred so much in the 1960s when they were denigrating gold and claiming that it was on the way out. It was in the 1960s and early 1970s that the great monetary battles involving gold were fought, with few people in the United States realizing what was happening even after the dollar experienced two devaluations. Briefly, the dollar, which had been ‘as good as gold’ for so long, no longer was as good as a thirty-fifth of an ounce of gold. And many people were discovering this fact.

“These people were termed ‘speculators’ through the monetary cyclones which erupted. Actually, they were ordinary businessmen, bankers and others who had sense enough to protect their assets. In politics, whenever anyone disrupts a pet project of the party in power, it is customary to tack some derogatory term onto the disrupters. The word ‘speculator’ has enough of an unsavoury connotation that it appealed to those in government who saw themselves as ‘defenders of the dollar’, though they couldn’t see the easiest method of preserving the whole system – a doubling of the monetary price of gold.”

Therefore, however unlikely it may seem on the surface that a numismatic website should feature regular political commentary, the central role that gold plays in human affairs means that its political and economic aspects need constant analysis.

By Mark Rogers

Taxation in the modern state is an attack on wealth and its creation.

Which is illogical, because without wealth creation there can be no tax base.

The Welfare State was founded, and is foundering, on conundrums such as these. So perhaps it is not surprising to see a Tory Chancellor of the Exchequer engaging in what amounts to left-wing style class warfare.

George Osborne has just announced that he is “going after the wealthy tax dodgers”. As reported in The Daily Telegraph, Tuesday 10th April, he has been examining “anonymised” tax returns furnished by HM Revenue and Customs which show the completely legal measures that some very rich people have been using to reduce their tax bills, through what the Chancellor and the Revenue are pleased to call “loopholes”.

If the measures are legal, how can those who use them be called “dodgers”? (And see here for another example of the Revenue being rude.)

Osborne has cleverly turned the issue into a moral one and in doing so has introduced a novel legal concept on the hoof. These schemes of tax avoidance have been dubbed “aggressive” avoidance, as if by hurling an adjective about what is legal is suddenly rendered “un”-legal.

Now one of these legal “loopholes” is offsetting tax liabilities by making donations to charity, which in the nature of things would be large ones for the offset to work. Closing this “loophole” is therefore going to deprive flourishing charitable organisations of substantial and necessary sums.

Now one of these legal “loopholes” is offsetting tax liabilities by making donations to charity, which in the nature of things would be large ones for the offset to work. Closing this “loophole” is therefore going to deprive flourishing charitable organisations of substantial and necessary sums.

And it is to be observed that such charities find more efficient and targeted ways of spending the money they receive through such donations. Can the government be expected, can the government even promise, to spend the money that it thus intends to steal as efficiently? Of course not.

One obvious practical problem that also looms is that many of these allegedly “aggressive avoiders” are foreigners, who settled here because of the way the tax rules had already been drawn up: they run businesses, they spend – in other words, they are already “contributors” in various ways to the economic life of the country. If the rules that encouraged them to settle here are changed, then they will simply leave, or if they stay, the taxes imposed on them will dry up certain expenditures, which will amount to much the same as if they had departed.

So the plans to deal with people who have done nothing illegal will have the opposite effect: less wealth creation, less voluntary “distribution” through getting and spending of that created wealth through the rest of the economy and more government waste – of human resources as well as cash…

Once upon a time, these things were done so differently: here is the opening paragraph of A. J. P. Taylor’s volume in the Oxford History of England, “English History 1914-1915”:

Until August 1914 a sensible, law-abiding Englishman could pass through life and hardly notice the existence of the state, beyond the post office and the policeman. He could live where he liked and as he liked. He had no official number or identity card. He could travel abroad or leave his country for ever without a passport or any sort of official permission. He could exchange his money for any other currency without any restriction or limit. He could buy goods from any country in the world on the same terms as he bought goods at home. For that matter, a foreigner could spend his life in this country without permit and without informing the police. Unlike the countries of the European continent, the state did not require its citizens to perform military service. An Englishman could enlist, if he chose, in the regular army, the navy, or the territorials. He could also ignore, if he chose, the demands of national defence. Substantial householders were occasionally called on for jury service. Otherwise, only those helped the state who wished to do so. The Englishman paid taxes on a modest scale: nearly £200 million in 1913-1914, or rather less than 8 per cent. of national income.

By Simone Wapler (translated from an article originally published in France)

In the middle of a difficult economic situation, investors rush for gilt-edged securities, among them: gold. But watch-out for the swindlers… do not confuse actual stocks with virtual stocks.

Everyone is talking about gold at the moment, especially as it is falling. Those who believe in a gold bubble are licking their lips. These bears are primarily to be found in the world of the big money men, the people who explain to you that your money must be made to “work”… in their own interest, clearly, just like Goldman Sachs. A recent survey carried out in France by the IFOP for the company AuCoffre.com produced surprising results. This particular French company is on the way to becoming the leading French company selling gold coins online. According to this survey, 68% of French people believe that gold is an investment with a future, but 60% find that it is incomprehensible and reserved to a privileged audience.

Some people who recently tried to buy gold through their banks found that it was not easy. Banks prefer to put forward their own certificates, or trackers, that are supposed to respond to the price of gold, rather than sell physical gold.  At first sight, if people want gold it is because they think that it will go up. Which is completely untrue. It is not gold that rises but currencies that drop. Here is the rise in the price of gold in the main currencies over the last 10 years:

• Peso 694%
• Rupee 487%
• US$ 474%
• Rouble 443%
• Pound Sterling 421%
• Real 339%
• Euro 287%
• Yen 262%
• Rand 262%
• $CAD 258%
• Francs 219%
• AU 186%

It is obvious that with the help of the crisis and the restarting of dubious monetary transactions, currencies continue to lose ground to gold and therefore its rise (since it is the commonly used term) continues. It is because currencies fall, with the dollar in the lead, that the central banks of the emerging country buy gold to diversify their reserves.

Who are the people holding gold for investment?

Out of the 166,000 tons of gold extracted from the ground, the central banks have 28,000 and private sector investment 30,000. Gold for investment is therefore to be found in the safe deposit boxes of the central banks, therefore the official sector, but also (and especially) in the private sector and in this case in two forms: in a shared form with the ETC (Exchange Traded Commodities) and in a private form for individuals. The ETCs are continuously listed certificates, in theory guaranteed by a physical gold reserve. Private individuals may also choose to obtain gold through their bank, and store it in their bank. In this case gold appears simply as one line on the bank account statement (1 ingot with a value of €40,000) and the bank stores it. Benefits: reduced management fees (since they are shared with others) and the safety of the large deposit-box of your bank.

But the real question is “does everyone actually have the gold that they claim to have”?

Why does the Fed refuse to have its reserves audited?

Our eyes are immediately focussed on the Fed, its colossal balance sheet of bad debts and its gold reserves. The Republican Senator Ron Paul has been asking for years for an audit on the gold reserves. In vain. [And see here for an analysis of this problem.] Just to stir up more problems, false ingots lined with tungsten have been discovered. They would appear to be of American origin.

Why do the central banks loan out their gold?

During the double decade (1980-2000) and the flat-period in the gold market, central banks engaged in the regrettable practice of giving gold out on loan in order to get some income from this dormant stock-pile. They can loan it out to commercial banks which use it to satisfy demand from an institutional client, for example. The last report on these strange practices goes back to 2006 and emanates from a private player, the specialized trader Blanchard. One then has to ask the question: do the ETFs (Exchange Traded Funds) ETCs actually possess their gold?

There exist various legal arrangements according to country. The following question is often repeated: wouldn’t these reserves not just be gold out on loan?

When banks give gold in exchange is it their own or your own?

In February 2011, The Wall Street Journal informed us that gold is accepted in the swaps transactions of commercial banks.  At this date, the inter-banking market is completely seized up. Banks are terrified and refuse to lend between themselves. Where does this gold, that suddenly appears, come from? Is this gold out on loan by central banks or is this the famous gold in the pipeline of the customer? Deafening silence.

Comex sets the price of gold… paper gold. The largest futures market in the world remains Comex. A futures contract is a bit of paper which bears an expiry date, a commodity, a quantity and a price. At the expiry date, the owner of the bit of paper has a choice: to take delivery at the agreed price of the commodity or “roll-over his position”, i.e. take the following contract. The majority of speculators choose the latter. In the warehouses of Comex, there is therefore much less gold than that which is covered by the futures contracts which circulate. So much less that the Canadians (who are large gold producers) got annoyed: Comex sets its prices, disconnected from reality, on paper. Short sellers are financed by the lobby of the large US banks and everything is distorted, they claimed.

A revolt was organized in 2008 Vaporize Comex (Let’s smash Comex). Principle: that the holders of futures contracts ask for delivery, in unison, all on the same date to show to the face of the world that the warehouses of the Commodities Exchange were almost empty. The Canadian rebels had agreed on a contract at the end of December. Shortly after, rumours circulated according to which certain contract holders had agreed not to take delivery in exchange for substantial compensation in dollars…

 And that’s why the premium goes up!

 Simone Wapler is Chief Editor for Agora Publications (financial analysis and consultancy).

Source: Reuters

A lucid analysis from France on the logic of gold investment

Translated from an original article by Charles Sannat, Director of Economic Studies, AuCOFFRE.com, Paris

With regard to the economy, we have just gone through a “settlement” period with the Greek crisis. But in reality nothing has been settled. As far as Greece is concerned, we have gained a few months’ respite in so far as that country remains indebted to the tune of more than 120% of its GDP and nothing indicates that a recovery in the public finances can succeed. Having said that, we shall see within 12 to 24 months.

More worrying of course is the economic situation of Spain and Portugal, with here too monumental social damage in progress and popular demonstrations which are starting to become extremely significant in the fight against austerity plans. Beware. Spain is not Greece. Spain is a great country, with a great history and Franco’s nationalism only dates back to 1975, i.e. yesterday. As any expert on Spain will tell you, that country will never accept a Greek-style humiliation. The Prime Minister has in fact called a stop to certain reforms. And he is right-wing. Spain will not be able to find a way out of the economic, financial and property crisis with a strong euro which does not correspond to the intrinsic characteristics of its economy. The same applies to Portugal.

We should not forget our own country, France. If we recall, in 2010, there were 1.42 working people for every retired person. Retirements will end up by no longer being paid for because there is quite simply no more money. The problem is not in 20 years’ time. It is now.

France is also in bankruptcy. The Court of Auditors in France, chaired by the Socialist Migot, has stated that it is necessary to dispense with indexing pensions to inflation. With real inflation of 5% per annum, in 10 years’ time a pensioner will lose the equivalent of 60% of his purchasing power. That is the reality.

Lastly, let us remember the end is nigh atmosphere at the end of 2011 (that was three months ago). One really wondered whether the euro would have survived by Christmas. What has changed since then?  One simple but basic fact. Over-indebted countries (France and Germany) became even more indebted, to temporarily save a country like Greece from immediate bankruptcy. But it is the entirety of our economic system which is in an irremediably compromised position. Nobody is able to say so. Even less the “people” behind the system. That is self-evident.

The only truth is the following: infinite growth related to mass consumption thanks to abundant and cheap energy in a finite world is a system likely to fail.

• A gold purchaser does not buy gold to speculate.
• A gold purchaser does not buy gold to get rich.
• A gold purchaser does not have a view on the financial results of the next quarter.
• A gold purchaser buys gold because he or she has a fundamental analysis of the current dead end in which the global economy finds itself.
• He or she buys gold because each serious crisis ends up by finding a “monetary” resolution that is usually painful.
• He or she buys gold because gold has been the Vera Valor (true value) for more than 6,000 years whilst the euro barely celebrates its 10th anniversary.
• He or she buys gold because before 1914 the currency was gold; because in the inter-war years those who had given up gold got to know a period of hyperinflation which led to Nazism coming to power with the disastrous consequences that we all know.
• He or she buys gold because in 1971, the dollar was no longer convertible and only the banknote plate continued to function unsupervised.
• Above all, he or she buys gold because he or she knows, and it is a historical certainty, that nothing is immaterial. During the last century we saw five different international currency systems or one every 20 years on average.
• He or she buys gold because the current system will change. Regardless whether it is in six months or six years.
• Gold buyers buy gold because they know that whatever the outcome of change, they will have simply kept the value of their assets. And it is that which will make all the difference.

Everyone else is half-witted, rendered moronic through TV and lobotomized by the eternal Welfare State. They will suffer. But this last sentence should of course not be quoted. It is OFF the record as they say. And I will not even give a small coin (out of gold) to a tramp when he goes around begging with his small sign: “May I call upon your kindness, Ladies and Gentlemen, in helping a former paper salesman by giving a bit of change to eat and help me to remain clean.” These people are ruining French people, just as with the Russian loans, or the assignats, and with each devaluation… In short it is necessary to know history and fully understand that they do not support us. The people act as compensation for the rich (banks and the system).

That’s why gold is bought.

Gold is rising I am happy. Gold is falling I am equally happy because I can buy more.
A gold buyer is always happy:-)

… and the government follows their lead

By Mark Rogers

In recent posts I have looked at what money is, what underlies the knowledge economy and suggested the role of “de-development” lying at the core of the financial crisis.

It is therefore interesting to report on how ordinary Greeks have rapidly over the course of the last few years started building informal economies, part-barter, part-alternative currency.

As reported in The New York Times, October 2011: “‘Ever since the crisis there’s been a boom in such networks all over Greece,’ said George Stathakis, a professor of political economy and vice chancellor of the University of Crete. In spite of the large public sector in Greece, which employs one in five workers, the country’s social services often are not up to the task of helping people in need, he added. ‘There are so many huge gaps that have to be filled by new kinds of networks,’ he said.”

In Volos, a fishing port in Central Greece, an alternative banking system has been established based on something called a Local Alternative Unit: its value is at par with the euro and can be used to exchange local goods and services. Members even receive books of vouchers, proofed against forgery, which can be used like cheques. (This is reminiscent of the way in which in nineteenth century Hong Kong, cheques themselves were simply circulated as currency without ever being cashed!)

“In Patras, in the Peloponnese,” continues the story in The New York Times, “a network called Ovolos, named after an ancient Greek means of currency, was founded in 2009 and includes a local exchange currency, a barter system and a so-called time bank, in which members swap services like medical care and language classes. The group has about 100 transactions a week, and volunteers monitor for illegal services, said Nikos Bogonikolos, the president and a founding member.”

The most significant aspect of the story is how the Greek government has responded: legislation was passed in the last week of September 2011 which recognised these “alternative forms of entrepreneurship and local development”, giving these groups non-profit status. In the light of the severity of the Greek position, it could not very well do anything else, but that is not where its significance lies.

Extra-legal economies are the time-honoured way in which poor and impoverished peoples have banded together to build an economy from scratch; eventually, the pressure on the legal economy, in 18th Century Britain and throughout the developing world today, which largely exists to protect the monopolistic privileges of the guilds of yore and the professional castes and trade unions of today, forces it to give way: monopoly privileges are legally rescinded, and legal protections extended to those in the extra-legal economy so that they can operate beyond the immediate locality (i.e. safely do business with strangers) and realise their assets.

It is this that the Greek government with admirable perspicacity and speed has enabled for its beleaguered citizens. The Greek government over the decades has acted as one enormous vested interest, which coupled with the incredible way in which Greece was permitted to enter the euro, reduced its citizens to these bare economies. But is there the seed of something else?

There is here the potential to wean people off the whole concept of welfarism: “‘The most exciting thing you feel when you start is this sense of contribution,’ [said Maria Houpis, a retired teacher at a technical high school and one of the Volos group’s six co-founders]. ‘You have much more than your bank account says. You have your mind and your hands.’”

By Mark Rogers

It is a universal truth that revolutions devour their children: this is ruefully acknowledged in the cases of the French and Bolshevik revolutions – considered “good” revolutions, as if Robespierre or Lenin were somehow accidents.

The revolution that is now unwinding with a vengeance is the Welfare State. It may seem overdoing it to call the Welfare State a revolution, but consider: it is normal to discuss the Welfare State in terms of safety nets, short-term solutions to modest problems like seasonal unemployment and housing for the poorest, or, in a more wide-ranging version of the arguments for it, as a necessary bulwark against economic catastrophes such as the Great Depression.

Yet the Welfare State itself devours so many resources and applies them without the constraints of market discipline, with the accompanying bloating of the civil service to administer it, that this in itself constitutes a revolution in economic and political habits. Add to this that as a result huge numbers of people have come to perceive government as a necessary arbiter of the way they live and the provider of their needs: this is an even bigger revolution.

For example, many people live in council flats and houses and survive on benefits including housing benefit. What the benefits system effectually does, in consequence, is to deprive people of any assets whatsoever, including themselves. That is, those who live entirely at the provision of the state do not exercise the assets they possess in hands and brains to carve out a living for themselves – it is not worthwhile to do so, as they are better off on benefits than working. This is a major reversal of those virtues that Keynes reviled (as we have noted here): industry, thrift, independence, a proper self-respect.

What this means is that the Welfare State is the chief driver of what we may call “de-development” in the western democracies. This takes two forms: the destruction of economic facts (see the discussion here) and the culture of dependence on government. Both have their origins in the misplaced desire to assist the poorest in society. The subprime crisis, for example, has its origins in FDR’s “New Deal” and the creation of the government-backed savings and loans “banks”. The massive growth of these institutions in itself became a problem, compounded by the Clinton administration’s drive to force lenders to lend to the poorest African Americans, under penalty of being convicted and fined for “racism” if they did not do so – ignoring the economic reality that no-one’s interests were served by deliberately creating debt in households that manifestly could not afford to repay it.

The bundling of “toxic debts” into securities that could then be traded was the banks’ and the markets’ ingenious but short-sighted nostrum to deal with one consequence of government intervention that had gone badly wrong. It may have kept western economies afloat a few years longer, this juggling act by the banks – but the policy behind it seems to have been somewhat Micawberish, waiting for something else to turn up…

And what has turned up is the massive bankruptcy of the Welfare State, nowhere more obviously epitomised than in the eurozone. Entirely driven by the manifest fact that the Welfare State is unaffordable, as is bluntly stated by those who know this – those who don’t, harp on about services being “underfunded”, as if unsustainable taxation only needed to become even more unsustainable and the problem would be solved!

As James Bartholomew points out in his crucial book “The Welfare State We’re In” it is only in the Welfare State that the poor are taxed – in ultra-capitalist Hong Kong the poor pay no taxes because the threshold on earnings before taxation kicks in is high, meaning that everyone has a chance to better themselves.

It should be more widely understood that bankruptcies are a sign of a healthy economy – stripping out ill-conceived or unworkable economic projects. This is the core of the eurozone crisis: what are we being told doesn’t work?

Dr Eamonn Butler, of The Adam Smith Institute, in one of his more recent books “The Rotten State of Britain” (Gibson Square, London, 2009), gives a succinct account of the regulatory burden on Britain:

“Each year, the state requires us to fill out more than a billion forms. And each year, the government passes twenty or more major laws. It also approves around 3,500 regulations, amounting to around 75,000 pages of rules, with another 25,000 pages of explanation.” He goes on to point out that “[i]n 2009 the British Chamber of Commerce reported that the cost of regulation on businesses rose by more than  £10 billion over the year before, to a staggering £76.8 billion. That’s more than six times the 2001 figure.”

The picture painted would be only too familiar to anyone attempting to do business in the developing world – even more so. There are places where, for example, it takes nineteen years to fill out the government paper work before one can start a business, or others where the forms to be filled in, laid end to end, lengthen out to 11 miles (for more details read Hernando de Soto’s classic “The Mystery of Capital”, probably one of the most important books on economics published since Adam Smith wrote “The Wealth of Nations”, and for the same reason: he describes in clear prose exactly how a developing economy works).

The effect of all this is of course in both the developed and the developing world deeply discouraging to enterprise. People simply don’t bother – or, in the developing world, go into the extra-legal economy. But the combination of the unnecessarily complex regulatory regimes in the developed world with the economic meltdown of the financial crisis, raises an interesting question which is the corollary of the matters I discussed in the recent post What is Money?

Are we in effect in the western economies entering a phase which we could call “de-development”? As Dr Butler rightly points out with reference to the regulatory burden: “Nobody can possibly keep up with this torrent of red tape.” And that inability has profound effects on the way business is conducted: people become increasingly careless of the law – such regulatory burdens always have the consequence of bringing lawmaking and legal processes into contempt – to our cost.

For if we live in a “knowledge economy”, then the foundation of that economy is the law. Indeed, in “The Mystery of Capital” referred to above, de Soto demonstrates that all successful economies are based on knowledge – economic facts enshrined in legal documents the ultimate purpose of which is to anchor title to property, making it justiciable and thereby tradeable and negotiable. It is the legal fact that comes first: that title is ultimately justiciable means that it can be safely traded, in the knowledge that any disputes that may arise have an objective forum in which they may be peaceably settled.

It is this that government regulatory systems destroy (in the case of the west) or prevent (in the case of the developing world).

In a thoughtful and alarming analysis, de Soto’s immensely fruitful work in the developing world enables him to see with great clarity just what are the roots and mechanisms of the financial crisis: “The Destruction of Economic Facts“.

By Howard R. Gray, Guest Contributor

When Debt’s Called Credit (1), (2) and (3) looked at the follies of the modern mortgage. In the following piece, Howard R. Gray, Chartered Surveyor and Barrister at Law of Lincoln’s Inn and the Middle Temple, discusses the alternatives to foreclosure.

Why should mortgages be hostages to fortune?

The concept of a loan secured upon real estate has been a standard feature of our society: Common law systems have used real estate as a fundamental element of wealth. The engine of society must be production, distribution and sale of goods and services, and these need to be financed. Loans come in two main varieties, secured and unsecured; as would reasonably be expected, security is preferred and thus the mortgage provided the very best security for commercial transactions.

So what exactly is the mortgage? The dead pledge is that the real estate is held in a shell form by the home purchaser until the loan is paid, while ownership in real estate terms is recognized to be in the hands of the owner of the property. However, the truth is the mortgagee has the power in theory to reclaim his money should the mortgage payments fail to arrive on time. We’re used to the situation, though there have been very serious problems with the way mortgagees choose to bundle mortgages, treating them as negotiable securities. This has become such a problem in the U.S. that situations have arisen where mortgages are so muddled administratively that it is frequently impossible to know who has title to the income stream as mortgagee.

Foreclosure and Perpetual Institutions

Let me tell you what happened during one of my property cases many years ago. My client owned two properties in London, one in Camden Town and one further north towards Alexandra Palace. He was behind in his payments on the Camden property and found himself in court in foreclosure proceedings:  the usual method was to repossess the property, sell it cheap and recoup the difference, if possible, from the mortgagor.

I thought this innately unfair and frankly inequitable. I therefore broached the perpetual nature of banks: the mortgagee (a recently converted building society) took great umbrage at this idea. The question was simply: if a bank is a perpetual institution why is it selling property on the cheap when it could quite as easily hold onto it until the market turned as it always does, recoup the loan plus any ancillary expenses and, of course, hand back the difference to the mortgagor. Does this not appear to be a thoroughly equitable solution to a very unpleasant financial situation? The response was most alarming: defending counsel was spat upon by the solicitor for the bank!

Moral of the story

Banks generally are perpetual so long as they are properly managed. The truth is that banks being in the real estate business should be better equipped to be in that market during a recession or depression. Writing off loans, attacking mortgagors’ equities, often negative or thoroughly underwater during a recession, results in spectacular losses. Most mortgagees (the banks) ignore the benighted borrowers unless so large they threaten the bank’s viability: so why not immunize against such threats?

If Freddie Mac and Fannie Mae had been disenfranchised from foreclosure in the first instance and had been made to stand back and look into the future and consider the possibility of managing underwater real estate, loans would have been factored to take that possibility into account. Given that recessions come and go and that banks are perpetual entities, by smoothing out repossessions over time very large elements of risk in real estate finance would disappear.

Since banks in any event hold onto properties in excess of 20 to 30 years why should they be shy of holding onto a property for three or four years to await a return to normality during a recession? While it is true that such a procedure might tie up funds, nevertheless a smoothing process which prevents a precipitous collapse in value through inimical short-term behaviour can only improve investment strategies for lender and borrower let alone the nation.

It would behoove the banking system to come up with this sort of arrangement rather than ask the government to do it for them. Now that gold and silver are becoming increasingly valuable it is high time to back up this process by ensuring some more rational security is built into the real estate market. By way of example, multigenerational mortgages exist in France, meaning that longer time horizons do not have to be a problem even for the shorter terms we are used to: this suggests that there are means of ensuring that foreclosure procedures could be smoothed out, as well as ensuring that the market waves are taken into account ab initio when the mortgage is granted.  

Money out of nothing – or gold?

Governments which overspend do not have a clue how to operate other than by creating money out of nothing or raising taxes. By having a mortgage market that can ride out economic waves there would be potential for underwriting the real economy as opposed to the fantasy economy of economically predatory governments. It won’t prevent government from fiscal irresponsibility but it might slow down the crash a while.

Introducing some form of gold valuation as an ancillary method of making real estate credible and tradable, should the currency collapse completely, ought to be carefully considered: this is a question of innovative contract design. Revaluing English real estate in the rental sector with regular rent reviews has, for example, been largely successful in dealing with inflation. If value is going to diminish significantly over time because of recession, why not make allowances for it and use some form of valuation based upon gold, coupled with foreclosure extension. This could be a short term method for the duration of a currency collapse.

Linking the value of real estate to gold through an underwriting formula is not an unreasonable proposition. Whatever the dollar or pound price of a good such as a Saville Row suit, pricing it in gold does not change much in the simple weight of gold. Real estate would work in the same manner: while for the most part the price of the real estate may go up or down, nevertheless, there would remain a component of the price that wouldn’t change much in real value over time, although it may change by significant amounts when measured in fiat currency terms.

Sustaining value

The simple conclusion is that banks are perpetual entities: they will be around after all the mortgagors have passed out of this world. It is not unreasonable to suggest that foreclosure should not entail the complete destruction of a loan contract. Given that recessions, depressions and booms are the norm in real estate as they are in the rest of the economy, nor should it be unreasonable to take account of this nature of the market by using a smoothing process to deal with a failure of the mortgagor to make his payments in full and on time. Since so many mortgagors have considerable equity in buildings this situation should have some form of protection in the loan recovery process. The market will develop ways to handle a creative process to allow a mortgagor to at least recover his investment just by allowing the market to turn back to an upward move in value.

By sustaining the value of buildings and preventing mortgagors from defaulting while awaiting a market turn coupled with creative processes to handle this there will be far fewer buildings coming onto the market in a distressed condition thus destroying overall building values during the pit of a depression.

By Mark Rogers

At the end of the post on the U.S. Federal Reserve’s non-existent gold I quoted C.H.V. Sutherland on paper money, which he points out  ”is not money at all, in any true sense, but an extension of credit”, hence “credit currency”. The latter term now of course encompasses electronic money, the device which makes quantitative easing so much easier.

The idea that paper or electronic money is really nothing more than an extenstion of credit, a promise to pay, raises an interesting point: to borrow money is in effect to take out a mortgage on the paper credit you hold and earn, that is, to extend credit on the basis of credit currency earnings is to extend credit on credit.

This raises the issue of trust that lies behind such a system to the level of the most important practical as well as moral feature of that system, and potentially compromises any sense of value that the monetary system embodies.

This post is by way of reflecting on some basic ideas about value and how it arises and what systems best embody it and allow it to function. These are introductory ideas merely, and the examination of this problem will continue in later posts, embracing history and anthropology as well as economics.

Hernando de Soto (whose work has already been referred to here and here) makes the interesting claim that we are only beginning to understand the nature of money, what brings it into existence and what supports it. His work in the extra-legal economies of the developing world has thrown up this question in sharp relief. His discovery that the poor, some 87% of whom live and work outside any formal legal structure, are camping on assets worth trillions (the value of which cannot be realised because of the absence of workable legal systems that realise title to those assets), raised the question of how assets are dissociated from their potential value.

There would appear to be a formula that runs from assets to value to capital to money, and that the jump from the first to the second of these, which in turn gives rise to the latter two, is a jump over a very large gap. That jump is taken very much for granted in the developed world because we do it all the time without necessarily realising it, so secure are our legal arrangements; but the gap effectively immobilises the poor in developing economies. They have assets in the form of unrealisable savings, which renders them, therefore, essentially worthless.

There is an interesting anthropological speculation arising from the idea that without property there can be no money system: that is if the formula suggested above turns out to be a true and fruitful one, then the common understanding that things such as cowrie shells and cattle were a form of pre-currency is a misunderstanding of the functions of money. That is, they may have been no more than a more highly stylised form of bartering and possibly, again against previous understandings, a less efficient one, not a rationalisation that led in time to formal money currencies.

If money only arises against a property system, and that in turn is the result of the development of formal legal systems, there can be very little connection between any system of bartering and formal money. The idea that money is a realisation of value inherent in property means currency is the result of a property holding system which, to be realisable, must have clear title. Then, on the basis of that title, the value of the asset can be ascertained and then realised as capital which then has a representational form as currency. That is, money as a representation of value, as a means of realising that value and being a store of that value is the result of a legal system that can render property fungible – that is, that the asset can be more than one thing.

This, of course, means that property is a form of savings, and that savings are therefore at the root of money. As we have seen in earlier posts, savings have been under attack throughout the twentieth century, with Keynes as a cheerleader of that attack, an attack which has been redoubled recently with quantitative easing and with measures against the purchase of gold being enacted in Europe. Even George Bernard Shaw saw through the paper money promise and recommended the purchase of gold! 

The failure to realise the necessity of savings and their wider functions in a workable economy is at the root of the financial crisis.

Those wise Cantonese grandmothers in Hong Kong understood the vital nature of savings – and, moreover, the best way to store them as gold.

By Mark Rogers                 

On 27th January 2012, The Daily Telegraph reported that a Civil Servant with the position of Permanent Secretary for Tax at Her Majesty’s Revenue and Customs, delivered himself of the opinion that those who pay tradesmen in cash are “diddling” the economy, “allowing them to evade VAT or income tax”.

The Permanent Secretary for Tax stated what taxpayers’ money is spent on:  “Tax provides the funding to run the country: hospitals, schools and everything else,” he says. “Every time someone pays cash in order not to pay VAT, the nation gets diddled.”

The Permanent Secretary for Tax has a pension pot, paid for by taxpayers, of £1.7 million pounds. He also said that those who contribute to the cash economy have no cause to complain about austerity. Clearly, £1.7 million pounds is no austerity – and so is very much open to objection.

H.M.R.C. – Stasi-style

H.M.R.C. is planning a “major clampdown”. In order to perform it, the government is to encourage sneaking: The Daily Telegraph reports: “Mr Hartnett encourages anyone who suspects wrongdoing to telephone the Revenue’s whistle-blower hotline and tip off inspectors.  He says: ‘Cash has been a problem for a long time. The people who are worried about it should use our whistle-blowing line to tell us. We are getting better and better at finding people who receive cash.’” Furthermore: “Tax disclosure rules introduced in 2004 had ‘massively changed the environment for tax avoidance and business’, he says. ‘We have now got to do the same with individuals’.”

These are highly charged statements; whatever other tasks a Permanent Secretary for Tax may perform, making political remarks is not one of them: they are beyond the brief of a mere Civil Servant.

Where does it all go?

Let’s see what we can make of these allegations and proposals. In the first place, having taken it upon himself, as a Civil Servant, to tell us that our taxes go on “hospitals, schools and everything else”, before making accusations about “diddlers”, perhaps he should justify this statement: is he certain that the taxpayer gets value for money?

The “everything else” is a bit suspicious, too: foreign aid that is declined by its recipients (here); MPs’ expenses; Civil Servants’ expense credit cards that leave no audit trail; one third of the national budget being spent on social workers, who routinely fail to save infants from horrible fates, while a mere 3% of what is spent on social workers is spent on the Armed Forces – which nevertheless face savage cuts; inordinately high salaries for local authority CEOs; vast sums wasted on government computer schemes, which just get written off; those in the private sector on the state pension seeing their pensions vanish, while those in the public sector have guaranteed pensions…. the welfarist list goes on (The Taxpayers’ Alliance are the experts on government waste). And while there is no guarantee whatsoever that this money is well spent, the government is so profligate that the Bank of England is indulging in massive Quantitative Easing so that the government can pay its debts… which is another way of saying that the government is able to write off its responsibility and accountability.

There’s the rub

“Cash” is indeed the problem. QE, while allowing the government to pay its debts, while decreasing the value of borrower’s liabilities, has a huge negative impact on pensions, annuities and savings.

So perhaps Mr Permanent Secretary for Tax had better be careful who he accuses of “diddling”. With the Welfare State seemingly beyond reform – but also beyond the nation’s pocket, and with QE devaluing the efforts of the prudent, why shouldn’t people find ways of doing what they can to hang on to their wealth? In an encouraging addendum to The Daily Telegraph’s story, an online poll shows 68.36% of respondents agreeing with the statement that “It’s not up to me to force other people to pay their tax”, while 18.98% agreed that they were “not willing to pay more if [they] can get a good deal with cash”.

In other words, prudence is valued. Savings, trying to do well for oneself and one’s family, are only regarded as “selfish” in the moral vacuum that the Welfare state creates. What a long way from the ringing endorsement of individuality and wealth creation that Gladstone made: “Let the wealth of the people fructify in the pockets of the people.”

There is a particularly ugly aspect to this move by H.M.R.C., which is very worrying in constitutional terms: the Customs and Excise, being the body that raised the King’s money, has always had stronger, almost extra-legal powers, than the Inland Revenue, the distinction being that Customs was practically a police force, founded in the days before income tax and granted powers to, for example, deal with smugglers. It was always a concern that VAT had been deemed a Customs’ matter; now given the merger of the Revenue with the Customs by Gordon Brown, there was always the possibility that this was a way of granting an extension of the sort of powers Customs officers enjoyed to the Revenue. And the remarks quoted above, including references to income tax, suggest that this indeed is what it happening….

Monopoly?

But let’s suggest a deal, taking our cue from the Permanent Secretary for Tax: those who operate in the cash economy shouldn’t complain of austerity – well, if they don’t complain, will they be left alone? After all, their activities may in their own small way help revive the economy.

And if the government can simply print money to pay its debts, will the Revenue have cause to complain if the rest of us decide to pay our taxes in Monopoly money?

(The manufacturers of Monopoly print more money every day than the U.S. Federal Reserve – although not, perhaps, for much longer……)

By Mark Rogers

The Federal Reserve’s holdings of gold are not only non-existent, contrary to what many people understand, they do not even amount to paper gold.

In 1933, the first year of his presidency, President Roosevelt ordered the seizure of private holdings of gold (with some exceptions for jewellery and dentistry); this was followed in 1934 by the confiscation of gold from the banks. This was allegedly in response to the shortage of gold caused by the great depression.

In 1934 the United States fixed the dollar price of gold at $35/troy ounce (devaluing the dollar thereby). This became known as the “statutory” or “legal” price. In spite of all that subsequently happened, the U.S. refused to consider an increase in this price of gold, not the establishment of the Bretton Woods agreement and the International Monetary Fund, nor the devaluation of the pound sterling in 1949 which in effect raised the price of gold in the sterling area without a rise in its price in the dollar area.

In the 1950s the volume and value of the world trade in gold kept on increasing, leading to the idea that a universal rise in the price of gold could be brought about by its dollar revaluation. The growth of the world’s monetary gold reserves as then valued fell far below the increase in the current volume/value; thus, it became clear that the annual yield of new gold (at the same valuation) could not express the increasing volume of goods produced. The U.S. gold reserves had by now fallen to well below the level at which they guaranteed paper money. Nonetheless the U.S. price of gold remained the same.

Decoupling the dollar from gold

In 1972 the “statutory” price was adjusted to $38/ounce and again in 1973 to $42.22/ounce. These movements were followed in 1975 by the revocation of the prohibition on ownership of gold by private parties.

Amongst the banks that had had its gold reserves confiscated was the Federal Reserve – the Treasury was the authority which performed the confiscation. The fact that the Federal Reserve is quasi-independent of the government (somewhat analogously to the Bank of England before it was nationalized in 1946), explains the apparent anomaly of the state confiscating its own reserves.

The Federal Reserve was obliged to sell its gold to the Treasury at $20.67/oz, in return for which it received gold certificates worth around $3.617 billion.

So why does the idea persist that the Federal Reserve has any gold reserves at all? Because the deal done with the Treasury issued in those certificates just mentioned, which is why the Federal Reserve lists them, as the “Gold certificate account”, in its accounts, consistently valued at the final price of 1973.

The Fed’s “paper gold” not even paper gold

Dr Ron Paul, member of the House of Representatives, is the champion of getting the Federal Reserve to be audited by the Government Accountability Office: that task has always been undertaken by the Federal Reserve itself (surprising as that may seem). Hitherto his efforts at getting this into law have met huge resistance and evasion by the Federal Reserve (which is not surprising at all).

On the first of June, 2011, testimony by Scott G. Alvarez, General Counsel, and Thomas C. Baxter Jr., General Counsel, Federal Reserve (formal testimony here) before the Subcommittee on Domestic Monetary Policy and Technology, Committee on Financial Services, U.S. House of Representatives, Washington, D.C., of which Dr Paul was the Chairman, on Federal Reserve Lending Disclosures, exposed the nature of the “gold certificate account” in exchanges between Dr Paul and Mr Alvarez.

Crucially, it transpires that these certificates are not even claims to the actual gold that the Treasury confiscated. Said Mr Alvarez: “No we have no interest in the gold that is owned by the Treasury. We have simply an accounting document that is called gold certificates that represents the value at a statutory rate that we gave to the Treasury in 1934.″

In a fascinating analysis of this extraordinary statement, GoldNews.Com discusses what this means in terms of the relationship between the Treasury and the Federal Reserve: “The Treasury, however, in a desire to realize the value of the gold without selling it, used their gold as collateral against gold certificate issuance to the Fed in exchange for fresh cash for the Treasury to spend. The Treasury is able to print as many gold certificates as they choose, under one restriction from the Gold Reserve Act: the amount of gold certificates outstanding shall at no time exceed the value of gold held by the Treasury, priced at the statutory rate. This meant any increase in the value of the Treasury’s gold could be matched by printing gold certificates and those certificates could be used to acquire new Federal Reserve Notes (dollars) from the Fed.”

This is Quantitative Easing with a vengeance! In order to have more money to spend, the Fed is asked to print more notes, in return for which, and in order, presumably, not to disturb the “statutory” price recorded on the Fed’s accounts, the Treasury then prints more gold certificates.

An upshot of this is that the dollar is worth a good deal less than is assumed. And a corollary of this is that the manner in which the Treasury acquired the gold and its subsequent valuation as “gold certificates” would explain why, as noted above, the U.S. insisted on maintaining the dollar price at $35 for so long: it was an accountancy exercise and no more, and continues as such to this day.

Does this, at least in theory, mean that should there ever be a deal whereby the Fed buys its gold back from the Treasury, it would do so at that “price” on its books?

The analysis of this extremely complicated state of affairs by GoldNews.Com can be found here (Part One) and here (Part Two, from which the substantial quotation above has been taken).

Credit no measure of true value

Here, in the light of the above discussion, is a sobering observation made by C.H.V. Sutherland, then Keeper of Coins at the Ashmolean Museum, Oxford, in “Gold: Its Beauty, Power and Allure” (published by Thames and Hudson, 1969): “Collapse of the gold standard was followed by the era of credit currency. We accept a bank-note for the payment of £1, but in accepting it we receive in fact only the bank’s promise to pay £1. We accept a cheque, similarly; but a cheque again is no more than its drawer’s promise that his bank will pay us another bank’s promises. The growth of ‘money’ in this sense – and of course it is not money at all, in any true sense, but an extension of credit – is one of the most remarkable features of economic life since 1914 [emphasis added].”

There is considerable historical irony in the fact that President Roosevelt ended Prohibition in 1933, only to enact another prohibition on the private ownership of gold, with consequences which are still unravelling in the “current” financial crisis: I say “current” because the problems of paper money have been unravelling ever since the decisions about gold related above were taken – just as the same President’s New Deal, with its state-backed savings and loans funds, is a fundamental cause of the subprime crisis.