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The Fed's Campaign
Posted by Peter Schiff on 09/07/2012 at 3:39 PM

This past Friday, as Fed Chairman Ben Bernanke delivered his annual address from Jackson Hole - the State of the Dollar, if you will - I couldn't help but hear it as an incumbent's campaign speech. While Wall Street was hoping for some concrete announcement, what we got was a mushy appraisal of the Fed's handling of the financial crisis so far and a suggestion that more 'help' is on the way. 

It is important to remember that it's not just President Obama's job on the line in this election; in two years time, the next President will have the opportunity to either reappoint Bernanke or choose someone else. So we must understand what platform Bernanke is running on, as his office has an even greater effect on global markets than the President's.

Bernanke has been the perfect tag-team partner for George W. Bush and then Barack Obama as they have pursued an economic policy of deficits, bailouts, and stimulus. Without the Fed providing artificial support to housing and US debt, Washington would have already been shut out of foreign credit markets. In other words, they would have faced a debt ceiling that no amount of bipartisan support could raise. Fortunately for the politicians, Helicopter Ben was there to monetize the debts.

As far back as his time as an academic, Bernanke made clear that when the going got tough, he wouldn't hesitate to fire up the printing presses. He specialized in studying the Great Depression and, contrary to greater minds like Murray Rothbard, determined that the problem was too little money printing. He went on to propose several ways the central bank could create inflation even when interest rates had been dropped to zero through large-scale asset purchases (LSAPs). Sure enough, the credit crunch of 2008 gave the Fed Chairman an opportunity to test his theory.

All told, the Fed spent $2.35 trillion on LSAPs, including $1.25 trillion in mortgage-backed securities, $900 billion in Treasury debt, and $200 billion of other debt from federal agencies. That means the Fed printed the equivalent of 15% of US GDP in a couple of years. That's a lot of new dollars for the real economy to absorb, and a tremendous subsidy to the phony economy.

This has bought time for President Obama to enact an $800 billion stimulus program, an auto industry bailout, socialized medicine, and other economically damaging measures. In short, because of the Fed's interventions, Obama got the time and money needed to push the US further down the road to a centrally planned economy. It is also now much more unlikely that Washington will be able to manage a controlled descent to lower standards of living. Instead, we're going to head right off a fiscal cliff.

The Fed Chairman even admitted to this reality in his statement. Here are two choice quotes:

"As I noted, the Federal Reserve is limited by law mainly to the purchase of Treasury and agency securities. ... Conceivably, if the Federal Reserve became too dominant a buyer in certain segments of these markets, trading among private agents could dry up, degrading liquidity and price discovery." [emphasis added]

"...expansions of the balance sheet could reduce public confidence in the Fed's ability to exit smoothly from its accommodative policies at the appropriate time. ... such a reduction in confidence might increase the risk of a costly unanchoring of inflation expectations, leading in turn to financial and economic instability." [emphasis added]

So we all agree that the prospect of inflationary depression was made worse by the Fed's actions - but at least Ben Bernanke has pleased his boss. As a guaranteed monetary dove, Ben Bernanke appears to be a shoo-in if Obama is re-elected.

Meanwhile, Mitt Romney has pledged to fire Bernanke if elected. While I am not confident that Mr. Romney has the economic understanding to appoint a competent replacement - let alone pursue a policy of restoring the gold standard or legalizing competing currencies - he may well be seen as a threat not only to the Fed Chairman's self-interest, but also to his inflationary agenda.

Given this background, let's look at Bernanke's quotes that have been the focus of media speculation for the past week: the US economy is "far from satisfactory," unemployment is a "grave concern," and the Fed "will provide additional policy accommodation as needed." These comments seem designed to reassure markets (and Washington) that there will be no major shift toward austerity in the near future. The party can go on. But they also hint that Bernanke might be planning to double down again. I have long written that another round of quantitative easing is all but inevitable. It now seems to be imminent.

In reality, when the money drops may have more to do with politics than economics. The Fed may not want to appear to be directly interfering in the election by stimulating the economy this fall, but there are strong incentives for Bernanke to try to perk up the phony recovery before November and deliver the election to Obama. However, if Romney wins, Bernanke can at least fall back on his appeal as a team player as he lobbies for another term.

For gold and silver buyers, either scenario is likely to continue to stoke our market in the short- and medium-term. As the past week's rally indicates, there is no longer a fear that the Fed has had enough of money-printing - in fact, it looks prepared for much more.

 

Peter Schiff is CEO and Chief Global Strategist of Euro Pacific Precious Metals.        

If you would like more information about Euro Pacific Precious Metals, click here. For the fastest service, call 1-888-GOLD-160  



Tags:  Ben Bernankedebtfedfederal reservegoldgold standardquantitative easingstimulus
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The Gold Standard Gets Another Look
Posted by Peter Schiff on 08/28/2012 at 10:12 AM

As Republicans convene in Tampa to nominate Mitt Romney and hammer out their party platform, one of the planks that could attract the most attention is the Party's official position on the gold standard. As it is now being considered, the platform stops short of recommending a return to the gold standard, but does advocate a commission to consider the possibility. However, judging by the reaction with which many Republicans have greeted the idea, one would think that the platform might as well have called for the return of slavery.

The fact that so many supposed conservatives liken a belief in a gold standard as the monetary equivalent of membership in the Flat Earth Society shows just how far the American public has come from a true understanding of how money works within an economy. But, if there were a parallel to be made between gold enthusiasts and flat earthers, then it should strike many as curious that the world's top central bankers, who can be seen as the equivalent to the most advanced astronomers, continue to hold so much gold in their vaults. If gold were so obsolete, why would these bankers hedge their positions?

The general idea among most economists is that gold would be a step backward for our modern monetary system -- the equivalent of trading in an automobile for a horse and buggy. However, paper money is not new. It's been around for centuries, and has been tried many times, on many continents. But every time it has been used, it has led ultimately to economic disaster.

At the time of America's founding, the uses and abuses of paper money were well understood. The Founding Fathers could have empowered the Federal Government to print paper money, a power enjoyed by the Continental Congress under the Articles of Confederation. However, the Constitution represented an improvement on that system. The framers, having just experienced the horrors of the Continental currency (which had been used to finance the War of Independence) opted to limit Federal monetary powers to coining money, which for legal tender purposes they defined as gold and silver.

As a result of that wise choice, our national economy thrived, and eventually became the richest on earth. In contrast, since the time that the standard was abandoned in 1971, America has become the world's largest debtor nation and is now teetering on the brink of financial ruin. It's ironic that gold standard critics look back to Nixon's decision to close the gold window as proof that the standard does not work. In reality, it was precisely because the gold standard was working so well that Nixon felt he had no choice but to abandon it.

In 1971, adherence to the gold standard meant the Nixon administration faced a politically difficult decision. Big increases in government spending associated with the Great Society programs, the war on poverty, the Vietnam War, and the Space Race, resulted in large deficits (by 1971 standards of course). This led the government to print lots of money, thereby hitting Americans with large doses of inflation. As a result, general prices had by then tripled from the levels seen in 1932. But the price of gold had been held at 35 dollars per ounce. This led America's foreign creditors to exchange their paper dollars for gold (It was illegal for American citizens to do likewise). This created a drain on our gold reserves, and if something were not done, it was likely that the U.S. would lose all of its reserves.

Staying on the gold standard left the government with only two options. One was to devalue the dollar and raise the price of gold consistent with the increase in the CPI. That would have required a gold price of over 100 dollars per ounce. Alternatively, the government could have removed the excess dollars from circulation, bringing consumer prices back in line with 35 dollar gold. In other words, the choice was devaluation or deflation. Neither was politically appealing, and both would have brought deficit spending to a halt. 

The gold standard forced the government to responsibly confront irresponsible fiscal policy. At first Nixon tried devaluation, but the amounts were far too small to stop the gold drain. As an escape hatch, he instead abandoned the gold standard (although he said that the move was temporary). Without this "relic", government could continue to finance its spending with ever larger deficits without losing any more gold. So instead of devaluation or deflation, we chose inflation instead. Many consider the impossibility of running perpetual deficits under the gold standard as proof of its unsuitability to the modern economy. As I see it, this is precisely why the gold standard is so desirable and so badly needed today.

Proponents of the centrally planned pump-priming, deficit-spending welfare state see the gold standard as the enemy of a healthy economy. However, if you believe in individual liberty and limited government, then the gold standard is your best ally. Had Nixon made a more responsible decision, the initial pain might have been worse, but we would have ended the decade in much better shape. And had we stayed that course, our nation would be far wealthier today as a result. We would not have been enabled to bleed away our wealth through two generations of deficit spending.

Many people also look badly on the gold standard because it prevents central banks from using monetary policy to manage the economy. This, of course, may be its greatest attribute. Under a gold standard, the free market determines money supply and interest rates. Under our current system of paper money a few politically connected bankers make those determinations. The results have been disastrous, with the recent housing bubble and financial crisis being just the latest iterations.

In a market economy, prices must be discovered by supply and demand. Interest rates, which can be described as the price of money, are arguably the most important prices of all. The only way to get it right is to let the market do its work. Empowering politically motivated central bankers to fix the price instead is a recipe for disaster. Unfortunately, we have now all had a good taste, and a return to the gold standard is the only way to refresh the palate. I hope the Republicans have the stomach to see it through.  



Tags:  dollargold standardMitt Romneyrepublicans
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Pentonomics - Gold is the True Reserve Currency
Posted by Michael Pento on 08/04/2011 at 9:51 AM

The reliance upon the U.S. dollar as the world's reserve currency and "safe haven" asset has created a perverse, but deeply entrenched, mindset among global investors. In fact, many believe the major financial players have no alternatives to owning U.S. debt and dollars. They argue that the market for U.S. dollars and Treasuries is the only financial pool large enough to handle the massive liquidity that sloshes around the globe on a daily basis. This idea makes a mass exodus from U.S. debt holdings seem impossible. This provides a nice explanation why the U.S. Treasury bonds can rally even while the government openly flirts with default and ratings agencies issue downgrades. But just because an illogical event occurs habitually does not mean it is logical or tenable.  

 

The sophomoric reasoning behind the dollar "exceptionalism" argument is like assuming a stock can never fall unless a significant portion of shareholders decide to sell. In reality, a buyers strike is all that is needed to puncture a market. If the U.S. experienced just one disastrous Treasury auction, prices could nose-dive and yields could skyrocket across the board on all U.S. debt.

 

But the problem doesn't just lie with the United States. Investors around the world are finally beginning to understand that central bank's thirst for creating inflation, in order to keep their banks and governments solvent, will never be quenched.

 

This week, the Swiss government took action to weaken the surging franc by lowering interest rates and printing currency. The franc was pushed down briefly, but then snapped back. It's hard to keep a good currency down. Similarly, the Bank of Japan announced that it won't stand for Yen appreciation much longer and would likely soon intervene to buy dollars and weaken the Yen.

 

Meanwhile, problems at the overly indebted countries just get worse. Italian and Spanish debt yields are now following the upward spiral of Greek bonds (and hitting multi year highs). Italian ten-year notes have surged from just above 3% in late 2010 to well over 6% today. For a country whose debt to GDP ratio is currently over 120%, a doubling of interest rate expenses spells disaster.

 

Enter Jean Claude Trichet who will certainly use his printing press to buy much of the weakening Italian debt that is now festering on the balance sheets of the biggest European banks. But the size of the bailouts needed to deal with Italian and Spanish debts will be several orders of magnitude greater than those needed for Ireland or Greece. Anticipating a massive increase in the Euro money supply, investors are flocking to gold to protect themselves from currency debasement.

 

Adding fuel to the gold fire is the recent debt deal reached in Washington. The disgusting agreement virtually assures that over the next decade the U.S. will add an additional $8 trillion in public debt, an increase of nearly 80% in ten years! The back-end-loaded deal will cause the amount of deficit reduction to be just $21 billion in 2012 and $42 billion in 2013.

 

But even this modest debt reduction depends on rosy assumptions from Washington that are always wrong. For example, the Obama administration predicts GDP growth will average well over 3% for the coming decade. But the annualized GDP growth in the first half of 2011 was just 0.9%. That means the actual deficit and debt figures will be far greater than the projections. Given the immediate increase in borrowing needs, and the obvious slowing of the tepid "recovery," there can be little doubt that the next round of quantitative easing will be launched sooner rather than later.

 

The incompetency of U.S. credit rating agencies has long been suspected. But their actions in the wake of the debt ceiling agreement now confirm them as liars. After threatening to downgrade U.S. credit if Washington failed to cut $4 trillion in spending, neither Moody's, Fitch nor S&P had the courage to carry through, despite the fact that the total cuts would amount to only half their requirements. But a credit rating downgrade on Treasuries did come-from China. The Dagong Global Credit Rating agency cut the credit rating on U.S. sovereign debt to A from A+, 5 notches below AAA. And since the Chinese are the biggest foreign buyer of Treasuries, their opinion counts. 

 

This week, more evidence of U.S. stagflation emerged. The ISM manufacturing and non-manufacturing reports showed a slowdown in new orders and employment and the ADP report showed that the U.S. lost 7,000 goods-producing jobs in July. Other data releases showed that layoffs surged 60% last month to a 16-month high. Meanwhile, YOY consumer prices are up 3.6% and M2 money supply is up 7.5% YOY and rising at a 14.6% annual rate in the last quarter. As the problem with stagflation becomes worse, international investors will avoid the U.S. dollar and U.S. debt at an ever increasing rate.

 

With soaring debt-to-GDP ratios in Japan, Western Europe and America, the desirability of owning precious metals will grow as investors realize the fiat currency system's days are numbered. Those holding U.S. dollars and U.S. debt will feel the biggest brunt of the change. But it is always darkest before the dawn. As a result of the carnage the re-establishment of gold as the world's reserve currency is, hopefully, only a few years away.



Tags:  currencydebtdollareconomygoldgold standardreserves
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THE RISE OF THE BARTER ECONOMY
Posted by Peter Schiff on 07/05/2011 at 10:00 AM

Imagine a day when you go to buy a quart of milk, ask the price, and the cashier says, "that'll be a tenth ounce silver." As the US dollar's decline accelerates, several efforts around the country are trying to make this vision a reality.

Historically, paying for items in silver or gold was actually quite common. We happen to live in an unusual time and place where generations have grown up trading exclusively in paper. While my parents still used dimes made of silver, we have now gone several decades with no precious metals in any of our official coinage. But this system of money by government fiat is unsustainable.

 

While the practice of bartering precious metals directly for goods and services has continued on a small-scale over the last few decades, the 2000s saw the beginning of organized efforts to revive gold and silver as money.

THE LIBERTY DOLLAR

 

One such effort was spearheaded by an eccentric mintmaster from Hawaii named Bernard Von Nothaus. He called his project the Liberty Dollar, and it centered on privately minted gold and silver rounds as well as deposit certificates for precious metals held in his firm's vaults.

I had many reservations about how the project was implemented - coins were minted with a fixed US dollar amount at which they were supposed to circulate, the dollar amount was well above the spot price of the metal, and authorized "distributors" were allowed to pocket the difference (which often resulted in buyers paying far higher prices for their gold than what they would have paid had they simply bought, say, Canadian Maple Leafs instead) - but I believe Nothaus' idea was a good one, even if the product was over-priced. Tellingly, despite the obvious flaws, public participation grew steadily from 1998 until 2007, when federal agents raided the Liberty Dollar's offices on trumped-up charges of counterfeiting.

Really, they were charging him with competing with the US dollar's monopoly privileges by offering a better product. It's important to note that the case against Nothaus was built around his coins looking similar to official US coinage (though no one actually mistook Liberty Dollars for US currency), and not around encouraging people to use precious metals as circulating money.

DIGITAL GOLD

Next came a crop of internet-based currencies backed by gold and silver. Most prominent among them are eGold and GoldMoney. Both were designed to allow customers to open online accounts that were valued in, and backed by, gold and silver bullion.

eGold was perhaps the better known of the two until it, too, was shut down by the US government on charges of money laundering. eGold was positioned more as an online payment system than a means of holding bullion. Due to the anonymous nature of the transactions - it was akin to spending cash - the authorities alleged that it was being used by criminal enterprises to funnel illegal funds. But mostly it was being used by regular people to begin saving and trading in money that holds its value. eGold had a transparent system of annual audits and live transaction screening by any user to keep the system honest. It, too, was growing robustly, and was putting up strong competition against PayPal until the authorities intervened.

GoldMoney, founded by my friend James Turk, has remained in operation by keeping its principal operations overseas and by cooperating fully with onerous US financial regulations. It offers similar services to eGold, but with an emphasis on long-term storage. GoldMoney improves upon traditional storage by locating offshore, offering real-time online account access, and providing extra liquidity. These services do come at a cost, however. Still, over the course of the last decade, GoldMoney has swelled to over $2 billion in assets. Clearly, many people want to trade gold and silver over US dollars.

Digital gold is a niche service, but I think the public's rapid embrace of these projects - none older than ten years - shows that investors are viewing gold and silver as more than mere commodities, but once again seeing them as money. This could signal a paradigm shift back to tradition, which is good news for any precious metals holder.

STRAIGHT UP BARTER

While digital currencies are neat, in practical terms, nothing beats the resilience of traditional barter of bullion for goods and services. If you actually own the physical gold and silver that you intend to save or trade, then you can be sure it will be there until you're ready to sell. You don't have to trust anyone except yourself.

In that vein, several efforts have popped up around the country to simply get people trading gold and silver rather than dollars. Since the transactions involved are usually small, such as buying lunch at a local diner, silver is typically the metal of choice.

There are several hotspots for this sort of activity.

Philadelphia has one group, DelValley Silver, that has fostered a local barter market there by encouraging merchants to accept silver coins in addition to dollars. DelValley is also a silver dealer, but they sell privately minted rounds, which can be harder to liquidate than well-known coins like the American Gold Eagle and Canadian Maple Leaf.

Meanwhile, in New Hampshire, many merchants associated with the Free State Project have begun accepting gold and silver at their businesses. Innovation abounds here and the practice of encasing small amounts of silver in laminated cards seems to be the most successful.

Shire Silver encloses silver and gold wire in their cards and measures them in terms of grams. It's much easier to trade a flat, plastic card containing a gram of silver than to carry around a 1 oz coin. However, even their website will admit that the premium on such a small amount of silver makes it less than ideal for investment purposes. Of course, when you're ready to barter, they'll be happy to take your 1 oz rounds in return for some Shire Silver. And that Shire Silver is being accepted by more and more merchants across New Hampshire and beyond.

Another variation, from a group based in Phoenix, Arizona, encloses a pre-1965 US dime inside the laminated card. Before '65, every dime contained 90% silver, making them worth about $2.50 each in today's debased dollars. That's why you won't find any pre-'65 dimes in your change from the grocery store. However, one fellow had the clever idea of putting them in these cards so they could trade at their silver value without getting mixed in with the worthless dimes we carry around today. The same group even created a free iPhone app that translates US dollar prices into various amounts of silver (more info here).

While I'll still be selling regular old bullion coins and bars at Euro Pacific Precious Metals, because these are the best way to invest in physical precious metals, I am energized by these efforts. The great thing about holding and bartering physical precious metals is that there is no central company running the operations, like with the digital gold currencies, and therefore there's no single person the government can go after.

(My new offshore bank, Euro Pacific Bank, Ltd., will soon be offering Visa-branded debit cards back by individual holdings of gold or silver. Euro Pacific Bank customers will be able to purchase gold from the bank, have it stored, and then access their holdings directly using their Visa cards to either make purchases though merchants or withdraw cash from banks and ATMs. Unfortunately, due to the reasons described above, I cannot offer this service to US customers. For more information about my offshore brokerage and banking companies, please visit www.europacintl.com.)

THE WRITING IS ON THE WALL

Besides these grassroots efforts at building barter communities, I'm seeing a cultural shift in favor of precious metals. Utah recently passed a law establishing gold and silver as legal tender and abolishing state capital gains taxes on their appreciation. I was interviewed for a new animated film called Silver Circle that features a rebel group in the near future which mints silver coins in defiance of an even more aggressive Federal Reserve. More and more people are starting to watch the gold price as often as they watch the Dow.

Overall, this bodes well for our investments and for our country. If gold and silver are successfully re-monetized, our children may know a rate of economic growth not seen since our great-grandparents were in their prime. And prices may never return to today's levels again.


Tags:  dollargoldgold standardinflationjames turkliberty dollarsilver
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Pentonomics - A Tourniquet is Now Needed
Posted by Michael Pento on 03/08/2011 at 6:41 PM

The budget deficit for February hit another all-time high record high. The federal government posted a monthly deficit of $223 billion, which was the largest monthly deficit in the history of the USA. It was the 29th consecutive month of red ink—another record. In fact, to put that $223 billion into perspective, the total deficit for the years 2006 and 2007 was $247.7 and $162.8 billion respectively. You read that correctly, we are now bleeding red ink on a monthly basis what it used to take an entire year to hemorrhage.

The Senate plans to vote today on competing proposals to cut spending, but Democrats have rejected GOP proposed cuts of more than $50 billion, and Republicans have ruled out Democrats’ cuts of less than $10 billion. The end result is that neither plan will draw the 60 votes needed to overcome a filibuster and pass. Therefore, even these paltry cuts—which aren’t enough to put a dent in the budget in the first place—will not be implemented. So it will be back to drawing board for both parties as they watch Rome burn.

According to the CBO, the government has already run up a $642 billion deficit for the first five months of fiscal 2011. And the interest on that debt continues to grow, reaching $101 billion through the end of February. That is a 12.5% increase over 2010, despite the fact that interest rates are still quiescent.

That’s why we need a third party that espouses two corner stone principles. One is to place the country back on a gold standard and the other is to pass a balanced budget amendment to the constitution. Of course that means we will suffer a severe but truncated recession or depression. But one is coming anyway so we should at least have it on our own terms. The longer we wait the more destrctive it will become.



Tags:  budgetgold standardgovernment spending
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