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Archive for May, 2012

WHAT ARE BANKS FOR?

Wednesday, May 30th, 2012

By Mark Rogers

At the first bookshop I managed when I settled in London in the mid-seventies we had our own banking system. It was called a safe. A very large and very solid safe.

Most sales were paid for in cash or the occasional book-token. Book tokens were redeemable for new tokens to be sold for cash. We had a business bank account for the purpose of paying our suppliers, into which were paid any cheques we had taken (usually for large purchases), supplemented by cash to cover supplier invoices. For the rest, all the staff were paid weekly in cash, and the cash to cover wages, petty expenses and second hand book purchases was held in the safe. It was secure and meant that trips to the bank were kept to a minimum.

In those days personal accounts were not as widely held as they are now. It is impossible to imagine doing without a bank account these days: online shopping whether it be for groceries from your local supermarket or global purchases on eBay, for example, simply could not function without a bank account.

This means that banks are now indispensable. To what extent has mass banking driven some of the technological changes we are experiencing, changes which make banking easier? Digital money is one of the most important of these changes – and the one that will have already had the alert reader saying: hang on…

Inflating “assets”

Exactly. Whether you keep your money in cash at the bank or in a safe or some convenient hidey-hole at home known, you hope, only to yourself, it is fiat money. As such it is permanently subject to inflation.

It should be borne in mind that when governments boast of controlling or holding down the rate of inflation, rather than killing it outright, what is meant is that they are controlling the money supply, which includes low-level printing of paper money, or, nowadays, switching electronic money on, so that gradually over time prices creep up. In this year of Jubilee, it is worth noting that in 1952 when the Queen came to the throne, today’s pound would have been worth just four pence – or, a 1952 pound would be worth just over £24 today!

In a crisis, this is called Quantitative Easing (perhaps to make it sound as if something constructive was being done) and the amounts are huge, but, like background noise, fiat money is always seeping out of the central banks’ printing presses or electronic data bases.

An important confusion

Detlev S. Schlichter, in his important book, Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown, makes a crucial observation.

“Modern societies around the world are now running their economies on perfectly elastic money. Most people today do not appear to see a problem with this. Paper money works. … Every day others in society accept our paper money (or electronic money) in exchange for goods and services. … Today, we pay increasingly electronically or by using our credit cards. Obviously, this constitutes progress. Compared to previous societies we are richer and economically and technically more advanced. It is no wonder that we use a different and more sophisticated monetary infrastructure.

However, this view tends to confuse innovations in payment technology with the basic construction of a monetary system [emphasis added].”

This vital point is overlooked, and it is perhaps overlooked because we have forgotten what banks are for.

We saw here how banks emerged as a secure store for wealth already created, which provided a means of accessing its value without actually having to transport the physical wealth which was contained in the gold and silver coins which were the monetary system at the time. In essence, this remained the function of banking over time. Banks were facilitators, and in a monetary infrastructure where wealth was real and tangible, not only was safe storage facilitated, but also prudent loans backed by real assets.

This changed with the invention of fractional-reserve banking, where banks made loans which floated free of any assets to back them: this was a system without reserves, and wealth creation in the form of credit became much riskier. From this, it is an easy step to see banks as active components of an economy rather than strategic safeguards. And of course this view has underpinned the removal of the gold standard.

Bankers: the Economy’s Red Queens

The biggest myth of the paper money syndrome is the belief that recessions should not, could not happen. That they do is rather simple-mindedly attributed to an insufficient level of intervention. One of those who propose this simple-minded solution is Larry Krugman, a professor of economics no less, and a Nobel Prize Winner to boot, author of End This Depression Now!, just published, in which this same old Keynesian tripe is rehashed.

On this model, not only are banks made utterly crucial to the fortunes of the economy, the interventions that they must constantly make to avert risk increase, the sums involved increase, bankers work longer and longer hours just to keep running on the same spot, like the Red Queen in Alice Through the Looking Glass. Only the same spot keeps moving and the concentration they must bring to the task of staying on it, makes them oblivious to the fact that soon the spot won’t be there any more… It is this desperate running, of course, that justifies their large salaries: but an illusion is still an illusion, and paper money is no more than a very expensive conjuring trick. Not what our forefathers would have tolerated in their bankers.

The old reputation of banking being a solid and really rather dull profession has been jettisoned: we all live on the edge now, and edges are things one falls off…

LIPASTOCK, An Investment in the Future

Monday, May 28th, 2012

Here at Goldcoin.org we’d like to share a story of hope and determination that has led to the International Music Festival, LIPASTOCK.

TRACT

LIPA is the Liverpool Institute for Performing Arts founded by Sir Paul McCartney & Mark Featherstone-Witty (the current CEO and Principal) in 1996. LIPA is housed in Paul McCartney’s old school which underwent a multi-million pound renovation to transform it into a state-of-the-art performing arts higher education facility.

LIPA provides education and training for the main skills needed for putting on a show (performers and those who makes performance possible), uniquely blending specialist and generic skills.

This Academy of excellence is dedicated to all aspects of the Performing Arts.

LIPA offers degree courses in Acting, Community Drama, Dance, Music Theatre and Entertainment Management, Music, Sound Technology, Theatre and Performance Design and Theatre and Performance Technology. We also run full-time one year Foundation Certificates  in Performing Arts (Acting); Performing Arts (Dance); Performing Arts (Singing); and Popular Music and Sound Technology.

The courses are structured to perfect their talents and prepare them for a career in the Entertainment Business. Most recent figures have shown that over the most recent four year period, 96% of LIPA’s graduates are in work three years after leaving.

LIPASTOCK – the Idea

Two of the students, Pat O’Shaugnessy and Max McGowan hatched a plan to organise a Festival at the end of the academic year to bring together the collective talents of their peers and stage a Woodstock style festival. Eagerly encouraged by Max’s Dad who happened to be visiting they decided it would also be a good idea to stage this in the warmth of the South of France, where Max lives.

The idea quickly crystalised around the date of the 21st June as this is the “Fête de la Musique” in France which is a National celebration of music, all day and all night.

ALEXCAPTUREVIDEO

CLICK IMAGE FOR A VIDEO INTRO TO LIPASTOCK

Although the idea was as recent as November 2011 the two lads adopted  this as their course project and have managed to set the whole thing up for Saturday 23rd June 2012.

Their idea was also to create a cultural exchange with the many nationalities of LIPA students and the local population in France.

They also wanted to include some bands from the local scene as this had helped Max earn his place at LIPA and because many of them have been to visit LIPA & bonded with the students.

Of course to put on a Festival like this requires lots of planning and funding.

Find a sponsor!

Sponsorship is hard to find in these times of economic crisis and so the lads real stroke of luck was the sponsorship they secured from our good friends at LinGOLD.com, AuCOFFRE.com and VeraValor.com.

“Their support has been invaluable”  said Pat, “ and without it we wouldn’t be able to put the Festival on”.

Max added, “the cool thing about it is they’re really big fans of what we do and they wanted to help us because we share the same philosophy of true values”.  “These French and Swiss based companies have really given us the chance to stage the first LIPASTOCK and realise our dream. UK sponsorship has been much more difficult to find and although we tried many well-known names like Virgin, who share a similar philosophy, we didn’t even get a reply to our dossier requesting help.

LIPA have also contributed and the Principal, Mark Featherstone-Witty and his staff have been immensely supportive of this project.

The Event

This will be staged in the considerable grounds of a Youth and Cultural centre in St Ferréol, Bon Encontre (47240) which is near Agen in the Lot-et-Garonne, South West France.

The many talents on stage will include groups like Gaby & the Gents, Highfields, Manukah, Wonderlust, JazzHands, acoustic surprises and local bands. You may check out the talent by visiting their facebook page which has videos and links to their music – http://www.facebook.com/Lipastock.

Here are a few tasters to get you in the mood and hope to see you there.

Gaby & the Gents

Max McGowan

Graham McKee

This not-for-profit event has been carefully planned and supported also by the local French community who have rallied to the call and will provide transport and accommodation for all the students.

The French organisers have formed the LIPASTOCK Association which gives them a legal structure to apply for authorisations, licences and insurance.

The French are passionate about live music and this event should be an absolute hit with the local community as it also forms part of their “Fête de la Musique” celebrations.

If you require any further info do not hesitate to contact them by facebook or leave us a message and we will forward it on.

In the meantime we wish them every success and thank them for their time in providing all this information.

It is so refreshing to have the opportunity to report on positive aspects of humanity and to help promote this wonderful event aimed at all the family and Music lovers everywhere.

Vive la Musique as they say in France and enjoy.

French coins: The Cérès Family

Friday, May 25th, 2012
20F Napoleon Cérès Reverse

20F Napoleon Cérès Reverse

The Cérès are among the most unusual of gold coins in light of their history. Though certain types are somewhat mundane, others are extremely rare and make the Cérès one of the most sought-after coins for numismatists.  Here is an introduction to these small coins which have all the markings of a great one!

Brief introduction to the coin

The Cérès, as the name suggests, displays the head of Ceres on its obverse, the Roman Goddess of agriculture, harvests and fertility and a symbol of the Republic.  She is represented from her right profile, wearing an earring, a pearl necklace and a braided chignon in her hair attached with a ribbon and in which seeds, acorns and oak leaves are placed.  This face is framed by fasces lictoriae featuring the hand of Justice on the left, behind the nape of the neck, and a laurel branch on the right, under the chin.  A 6-sided star is above her head.  The title is “Republique Française” (French Republic).

On the reverse, which comprises the words “Liberté, égalité, fraternité” (Liberty, equality, fraternity), the value of the coin is displayed (5, 10 or 20 Francs), between an olive branch (on the left) and an oak branch (on the right) linked at their base by a ribbon.

The 5 Franc Cérès: an extremely rare type!

The numismatists who have the immense privilege of coming across a 5 Franc Cérès can die happy: they hold in their hands one of, if not the rarest gold coins in the world!  Unobtainable in B, TB or TTB condition, it can be found in SUP, SPL or FDC.  There exist only 30 specimens in all for the year 1878 and 40 for the year 1889.

The reason for this extreme scarcity?  A coin which was destroyed as it contravened the Latin Union convention – a convention dating from 1865 aimed at unifying the currencies of France, Belgium, Italy, Switzerland and later Greece in 1868 – which prescribed that, among other things, 5 Franc coins be made of silver and not gold!  Indeed, at that time, as astonishing as it may seem, the “gold of the poor” took precedence over gold before being heavily devalued in 1871.

The 10 Franc Cérès: a little gem for numismatists

With just over 3.7 million specimens minted, the 10 Franc Cérès is a little less rare than the 5 Franc Cérès.  Since one can easily find it in B, TB and with more difficulty in TTB condition, anyone who finds it in SUP or SPL condition should be pleased.  As for the FDC, it is unobtainable for the 10 Franc Cérès of 1850.  To give you an idea: the 1850 10 Franc B sells for approximately 70 €, whereas the fleur de coin can reach €3,000.

The 20 Franc Cérès: quintessence of the IInd Republic

More than 17 million 20 Franc coins were struck between 1949 and 1951.  The quality of strike is quite exceptional.  On the other hand, this coin is difficult to authenticate.  It is the condition of its preservation that dictates its authentification.  One must concentrate on the last leaf on the right of the crown and the cheek of the face to differentiate the SPL from the FDC.  Like all gold coins from this period which were in circulation, this series has three different surfaces between the obverse and the reverse: glossy, matt and cameo.

The Cérès: collector’s item or great investment?

Both!  The 5 Franc Cérès, in spite of its extreme rarity which classes it amongst the great coins of true numismatics, as in the case of the 10 Franc FDC, can nevertheless be a good object for investment for those who have the means and the immense privilege of being able to purchase it!  Indeed, like a work of art, it maintains a quite stable price, hence protected from fluctuations in the market price of gold.

As for the 20 Franc Cérès TTB in particular, like the Napoleon III or the 20 Franc Marianne Coq, it is an ideal gold coin for investing in physical gold, its price being around €170.

DEBT AND DEMOCRACY

Wednesday, May 23rd, 2012

By Mark Rogers

Having looked at the recent elections in France and Greece (here and here), and raised questions about the political outcomes and their effect on the euro and the EU as a whole, it would be pertinent to ask what part democracy based on universal suffrage plays in economic decline.

To blame the economic consequences of the euro and the welfare state solely on politicians would be mistaken. After all, the electorate votes, and therefore must take some responsibility for putting into effect the policies for which they vote. Even if the mismanagement and over-reach of government cannot be directly laid at the feet of electorates, the general tendency of what their votes tell the politicians what it is they, the voters, want is certainly something for which voters are culpable.

The current decrying of “austerity” is a measure of this, a considerable proportion of the French and Greek electorates voting for “anti-austerity” measures. There is much confusion as to what “austerity” is in practice: a sharp analysis by Peter Martino on the Gatestone Institute’s website makes this very clear.

The irony is that the thrust of austerity is correctly understood – and rejected by very large numbers of people in Europe. The measures themselves, as Mr Martino points out, are anything but austere. In making the reduction of deficits through increased taxation the focus of policy is only to reward profligate governments and encourage the failure to think through what is actually happening, as I have frequently pointed out.

When Mrs Thatcher was campaigning for election in the late seventies, she was much abused for using homely analogies about domestic housekeeping. Her ever-so-sophisticated critics chortled at her supposed naivety in not realising that a state is not like a household, so her constant invocations of the housewife who cannot spend if her purse is empty were mocked as exposing a shallow, as well as, somehow, a nasty mind.

Well indeed, a state is not like a household in this sense: it takes real statesmanship and foresight to run a state as if it is a household. Politicians who decide that, given that a state is not a household, they are therefore licensed to make free with the state’s economy will soon learn Mrs Thatcher’s lesson – that is, if they are disposed to learn…

The Greeks are going back to the polling booths in June, but it is not likely that the new votes will change much: what needs to change is the electorates’ attitude to the boondoggles of European policy. Doubtless there are many Greeks, as there are many voters throughout Europe who do not bother to vote, which in itself is a vote of a sort. One must hope that a sufficient number of them are like the Greeks in this story, who, having taken the measure of the disaster, have quietly foreseen that there are no easy solutions and have therefore set up alternative currencies and friendly associations to make ends meet.

Greece is commonly referred to as the birthplace of democracy; democracy has over the centuries come to be defined in many different ways, so much so that it is pertinent to ask: were the ancient Greeks democrats? And is democracy the same as freedom? To be continued….

THE GOLD STANDARD RETURNS

Saturday, May 19th, 2012

By Mark Rogers

Is the Gold Standard set to make a return and is that return inevitable?

The answer must be yes to the first question and an interestingly qualified yes to the second.

There is little to no consensus amongst politicians and academics that the crisis we are passing through is a crisis of paper money, but even the most dyed-in-the-wool quantitative easer cannot but notice that QE is (a) a stop-gap and (b) that the gap refuses to be stopped.

Academic Blindness

Part of the perhaps inability to see that this is the paper money crisis to end paper money crises, is the hold that the consensus as to what caused the Great Depression has on such a wide range of academics and policy makers, the most important exponent being Ben Bernanke.

While faulty analysis is to be blamed for the position that Bernanke assigns to gold in the Great Depression, this position is also the result of the fallacy of assuming that the coincidence of two things necessarily entails cause and effect, in this case that because the gold standard existed at the same time as the Great Depression, ergo the gold standard caused the depression.

As James Rickards points out in his exceptionally informative book, Currency Wars (Portfolio/Penguin, New York, 2011), Bernanke’s argument depends on the observation that “[c]ountries that left gold were able to reflate their money supplies and price levels, and did so after some delay; countries remaining on gold were forced into further deflation.” (Bernanke, “The Macroeconomics of the Great Depression: A Comparative Approach” Journal of Money, Credit and Banking 27, 1995). Rickards extrapolates: “Gold was at the base of the money supply; therefore gold was the limiting factor on the expansion of money at a time when more money was needed. … the evidence showed that gold had helped to cause the Great Depression and those who abandoned gold first recovered first. Gold has been discredited as a monetary instrument ever since. Case closed.”

But, while this academic case against gold is proved beyond controversy in the minds of policy makers, it is simply untrue. It was policy decisions that caused the problems: “As gold flowed into the United States during the early 1930s, the Federal Reserve could have allowed the base money supply to expand by up to 2.5 times the value of gold. The Fed failed to do so and actually reduced money supply, in part to neutralise the expansionary impact of the gold inflows.”

This then was what the Fed chose to do, and as a policy option was actually independent of the supply of gold. “It is historically and analytically false to blame gold for this money supply contraction.”

Bernanke’s Real Fear of Gold

“One suspects that Bernanke’s real objection to gold today is not that it was an actual constraint on increasing the money supply in the 1930s but that it could become one today. … [He] may want to preserve the ability of central bankers to create potentially unlimited amounts of money, which does require the abandonment of gold. Since 2009, Bernanke and the Fed have been able to test their policy of unlimited money creation in real-world conditions.” [Emphasis in the original.]

With the Bank of England recently following hard on the heels of the Fed. Pun intended. And one should note that the word “creation” in this context is an irony… but one that is almost certainly lost on those with an academic agenda to pursue: Mr Rickards’s last sentence above is a masterpiece of understatement!

Rickards summarises his conclusions on the false attribution of the Depression to gold thus: “the crime of tight money was not committed by gold but by the central bankers who engaged in a long series of avoidable policy blunders.” (Readers are well advised to get hold of Mr Rickards’s book: his analysis of the inaccuracies of the enemies of gold is extremely well done – as is the rest of this very important book.)

Which brings us up to date: avoidable blunders by policy makers. For how long have we been reading headlines that essentially declare Greece/Italy/Spain/the euro/the EU all to be teetering on the brink, when it is quite obvious that they are all well over the cliff and clutching at clouds to reassure themselves even as they plummet.

How does the current situation presage a return to the gold standard?

The gold standard must return, and in one of two ways. Either it is deliberately courted through enquiries as to the best form it should take and how it should be introduced, whether unilaterally at first, or in some form of international cooperation, or a unilateral introduction leading to other economies tagging along, pegging their currencies to a revitalised dollar anchored to a clearly defined gold standard… the options are adroitly canvassed by Mr Rickards.

Or, in the interestingly qualified yes to the question as to its inevitable return, it is reintroduced on the sudden as part of the emergency procedures that the President of the United States adopts to halt the chaos resulting from the unwillingness of politicians and economists and central bankers to do anything about the paper money crisis until it is too late.

Mr Rickards is extremely good on the possible agendas that will result from the present impasses: paper, in the form of multiple reserve currencies and Special Drawing Rights; Gold; or Chaos – with gold making its back door entrance as an emergency measure because by that time nobody will be able to stop it. And true to that emergency requirement, of course, gold will make its entrance by way of confiscation and the prohibition of all exports of gold from the States.

So if gold is going to make a comeback anyway, why wait? Why not prepare for its orderly reintroduction now, which will have the effect of avoiding the chaotic melt-down of value that will otherwise ensue?

“A studied, expertly implemented return to the gold standard offers the best chance of stability but commands so little academic respect as to be a nonstarter in current debates.”

In other words, there are none so blind as those who will not see.

Currency Wars

Mr Rickards has written an immensely important book. He is dry and unalarmist; he is not scaremongering – the situation is already too scary for that. His recommendations are measured, and as a plea for a change of mind and heart are couched in terms of compromise – for example, he insists that the only way to defeat the Bernanke thesis is for gold advocates to take it seriously and argue the evidence on its own terms, something which he does brilliantly.

He is also illuminating on how the gold standard can live comfortably with occasional central bank manipulation of the money supply – indeed his argument with Bernanke shows just how it was the failure to do this that caused the problems that Bernanke and co. blame on gold – but in such emergency circumstances that gold will still act as a constraint on the possible solutions – i.e. will keep the interventions in check. As well as, I would say, provide the yard-stick by which such interventions can be properly evaluated as necessary.

He even suggests reviving Keynes’s suggestion, made at Bretton Woods, for an internationally gold-backed currency; he goes further and suggests that Keynes’s rather inelegant name for this substance, the “bancor”, could be adopted. Now there’s an olive branch for you.

If only Keynes had not held all his other prejudices against gold… his thinking seems to be that gold was a barbaric relic perhaps in so far as it supported nation states, but was alright as the support for a supra-government supervised international currency of last resort. Well, the European Union is teaching us a lesson about supra-government international arrangements that we should heed before the chaos that Mr Rickards so calmly describes engulfs us all.

[At a later date, I will continue reviewing the whole of this illuminating book.]

The Mint Museum of Colombia located in Bogota’s La Candelaria district.

Thursday, May 17th, 2012

From an original article published at L’Or et L’Argent.

Museum of Money, Bogota

Museum of Money, Bogota

There are several institutions throughout the world which are part of the historical numismatic memory  –  without which we could not enjoy the collections nor any interest in investing in those precious coins which safeguard our heritage in the way that gold coins do. Today therefore we will touch upon the history of Colombia’s Mint Museum.

For those passionate about numismatics travelling to Colombia and in particular to Bogota, there is one place not to be missed: the Mint Museum, located in the working-class district of La Candelaria.

Latin American countries have always had a very strong link to the history of gold – therefore we shall dedicate some space to them, sharing their history and an analysis of their coins, those which are most representative and much valued and appreciated by their inhabitants.

King Felipe III of Spain ordered the foundation of this emblematic Mint Museum in Santa Fé de Bogota and entrusted the works to the engineer Alonso Turrillo de Yebra.

First coins struck

First coins struck (BANREP)

The striking of coins began in 1621 in one of the very first buildings constructed in Bogota. The history of this Mint Museum is very important since it is the place where the first gold coins of the Americas were manufactured, the “macuquinas”, which were named ‘doubloons or mintings’.

Some were struck in Cartagena and others in Santa Fé de Bogota. It was only a decade or so later that the striking of gold coins was authorized in the Mint Museums of Mexico and Peru.

Its infrastructure improved gradually, going from a small, simple blacksmith’s workshop located on only one level at the current Museum, endowed with a beautiful Andalusian-style architecture with a touch of provincial colonial period features.

Santa Fé de Bogota was the capital of the Spanish Vice-royalty of New-Grenada, home to the viceroys, the judges of the Royal Court, the Clergy, the Captains of the Tercios of Spain and of course to Gonzalo Jiménez de Quesada, its founder.

The amount of work becoming increasingly important in terms of volume, the directors of the museum found themselves under increasing pressure over time to reform it in order to meet requirements. Half a century after its inauguration, it was Felipe VI himself who ordered its expansion – in the beginning, the striking was highly traditional, but following the implementation of various changes, machines started to be used.

Their treasures were much coveted during the riots which took place in the Colombian capital, but they fortunately survived all attacks – including natural ones, notably during earthquakes.

Nowadays, we can enjoy the same museum as that of several centuries ago, which was re-inaugurated by Viceroy Solis in 1756.

Bogata’s Mint Museum is recognized as a National Monument, a title which was granted in 1975 following the decree of 1584, currently dependent upon the Bank of the Republic of Colombia.

Within, one can follow all the most important events of the country’s history, the history of the museum and all the coins and notes manufactured throughout these centuries.

Gold: The Terminator amongst currencies: “I’ll be back”

Tuesday, May 15th, 2012

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.

TAX, DEBT AND THE PRICE OF WELFARE DEMOCRACY

Monday, May 14th, 2012

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 which the fissiparous nature of the political system was dangerously apparent, 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.

HOW LONG DID IT TAKE HOLLANDE TO DO A SARKOZY?

Wednesday, May 9th, 2012

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 a recent 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…

GOLDEN ENCOURAGEMENTS

Thursday, May 3rd, 2012

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.

GOLD: MARKET ABUSES AND FORGERY

Tuesday, May 1st, 2012

Following on from our reflections (here and here) on the problems at the South African mint, another consideration has arisen: are the dud krugerrands that have come to light dud forgeries? That is, have some stamps been stolen from the mint (it should be remembered that the design of the krugerrand was supposed to make it very difficult to forge)? The forgers would be attempting to put onto the market coins that in all respects were identical (weight, specification) to the genuine article, just made from some cheaply acquired black market gold. We hope to find out more this month with the promised revelations in Forbes Africa.

Meanwhile, our friends at L’Or et L’Argent (for the original article: here) have come up with these findings about market abuses and forgeries:

Gold agencies are checked by customs!

There is currently an intensification in the auditing of the gold market. Faced with abuses the French authorities are (finally) ringing the alarm bells: customs officers have taken up   energetic measures. But what are their priority targets? Agencies dealing in the sale/purchase of gold!

In an article on April 18th, 2012, the newspaper Sud Ouest announced numerous “raids” organized by the regional customs offices of Bordeaux on the shops of gold buyers. The objective behind these unannounced visits is to check the compliance of the corporate name and observance of the strict regulation monitoring the trade. Customs officers are particularly vigilant when it comes to compliance with the law of July 29th, 2011 which prohibits paying for the purchase of gold in cash (although see here for an alternative concern).

Gold, a corollary of trafficking

It is clear that with the explosion in the price of gold over these last few years we are not short of people setting a bad example in this market.

The traceability of the noble metal remains a significant problem which gives rise to all types of abuse. It is extremely difficult to authenticate the source of gold which can be re-melted at will. These agencies take part only too often, with or without their knowledge, in the illegal trading in gold arising from burglaries in particular. They then, perforce, act as real platforms in the trafficking of the metal…

If we take just one example: the daily newspaper Sud Ouest mentions shops for the buying/selling of gold which had opened wholly illegally: without a declaration and certificate from the trade registry. In charge of one of them? An “ex-burglar” – as simple as that: a wonderful switch of employment!

We should not be quick to stigmatise them, but we must remain very cautious with regard to these agencies which are not very particular about the source of the gold and which appear to condone the abuses of the market…

The trafficking of gold is thus not a myth and the arrest of a gang of forgers in Libya last March clearly illustrates the extent of the phenomenon!

FRANCAIS ESPANOL ITALIANO CHINESE

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Thoughts
"For a mountaineer, the important things are the effort, the posture and the muscles. The rope that holds him serves no purpose when everything works but it gives him a sense of security. In the same way, all gold does is ensure confidence; it's a safe haven."