Some thoughts on the return of gold as a means of exchange from L’Or et L’Argent (the original article may be read here).

Payment for Iranian oil in gold

More than a trend, there is a strong signal being sent: gold is returning to the markets as a currency of exchange. Thus, China, the largest importer of Iranian oil, follows in the footsteps of India and avoids the embargo imposed on Iran by choosing to pay for crude oil in gold. Because it decided to continue with its nuclear program, Iran saw sanctions imposed by the United States in late 2011. The oil embargo, which will take effect in June, prohibits payment for Iranian crude oil in international exchange currencies (Dollars, Yen, Euros…). Soon after, the European Union announced that it was also going to apply the embargo which will take effect in July.

Gold returns in trading

Although Iran does not represent a large percentage of oil imports to the US and to the EU, the same cannot be said for India and China which between them account for 40% of imports. India, which has a large demand for oil, has chosen to maintain its commercial trade with Iran by paying its bills in gold.

Recently, Forbes magazine reported that China was also intending to avoid the financial sanctions imposed on Iran by buying its oil with gold. China, the largest producer but also the largest consumer of gold, already imports huge amounts of the yellow metal (its imports tripled in 2011, to 428 tons). Such a decision will only amplify the economic effects on the price of gold.

Gold: exchange currency and political weapon

Gold, which is increasingly returning to the mechanisms of means of payment will also take a more political dimension and become a real weapon of war. These events confirm the most bullish gold market for years. In the same way that investors made wise choices by betting on gold since 2007, this also goes for today’s investors, when they will see the ounce crossing the $2,000 mark in the next few months.

 Gold has recently been undergoing a consolidation period – its price is below the value that in reality it should have. It is therefore the right time to strengthen one’s positions on gold, before the summer. Moreover, because of the presidential elections in the US next November, uncertainty over the economic future of the country will undoubtedly cause a new rush on gold… which will not stay at the current level of $1,640.

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…

By Mark Rogers

While there is much speculation that there are moves afoot in some countries to rein in the private ownership of gold (see here and here), it is encouraging to read the following story (originally posted at L’Or et L’Argent) about how Singapore is opening up its markets to gold. This is yet another move in the free Asian economies to strengthen their positions, a welcome strength in view of the economic turmoil in the developed world and in China, whose economic future seems very uncertain.

Given that the following article points out the strong position of gold in Hong Kong, readers might like to read this fascinating account of gold dealing there; amongst other interesting points is the note that the Chinese Gold and Silver Exchange Society is the world’s oldest gold dealing exchange. Gold and stability could have no sounder exemplification than the growth of Hong Kong as one of the world’s strongest economies throughout the twentieth century and still leading the way in the new millennium!

Singapore’s move comes in tandem with growing speculation amongst gold observers that there is a slow but sure momentum building up to a return to the gold standard. The financial turmoil in Europe and the erosion of the US economy is fundamentally a crisis of paper money and cannot continue without a major shift towards the kind of stability that a properly backed currency provides. This shift will come either when the relevant governments realise that such a resolution of their problems needs to be carefully managed – or it will be forced upon them if they continue to do nothing other than roll the printing presses, which will in the end precipitate a catastrophe of an order such that even they will not be able to deny the obvious.

I shall in the very near future be posting reviews of Detlev Schlichter’s Paper Money Collapse and James Rickards’s Currency Wars, which contain detailed analyses of how our present woes are the inevitable result of fiat money, and, in Rickards’s book, an outline of how a return to the gold standard should be managed.

Meanwhile:

Singapore bows before Gold

The world’s fourth largest financial centre is seeking to open itself to the gold market. Thus, it has decided that tax cuts will apply to precious metals including gold.

The Finance Minister Tharman Shanmugaratnam confirmed a month ago that an exemption would be made to the 7% tax rate, hitherto applied to gold and all other precious metals, in order to encourage growth in trade negotiations and in particular as an incentive for producers to participate in the market.

Singapore will thus be able to compete on an equal footing with other neighbouring markets open to the gold trade, the most important being Hong Kong where producers prefer to sell their bullion – free of tax. It is evident that having to pay a 7% tax in Singapore discourages investors. This measure is completely logical and fair since no kind of taxes should be applied to a safe haven investment – the latter being basically currency.

This reduction will be initiated as of next October – which prompted certain declarations to be made at the time this measure was made public, for example, `that an important producer has expressed a particular interest in opening a factory in Singapore in the light of the announced tax change’ and furthermore that there will be more gold trading companies present in the country.

Gold has risen sharply and this is why there is so much competition between countries which are putting in place strategies to meet current requirements. If Singapore wishes to compete with its Asian neighbours who have a significant advantage, it will be extremely advantageous for it to adopt this fully justified initiative which will enable the gold market to benefit from a fall in tax or an exemption. By maintaining high taxes, Singapore has risked putting off all potential investors – the latter being welcomed with open-arms in Hong Kong and Japan.

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?

By Mark Rogers

Needless to say, there is a great deal of concern about this story, first addressed on this site on Monday. Conspiracy theorists are in little doubt this is a government swindle, though leveller heads are pointing out that this is unlikely. Nevertheless, it has to be said that the Mint’s Media Statement is very cagey in what it says about the origin of the dud coins: the suspension of senior staff last December was because of “technical issues”, and the longer statement quoted in my last article doesn’t exactly link those “technical issues” to the dud proofs.

Nor does it link the criminal gang which stole R5 circulation coins to the minting scandal. While it is entirely understandable that the Mint does not want to debase the trust that any such institution must maintain and therefore does not want to say too much in case panic ensues, why, then, has it said anything at all?

The curator of modern money at the British Museum, Thomas Hockenhull, is quoted in The Washington Post, April 24, as saying that it is unusual for mints to go public on problems of this kind, while Tom Hallenbeck, the American Numismatic Association’s President is also quoted to the effect that glitches in manufacturing are to be expected given the volume of coins produced.

Exposed

An obvious reason for saying anything at all is damage limitation. Whatever is going on at the SA Mint was already under investigation by CNBC and Forbes, and with television exposure and Forbes publishing its findings next month, perhaps the Mint thought that its hand was being forced.

Undoubtedly, it has fallen between two stools as a result. The clarification that it had (somehow) produced under specification coins and not as TimesLive reported underweight ones, led at least one commentator to conclude that this was evidence of a deliberate skimming exercise by the Mint itself:  “A national mint producing investment grade gold coins for several months with debased gold is not accidental. Period.”

That, of course, still does not rule out infiltration by a criminal gang, but that having been said, that such a gang could get away with it apparently for so long says volumes about accountability and transparency in a major public institution.

Effect?

A claim is made here that dealers are buying Krugerrand bullion coins at a lower premium than usual, while raising the possibility that there will be a “flight” from the coin. Did it escape the mind of the author of the Mint’s statement that this might happen, and that if the proof Krugers fell under suspicion, the contagion might spread to the bullion coins?

Even the mere speculation by a writer with an “anonymous source” on an internet site might be enough, especially in the light of the generally gloomy picture of politics in South Africa.

All over the world, political elites are coming under fire: high taxation, monetary incompetence, the keeping of a self-serving distance from their electorates – general nannying while the ship of state flounders.

Even if the problems of the SA Mint were occasioned by such political incompetence, rather than a deliberate crime sanctioned at the highest level, the suspicion that is falling on governments everywhere is reason enough to seek safe havens elsewhere – indeed, they are vital as havens from the financial incontinence of the state.

Alternative

Whatever else is revealed, and happens in consequence, there is an alternative, again as mentioned on Monday: the Vera Valor. Not only is this coin of the highest standard of purity; not only is it audited to a high standard, and its source and manufacture of a high standard of purity; it also has another quality – it is a purely commercial venture, with no connections to malfunctioning government institutions and suspicious officials.

An occasional series of curiosities of Gold, its history and ideas about it.

By Mark Rogers

For all practical purposes, it has looked for a very long time as if the gold standard has become a curiosity; reviled by Keynesians, found impractical by politicians (I wonder why?!), alleged to be unworkable as a medium for regulating international trade – these are just some of the reasons that anybody who advocates a possible return to it is regarded as a crank. (This does not stop governments from wanting to get their hands on gold or control it, as witness the buying of gold in China, and the curtailing of paying for gold in cash in Europe.)

That is not the only reason why I am, at least for the purposes of this article, putting the gold standard in the category of a curiosity. Although Britain came off the gold standard in 1931, at least as late as 1934 candidates sitting the Final Examination of the Institute of Chartered Accountants were still being asked questions on the gold standard.

I discovered this in a small crib published in 1934 for such candidates: “109 Examination Questions on General Financial Knowledge together with Answers Thereto” by R. Byrne (A.C.A, A.S.A.A., F.C.I.S), published by The Coaching Association Ltd, London E.C.2.

Here they are, giving as good and succinct a definition as one could wish for, written with essentially practical business in mind:

Q.77 Explain concisely what is meant by the gold standard, and mention the various forms of the gold standard.

By “the gold standard” is meant a system of monetary management whereby the currency of the country has a definite gold value, even though the circulating medium is a paper currency or a metal other than gold.

Any country which is on the gold standard undertakes that its standard coin shall contain a fixed and unalterable amount of pure gold. It also undertakes that such standard gold coins shall be legal tender to an unlimited amount, and that its central agent (the Bank of England in this country) shall buy and sell gold at certain fixed prices.

Under the gold specie or circulation standard – which is the most perfect form of gold standard – gold coins are actually in circulation and the central bank undertakes to redeem any of its bank notes in gold coin. Gold coin, therefore, is readily available for the settlement of debt. This is the system which was in operation in this country prior to 1914. The gold bullion standard, which was in operation in this country from 1925 until 1931, is a more restricted form of gold standard. Under this system the central bank is bound to buy and sell gold bullion at fixed prices. In England, the Bank of England was compelled to buy gold of standard fineness at the rate of £3 17s. 9d. per oz., and to sell it – in bars of not less than 400 ozs. – at £3 17s. 10½d. Consequently, gold was always available for shipment in payment of debts, and the £ always had a value fixed in relation to these prices. The gold exchange standard is that adopted by silver-using countries. Thus, a country such as India would maintain the gold standard by purchasing the exchange or securities of a country which was on the gold standard, e.g. England. These securities could be sold, and with the proceeds gold obtained from the Bank of England. This gold could then be transferred to India’s creditors so that the rupee, although silver, could be definitely linked to gold.

Q.78 Explain how the gold standard operates to adjust the balance of international trade.

The gold standard maintains stability of the exchanges, for when the currency of a gold standard country is convertible into gold at a fixed price, the value of that currency in terms of the currencies of other gold standard countries will only vary within small limits known as specie points. Therefore, international trade may proceed without any fear on the part of the trader of loss owing to exchange fluctuations.

In order that the gold standard shall operate freely, it is necessary that no restrictions shall be placed upon the free movement of gold from centre to centre, and that there should be some relationship between the internal and external purchasing power of a currency.

When a country has an adverse balance, payment will be made in the form of gold. The loss of gold will result in a contraction in the volume of money, and prices will tend to fall. In consequence, the country exporting gold is able to produce more cheaply, and its exports tend to increase. Its imports, however, tend to decrease because of the higher costs of production prevailing abroad. In the countries receiving the gold the opposite results will be noticed, i.e. more imports and fewer exports, so that in due course the country which had the unfavourable balance will tend towards equality with the others, and will ultimately have a favourable balance, resulting in the receipt of gold.

The gold standard therefore operates as a corrective, whereby the course of international trade is facilitated by the transfer of gold.

If the gold standard is not permitted to operate freely, i.e. by an inflationary policy on the part of the gold-losing country, or by excessive tariffs on the part of others, gold will tend to move one way only, resulting in the exhaustion of gold supplies of at least one country, and the eventual abandonment of the gold standard by that country.

For good measure, Q.79 is What are the disadvantages of a paper standard of currency? the last sentence of the answer reading emphatically: It may be remarked that inflation has always occurred in cases where a paper standard has been adopted.

[The author is, amongst other things, a dealer in secondhand books and is always picking up little gems such as this crib on his rambles!]

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

… 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.’”

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 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.

The continuing furore over bankers’ pay led to the recent decision by Stephen Hester, the Chief Executive of the Royal Bank of Scotland, to forgo his contracted bonus, worth just under £1 million. Wayne Rooney, the popular footballer, earns that in five weeks.

Top executive pay in the banks hovers around £1.2 – £1.35 million; these salaries are complemented by bonuses, which are largely or entirely paid in shares. Total remuneration for bankers is therefore high (albeit that a large element, the bonuses, may be said to be nominal). But, compared to the remuneration of other high earners, is it excessive?

Wayne Rooney earns £18 million a year, a combination of pay, score bonuses and sponsorship fees. Yet he is not damned for greed. Pop stars and film stars earn as large if not larger incomes; in fact some earnings are so high it is hard to find out exactly how high they are – the singer Rihanna, for example, is rumoured to be worth £70 million but her total income and net worth are undisclosed.

We hear nothing, however, about the impulsive greed of such people. Footballers’ transfer fees, when they do cause eyebrows to be raised, are justified in the context of the competitive world of international football, and the explanation seems to be accepted, notwithstanding the huge discrepancy between what bankers and footballers earn. So whence the moral froth?

Footballers and singers and film makers give people pleasure; their fans follow them, paying to see their latest games or films or buying their latest songs. Their value as entertainers is taken for granted by their audiences; it is easy to understand what they do, thus their value for the individual is measured instantly as a factor of that individual’s enjoyment of their endeavours. It is equally understood that their earnings are simply an aggregate of the money that audiences willingly pay to be entertained by them.

Given that bankers exercise, and are expected to exercise, an enormous responsibility for the deposits and savings of their clients, why is this fact not equally well understood? Presumably because the actual workings of the banking system and high finance are not amenable to the sort of instant understanding that facilitates the benign regard in which entertainers are held. That is, the fury directed at bankers is born of sheer ignorance.

There is another moral issue that lies behind this debate, and that is the way in which poverty (and therefore wealth) has come to be defined in the affluent west: it has ceased to be defined in absolute terms. The Poverty Site states the case for “relative poverty” thus:
“The view that relative poverty is not important is a perfectly valid position to take – it is just not the view that the authors of this website, along with most other researchers, the EU, the UK government, and politicians of all hues across the political spectrum take. So, for example, the government’s target of halving child poverty by 2010 is defined in terms of relative poverty.”

At least this makes it admirably clear that “relative poverty” is defined politically, that it is a political tool, designed to justify high taxation and providing politicians with their raison d’etre. Such a definition therefore helps perpetuate our contemporary intrusive and anti-wealth creation political system. The politicians needed someone to blame when that system imploded – and footballers just didn’t seem to fit the bill…

France’s loss of the triple A rating sharpens the focus on what needs to be done to avoid the Eurozone’s crisis deepening further. What happens in France in the immediate as well as the long term future is therefore of concern to those outside France as well as those within. This week it was made clear that through increased IMF funding, the UK is likely to be contributing to the bail out funds, although the UK remains committed to countries not currencies. Of particular concern to English readers is the likely reaction in France to the required social reforms. And of course the flight into gold helps strengthen the hand of the wise investor.

The loss of the triple A is only one of the superficial symptoms of the trends of 2012. The economic crisis continues to deepen, which may well cause the price of gold to climb more quickly than envisaged, but not initially.

The consequences for the economy…

This is not due to having been warned of the possibility of such a loss. Since October last year, the agency Moody had been holding the sword of Damocles over Gallic heads.
The downgrading of the French credit rating from AAA to AA by the credit rating agency Standard & Poor’s has far graver consequences than would be implied by the speeches of leaders who wish to give reassurances, a mere few months ahead of the elections.

The interest rates at which France borrows and which are already twice as high as those of Germany will increase, to cover the risk of default. The first direct impact on the economy is the flight of investors and thus a fall in the CAC 40 index.
And for individuals
Higher interest rates on mortgages, tax hikes, diminished access to credit… the French will have to curb their spending. All the large companies in which the State has a stake (EDF, GDF, France Telecom, Renault, SNCF…) will see their financing costs increase, which inevitably will impact the expenditure of individuals, not to mention the degradation of public services.

Is the A lost forever?

Of course, France can regain its triple A, but how soon and, especially, at what cost?
The corporate VAT plan is only a tiny initiative when viewed in the light of the catastrophic impact of such a downgrading. According to Norbert Gaillard, consultant at the World Bank, France can only recover its AAA at the expense of important social reforms and “a drastic reduction in public expenditure”. Flexibility of the job market for greater competitiveness, extending the period of contributions to pension funds, elimination of the 35 hour working week… Are the French ready to give up their social gains whilst increasing their daily expenditure? Working more and earning less money?

The consequences for gold

As soon as the credit rating of a country is downgraded, the cautious markets fall, demand for gold increases and hence its price. Initially, the need of banks for liquidity can result in a massive withdrawal following the resale of credit and a fall in the price of gold on the markets, as has been already more or less the case since December. One should therefore take the opportunity to strengthen one’s position on gold and buy now because the secondary effect once the selling off stops will see: gold reach new highs this year breaking the $2000 an ounce barrier and beyond.

Fools or Gold?

Once the dominoes of Debt start to tumble the skies the limit but more importantly, when states fail, currencies collapse or sovereign debt strangles everyday life, where would you rather have your “money”?
In a tangible precious asset with perennial true value?
Or tied up in the worldwide web of debt derivatives, Special Purpose Entities (SPEs) and untraceable off-ledger accounts?

The choice is simple, give your money to the crooks you’ve been conditioned to trust with blind faith and risk losing everything or buy something solid that you own and trust yourself to manage it properly?

It’s what they call a no-brainer!

Watch the Ads they didn’t want you to see here – read on

There are many theories surrounding the manipulation of the Gold Market and the Gold Spot price but few doubt that it takes place, orchestrated by some greater beings that seek to control the money supply.

In a recent cynical twist, gold has been effectively censored off the air of a host of major US TV Networks working in collusion with the Obama administration and the Fed.
An established gold investment company recently made two TV ads to be aired across the networks. The ads feature caricatures of Obama, Bernanke and Pat Boone who narrates the story. The latter works for the company Swiss America and has long been an advocate of the virtues of gold versus dollars.
The first of the ads takes a humorous jibe at Bernanke’s Wall Street reputation for being “helicopter Ben” , ready to dump money on a crisis.

“made-up” reasons for ban?

The reasons given for rejecting the ads vary from ;
• Comcast who explained that it “doesn’t meet our standards on public symbol. The Comcast Public Symbol Policy apparently specifies that the “use of the name or likeness of the President of the United States and/or the Presidential Seal for endorsing commercial purposes must be authorized by the White House.”
• Fox News said the “representation of public figures is something we try to avoid.”
• CNN/HLN told Swiss America the commercials were “not appropriate for the current political landscape.”

Swiss America CEO Craig Smith said “The networks’ reaction shocked me,” Smith said. “It’s a threat to First Amendment rights when a commercial message is rejected not because it is inaccurate or misleading, but because it makes what is perceived to be a political statement the networks want to avoid.”

Smith told WND he was concerned that the networks were protecting Obama and Bernanke.
“All we are saying in these two commercials is what dozens of responsible professional economists are saying every day,” Smith said;

“Gold investment as a responsible diversification strategy when governments printing of fiat currencies with abandon risk unleashing inflationary principles.”

Inflationary pressures are building globally and no-one has an answer to them rising and the consequent economic impact.
It is a common known fact that storing gold through a crisis and inflation is the BEST way to protect your wealth value and its purchasing power. This has been the case for 6000 years.

Gold can never be worth zero – it has intrinsic value.
Fiat currency can become worthless – its only value is that of a piece of paper

The Ban backfires

However, the censorship has backfired as Google TV accepted the ads which will eventually be shown throughout the networks via Google TV!
These humorous videos tell a very straight and simple story and the only possible reason for banning them is because of how close to the TRUTH they really are – and that hurts the Politocrats who believe they are all supreme and mighty to judge over us, control us and bankrupt us.

They are so desperate to cling on to power they will do anything – except we are not the fools they take us for – are we?