Thursday, August 5, 2010

Be careful what you wish for: push for Fed to support $5,000/oz gold

If you don't know about Mr Chris Whalen and Institutional Risk Analytics, you really, really should. You'll see a link on every page of the Bankster Report (left side, under the half dollar) to two of Mr Whalen's sites: anyone interested in the down-and-dirty of the banking world will do well to visits these sites regularly and perhaps subscribe to IRA's publications.

Mr Whalen is a frequent guest on Bloomberg, contributor to the Financial Times, The International Economy, American Banker, Barrons, and many other publications, and even recently gave a speech at the Ludwig von Mises Institute (which earns him double-points at the Bankster Report!). He vehemently protested against the ridiculous Basel II capital requirements at least as early as 2004, and predicted the amazing risk-taking it would encourage; he was one of the most vocal prognosticators of the 2008 credit crash; he warned of the "Wall Street Derivatives Casino" at least as early as 2006. I'm stating all of this as an introduction to make it very clear that Mr Whalen is not a "tin-foil-hat wearin', anti-guv'ment gold bug"--not that there's anything wrong with being one of us "tin-foil-hat wearin', anti-guv'ment gold bugs," of course. Mr Whalen is a researcher and an analyst who calls it as he sees it--but only after having researching whatever it is extensively. That said, if you caught the July 19 interview between Mr Whalen and Mr Lee Quaintance of QB Asset Management, you couldn't be blamed for thinking you were reading something that was more-than-a-little-outside the mainstream.

So, how far outside that mainstream?

Well, how about $5,000 an ounce gold?

You read that right, and you can check it out for yourself: "Deflation: Should the Fed be buying Gold?" Be aware that the fellows over at QB Asset Management are, obviously, rather big fans of gold: last year, they took on Nouriel Roubini's now-famous "barbaric relic" statement point-by-point in a statement of their own. Mr Quaintance's conversation, therefore, with Mr Whalen is very, very interesting, and with hoovering $1200/oz gold, timely. Here are some pertinent excerpts, emphasis added:

"The IRA: So Lee, we see deflation as far as the eye can see but also rising costs. What's your view of the inflation/deflation debate amongst the chattering classes?

Quaintance: Credit inflations create asset bubbles that destroy the organic equilibrium mix between the factors of production. The deflation process curtails production and shrinks overall wealth but, ironically enough, redistributes a vast portion of the wealth that's left to the privileged few, mostly banks and government.

The IRA: We have created quite a mess.

Quaintance: A mess, yes, but, a predictable one nonetheless. Inflation and deflation are two sides of the same coin. Fiat currency and unreserved lending privileges are the root causes of all these imbalances. Throw in a bit of greed and malice too no doubt. The Austrians modeled it and predicted it. The Keynesians make excuses for it."

Boy, if that's not the truth: if Keynesians are good at anything, its making excuses for their consistently failing hypothesis that debt creates wealth. The almighty Deflation Monster has been the ubiquitous boogie-man since 2008, and has served as the justification for the $24.7 Trillion in various federal debt-based spending to prop up the zombie banks or "stimulate" the backwards and unsustainable debt-based--err, I mean "credit based"--American economy. Mr Quaintance hits this on the head perfectly in the interview with the following statement:

"Have you asked yourself why most people have come to believe that deflation is to be avoided at all costs? It's painfully obvious to us -- because it destroys the banks and handcuffs the politicians. For everyone else, it's seemingly a zero sum game. Why all the fuss?

Repeat: "because it destroys the banks and handcuffs the politicians." Oh, some handcuffs would be rather useful right about now, considering, as Mr Whalen points out, the trillions of dollars in spending (borrowing) currently underway to quell the boogie Deflation Monster. Mr Quaintance's startling solution, therefore, is to introduce some serious handcuffs. . . some $5,000/oz handcuffs. He states:

"We have some basic views on what should be done and it comes in two steps. First, there needs to be a coordinated global currency devaluation. We argue for the Fed to tender for private gold holdings at something like $5,000 per ounce and to maintain that bid/offer. This would be the true economic/regulatory function of a central bank and/or monetary authority."

But as we know, the Fed is hardly concerned with "true economic/regulatory function," and that was even more firmly made clear with the latest Bank Bill. As Mr Whalen points out:

"The IRA: The U.S. central bank has not had any gold holdings since FDR's expropriation of the private banking industry's gold in the 1930s. All of the gold in the Fed's vaults belongs to somebody else. We have a reserve bank with no reserves. So you would have the Fed buy gold rather than purchase more crap assets from the large dealer banks via a second round of quantitative easing (QE II)?

Quaintance: Precisely. The second step would be a major policy-mandated contraction in unreserved bank lending. These two simple steps would not only rebalance the financial books globally but would prevent leverage from over-inflating asset prices going forward, in turn creating another non-sustainable bubble economy. This isn't just theory. Let's look back. Employment trends in developed economies are being strangled presently by prior asset price inflation. As an admittedly crude example, the cost of shops on Main Street are overvalued and require artificially high rents to service debts. The average would-be shop owner can choose to pay his inflated lease or choose to pay workers - but not both. So, asset price inflation due to excessive unreserved credit expansion is not wealth enhancing but, rather, productivity destroying."

As Mr Quaintance states another way: "The system yearns for more money, not more credit."

"In the end, credit inflation historically leads to asset inflation while base money inflation leads to wage and basic goods/consumables inflation. No matter how you slice it, the ratio of outstanding global debts to global base money is irreconcilable. This is a mathematical tautology. From this imbalance flow many of the imbalances you cite, in my mind. Chris, as I said, we think this is as simple a problem as too little "money" in existence attempting to service and ultimately reconcile too much debt."

As you can see, and will see more if you read the whole interview in context, this exchange between two serious professionals was a just a little more technical that most "gold bug" conversations (and lacked any reference to AK-47's and storable food, unfortunately), but otherwise the theme from Mr Whalen, Mr Quaintance, Alex Jones, Rollye James, or the Bankster Report is pretty much the same: you can't get blood from a turnip. Or, as Mr Quaintance states thrice:

1.) "No matter how you slice it, the ratio of outstanding global debts to global base money is irreconcilable."

2.) "...this is as simple a problem as too little "money" in existence attempting to service and ultimately reconcile too much debt."

3.) "It's all about excessive unreserved credit having created real economic distortions that can't be reconciled through further debt creation."

The message is clear, and Mr Quaintance is by no means the first to speak it: debt-based money is inherently incapable of producing surplus, and is formulaically destined to irreconcilability--"a mathematical tautology," as he puts it--even if you turn up the magical printing presses to pump out an endless amount of worthless paper "money" backed by not even thin air. This observation is nothing new, as every single example of fiat money ever attempted in the history of the world has eventually failed. Which, interestingly, brings us to the several historical references offered by Mr Whalen and Mr Quaintance in the interview. Specifically, those references are to President Franklin Roosevelt and his attempts at "reinflation" of the busted fiat dollar. You'll notice that what's missing in this short conversation is a reiteration of exactly what happened when FDR "reinflated" the money supply through a revaluation of gold, the likes of which Mr Quaintance is suggesting the Fed should consider. In case you need a refresher, the process went something like this:

Step 1: Head to the East Portico and get inaugurated on March 4, 1933.

Step 2: Get to work quick! Issue the fantastically-unconstitutional-nationwide-gold-seizure-order on April 5, dictatorially authorizing and mandating immediate confiscation of the personal property of millions of Americans, and call it Executive Order 6102 (pdf version).

Step 3: Whoops--correct that little mistake about prohibiting the export of gold to allow for an exception to--who?--the Bank for International Settlements, of course! Issue another Executive Order, EO# 6111, on April 20 to set this little issue straight--by name.

Step 4: Get most of the American people's gold under your control by May 1. Hey, this is working out great! Give those patriotic, law-abiding dopes $20.67 in worthless Federal Reserve notes for every one ounce they surrender, and remind them not to touch that dirty gold again, lest they be jailed for a decade and fined $10-grand.

Step 5: Pursuant to Executive Order 6102, give all the gold to the Federal Reserve Banks!

Step 6: Sign the Gold Reserve Act of 1934, and magically re-value gold by nearly 70%--from $20.67/oz to $35/oz--now that the banksters have it, and maintain the illegalization of gold ownership for the worthless citizens, occasionally throwing a few defiant gold bugs in jail for ten years or so. Turn on the printing presses to "extend credit." Claim that the US Treasury "owns" the gold, but admit simultaneously that the US Treasury is enslaved to the Federal Reserve, thus effectively neutralizing the value of this American wealth and limiting its use to operations to support the paper dollar Federal Reserve note instead.

Step 7: Engage the paper dollar support mechanism, also known as the Exchange Stabilization Fund, to execute massive debt-funded currency interventions on the behalf of the legislatively-enslaved-to-the-Federal-Reserve Treasury in pursuit of a hopeless and mathematically impossible goal of creating wealth out of debt.

Step 8: Claim the operation, and subsequent programs, to be a huge success, as the banks get richer, the government dives into massive debt, and the American people plunge into another decade of Depression that will only eventually be ended with the "help" of the most destructive war in human history.

Sounds like a plan?


Why do I bring this up? Well, if $5,000 an ounce gold actually sounds good to you and me and our tin-foil hat gold bug buddies, we might consider our history a little more carefully: do you actually think that a simultaneous global currency devaluation coupled with a Fed-supported $5,000/oz gold support operation would be executed with more gold in the hands of private individuals than in the hands of banks?

Such is currently the situation: of the estimated 150,000 tonnes of above-ground gold on the planet, less than 22%, or about 30,000 tonnes, are in the hands of central banks. With a $5,000/oz revaluation, this supply would be worth about $5.29 Trillion. This leaves a 120,000 tonnes, or $21.16 Trillion at the $5,000/oz peg, in the hands of "others." That's a big change from the current ownership of monies in the fiat system, were 100% of the "money" is owned by the issuing central banks and 100% of the debt is held by the people.

Would you now like to re-read that Executive Order 6102?

My point: $5,000/oz Fed-supported gold would be another anti-free market disaster, and you can bet every last coin that you won't be allowed to participate, anyway. We got into the mess by obeying non-sense spewing fiatists and their apparatus of control, the central bank. We will not get out of it by rendering ourselves further subject to these same banks by giving them the power to peg gold to $35, $50, or $5,000/oz--after, of course, they confiscate it anyway. There's no such thing as a free lunch--and there's no such thing as freedom under central banks. Not even with $5,000/oz gold.


  1. Great to hear from you again Keri. Thanks for another great mind blowing post. I hope to hear you on Monday when she is back live.

  2. This comment has been removed by the author.

  3. Dittos! Another great eye-opening report Keri! By the way, had paid a visit to my blog. I guess they were checking out your links. :)


  4. Hey George and Robert,

    Thanks! And George--GS at your site? Why am I not surprised? But don't look at me: seeing as they were at your site, I'm thinking now that maybe GS was involved in the JFK hit! Of course, we wouldn't be surprised at that, either, would we? :) Thanks for the info.