Debt substituted gold standard:
The origins of a developing crisis are deeply embedded in the financial system and date back to the invention of central banks, and more particularly to the Bretton Woods Agreement, which was the basis of the post-war monetary system.
While central banks could swap dollars for gold at $35 per ounce, there was no effective restraint on the issuance of dollar-money and credit. It allowed America to finance the Korean and Vietnam wars without resorting to domestic taxation. When those dollars-for-export returned home in the late sixties, the run against the dollar in favour of gold commenced, leading to the 1971 Nixon Shock, when the US finally sent the Bretton Woods Agreement to the dustbin of history.
From the 1970s the dollar continued in its role as the world’s reserve currency without any gold convertibility at all. As a deliberate policy the US government tried – read: RK-Mafia – to remove gold’s status as money by simply denying it had any such role.
The gold standard limits the amount of debt that can be issued. Forty-four years ago, when the U.S. made the switch to a fiat currency system, the federal government owed $399 billion. Since then, outstanding debt has ballooned 4,411 per cent to $18 trillion — more than twice the amount of all the gold in the world (nearly $7 trillion). Such massive debt levels can be reached only in a fiat currency system, where money is easy, virtually limitless and unsecured by anything tangible.
Today, no country on earth still uses the gold standard. In 1999, Switzerland became the last country to break from it. And yet central banks all over the globe continue to maintain, and add to, their gold reserves, including Switzerland. At 1,040 tonnes of gold, its holdings are the seventh largest in the world, following Russia’s.
The misinformation against the gold standard persists to this day, expressed as progress in the development of government-issued currencies. Having thus disposed of the shackles of sound money, money and credit were expanded to pay for sharply higher oil prices in the early 1970s, and was made available for Latin American borrowers without meaningful constraint. This was followed by an accelerating loss of the US dollar’s purchasing power in the second half of that decade.
The expansion of money and credit since Bretton Woods corrupted business controls in the same way as fractional reserve banking had done over the previous hundred years, but thereafter with the additional feature of unconstrained expansion of fresh money. Instead of periodic banking crises, which liquidated bad and excessive debts, banks were supported and debts were allowed to accumulate over successive credit cycles. Not even the increases in interest rates in the late-seventies, designed to halt runaway price inflation, saw total debt contract.
The consequences of these monetary and credit excesses up to the end of the last century were growing financial speculation. This culminated in the dot-com boom, which was on a similar bubble-scale to the stock market excesses of 1927-1929, and arguably was fuelled by the same degree of public speculation recorded in John Law’s Mississippi (1718 – 1720) and South Sea bubbles three hundred years ago.
Stock markets were only rescued from the subsequent fall-out by the unprecedented actions of the Fed in 2001-2003, which reduced the Fed Funds Rate to 1%, laying the foundations for the housing bubble of 2005-2007. And as is known, it was the collapse of this secondary bubble that led to the financial crisis that took down Bear Stearns and Lehman Bros.
Reliance on debt as an economic driver is the other side of the expansion of the total quantity of money. This can only continue so long as people accept that money maintains its objective exchange-value.
Since the late 1970s the major central banks, led by the Fed, have taken control of interest rates from markets on the supposition that economic activity and price inflation can be managed by varying them at the state’s behest. This policy is very different from the way interest rates are set in free markets. The philosophical bias behind state management of interest rates, that borrowers are more deserving than lenders, has a long history, as borrowing is the creation of money for the banksters.
Since central banks have controlled interest rates they have always favoured borrowers over savers, with the predictable result that global debt has expanded without the underlying production to support it. And without earnings set aside from production, debt cannot be repaid, so it must default.
Preventing this default has become a growing problem and is the primary task facing central banks. Household, corporate, government and financial sectors are all exposed to debt default, ensuring political and business considerations will allow no alternative outcome. The only means central banks can employ is the creation of yet more money, and to foster the expansion of bank credit at an ever-increasing pace, a remedy that was spectacularly confirmed as effective by the Fed’s management of the Lehman crisis and the rounds of quantitative easing that followed.
Zero interest rates have ensured that compounding unpaid interest is kept to a minimum, but at the same time they have encouraged yet more unproductive borrowing. As a result markets around the world are signalling that a new financial crisis is looming just around the corner, and soon it will be time to unleash the monetary weapon again.
The function of central banks:
The purpose of central banks was to serve as a “lender of last resort” to commercial banks faced with a run on the bank by depositors demanding cash withdrawals of their deposits. Banks would call in loans in an effort to raise cash to pay off depositors. Businesses would fail, and the banks would fail from their inability to pay depositors their money on demand.
To improve the economic outlook Central banks’ are holding stocks, which are responsible for more than 100% of the year-to-date rise in the S&P 500 prior to the latest sell-off.
Central banks’ agreement doesn’t stipulate that they are supposed to stabilize the stock market by purchasing stocks. They are supposed to buy and sell bonds in open market operations in order to encourage employment with lower interest rates or to restrict inflation with higher interest rates.
If central banks purchase stocks in order to support equity prices, what is the point of having a stock market? The central bank’s ability to create money to support stock prices negates the price discovery function of the stock market. – The law prohibits Central Banks buying equities.
So has GATA always maintained that no analysis of the monetary metals market is worth much if it fails to answer the following questions:
- Are central banks and governments in the gold, silver, and commodity markets surreptitiously or not?
- If central banks and governments arein the gold, silver, and commodity markets surreptitiously, is it just for fun — for example, to see which central bank’s trading desk can make the most money by cheating the most investors — or is it for policy purposes?
- If central banks and governments arein the gold, silver, and commodity markets for policy purposes are these traditional purposes of defeating a potentially competitive world reserve currency, or have these purposes expanded?
- If central banks and governments, creators of infinite money are surreptitiously trading a market, how can it be considered a market at all, and how can any country or the world ever enjoy a market economy again?
Documentation confirming the surreptitious intervention in these markets by central banks and governments has been summarised at GATA’s Internet site:
Only by an amendment:
In 2010 – Section 13(3) – was enacted to permit the Fed to buy AIG’s insolvent Maiden Lane assets. This amendment also created a loophole, which enables the Fed to lend money to entities that can use the funds to buy stocks.
Then it was discovered that the Swiss Central Bank bought huge quantities of S&P stocks.
“Are we witnessing the corruption of central banks? Are we observing the money-creating powers of central banks being used to drive up prices in the stock market for the benefit of the mega-rich?
It turns out that the Swiss central bank, in addition to its Apple stock, holds very large equity positions, ranging from $250,000,000 to $637,000,000, in numerous US corporations — Exxon Mobil, Microsoft, Google, Johnson & Johnson, General Electric, Procter & Gamble, Verizon, AT&T, Pfizer, Chevron, Merck, Facebook, PepsiCo, Coca Cola, Disney, Valeant, IBM, Gilead, Amazon.
Among this list of the Swiss central bank’s holdings are stocks, which are responsible for more than 100% of the year-to-date rise in the S&P 500 prior to the latest sell-off.
What is going on here? Could the Swiss central bank be operating as an agent of the Federal Reserve? – If central banks cannot properly conduct monetary policy, how can they conduct an equity policy? Some shrewd observers believe that the Swiss National Bank is acting as an agent for the Federal Reserve and purchases large blocs of US equities at critical times to arrest stock market declines that would puncture the propagandised belief that all is fine in the US economy.
Besides, the US government has a “plunge protection team” consisting of the US Treasury and Federal Reserve. The purpose of this team is to prevent unwanted stock market crashes.
Crisis of confidence:
Confidence is lost in the knowledge and foresight of monetary policy makers, specifically central banksters.
Confidence – that NEVER will be able to come back into a normal market. The everyday meddling in the market to try to “fix,” in particularly the latest are a complete fiasco even more in the wake of interest rate setting. The Fed has spent months and months preparing investors for a potential interest rate hike. It has spent months and months talking about the improved economic outlook. So it stands to reason that they should have moved last week. Actually they should have started raising rates long ago. It tells clearly the Fed itself has no confidence in the economy. It says they have no confidence in themselves, and that inflation and growth will ever rebound. The logic conclusion is; don’t have any confidence in Central Bankers forecasts, either!
The belief that a hike in interest rates is in the cards keeps the US dollar from losing exchange value in relation to other currencies, thus preventing a flight from the dollar that would reduce the United States to Third World status.
The Federal Reserve could have said that the stock market decline indicates the recovery is in doubt and requires more stimuli. The prospect of more liquidity could drive the stock market back up. As asset bubbles are in the way of the Fed’s policy, a decline in stock prices removes the equity market bubble and enables the Fed to print more money and start the QE-process up again.
On the other hand, the stock market decline in August could indicate that the players in the market have comprehended that the stock market is an artificially inflated bubble that has no real basis. Once the psychology is destroyed, the flight sets in.
Each crisis is of a greater magnitude than the previous one. The trigger undermining the global debt problem this time is a sharp slowdown in global production. Without the fig leaf of increasing productive output, the precariousness of the global debt problem has become all too evident to ignore, even for perpetual optimists.
In effect, it suggests that the only solution open to central banks is the deliberate destruction of their own currencies, not on the drip-feed basis that has existed since the Bretton Woods Agreement, but by a more deliberate acceleration.
Even the Bank of all Central Banks – BIS – Bank for International Settlement in Basel-Switzerland – has got their doubts about nowadays-financial misère. As Mr Claudio Borio, Head of the Monetary & Economic Department concluded.
“If we now settle back and look at events as a movie, their full meaning becomes clearer. In the big scheme of things, current events were already foreshadowed by the past evolution of the global economy.”
The financial world apparently is waking-up now so many signs of an imminent collapse are visible everywhere. He described the situation as a stranded tourist asking for directions, who was told: “If I were you, I wouldn’t start from here.” The massive printing and creation of money by central banks since 2008, finally is seen as the source of the upcoming mega-quake he refers to. – The BIS also warned of a massive debt crisis ahead, saying that any increase in interest rates in Europe, Japan or the United States could trigger global debt turmoil.
In predicting this final crisis for any country that walks down the path of government’s money corruption, the economist Ludwig von Mises described this manifestation as a crack-up boom, the boom to end all booms, when ordinary people ultimately realise the worthlessness of government currency and dump it as rapidly as possible for anything they can get hold of. The last remnants of the currency’s objective exchange-value evaporate. Never before has such a crack-up boom happened on a global scale as now will strike.
The hyperinflation of fiat money and the prospect of a final collapse in its purchasing power is becoming an increasingly probable outcome of the financial events unfolding now. That much can be assumed from sound economic theory, and is confirmed by historical records of similar crises.
Only this time the threatened currency destruction will be global, because where the dollar goes, and the dollar is still the reserve currency, so all nations go.
“I am focused on the ramifications of the Chinese devaluation. There is a lot of misinformation about this move but the reality and the point of the exercise is a product of the on-going race to the bottom as far as currencies. All of this is a result of unprecedented worldwide quantitative easing and liquidity….
The United States is the last country to participate in he race to the bottom. So when looked at the ripple effect, what the Chinese are doing is very strategic.
This is all part of their reserve currency plan. They already have a reserve currency and reserve swaps with 28 other countries. But what the Chinese want is for their currency to become like the euro and the yen. So the failed IMF discussions are also very important to China.
But the other important point is that the Chinese have something on the order of $4 trillion of foreign exchange reserves, of which more than $1,5 trillion is in U.S. Treasuries, for which reason they have devalued their currency. There are two ways for them to pay those long-term obligations. One is to run down their foreign exchange reserves. So they chose to devalue, and the other is to sell them off.
In the process they have been drawing down their foreign exchange reserves by $400 billion. At the same time the Chinese have been dumping three weeks ago the value of US$ 100 billion of U.S.-Treasuries. This has put pressure on yields. The market’s reaction that has been experienced is a destabilizing volatility, and this should lead to even greater fireworks as the markets head into October.
The recent turmoil in global markets suggests that the ability of the world to sustain such massive debt levels is coming to an end. If so, the Total Credit Market, particularly for derivatives, is in for a huge collapse.
At this hour intelligence sources reveal that both U.S. Citibank and Bank of America face total insolvency as Saudi Arabia has withdrawn up to $10 BILLION from the Global Asset Management Fund, which will make it impossible for worldwide banking interests to mark up any future derivatives.
Glencore – one of the largest silver miners – is in deep trouble and the world is about to see what happens when one of the largest silver derivatives counter-parties – blows up! Their derivative book is estimated to be over $19billion with most of it being hedged metal. These three together at this moment represent close to 30 billion in derivatives that are on the edge of a meltdown. It’s getting very interesting to see who is next and what will happen.
With rumours escalating that Deutsche Bank’s derivatives book may be on the verge of collapse, Jim Willie says: If Deutsche Bank Goes Under It Will be Lehman Times Five!
A failure of Deutsche Bank would trigger a systemic banking contagion the likes of which the Western world has never seen… A bank failure contagion, that’s what’s going to push gold WAY over $2,000/oz. again. Silver is going to be moving over $100 and gold is going over $5,000…
Willie, who recently stated that Deutsche Bank is under major duress and could be the first major bank to collapse in the next stage of the banking crisis, (told)… the Western Central banks were able to contain Lehman Brothers thanks to $13 Trillion in bailout funds, a failure of Deutsche Bank would trigger a systemic banking contagion the likes of which the Western world has never seen.
The important thing to keep in mind, if Deutsche Bank goes down it will take along with it 10, or 15 other banks! It will be 1 or 2 quickly, then the 3rd and 4th a few weeks later, another, then before people know it, all of Italy and their major banks would be finished.
Deutsche Bank owns at least $25 trillion in ‘over the counter swaps’ with the Central banks and other major banks, expect a chain of derivative failures for the $1.6 quadrillion derivative markets if they were to fail! – It would result in the complete breakdown of the European Monetary Union! – There will be massive amounts of money flooding into gold and silver!
Considering just a simple reversion to the mean – the median point from the years 1840 – 1980 – that would suggest a collapse from the current level – over 350% – to fewer than 150%. That will be a much larger credit implosion than the one that triggered the Great Depression.
Fasten your seatbelts, and buy physical gold and silver because it will be a terrifying ride as holders of paper assets such as stocks and bonds get destroyed, while the recent chaos in global markets must be seen as a warming-up.
- G. Edward Griffin-Hyperinflation is going to Happen in US
What will the next financial calamity look like to the man on the street? G. Edward Griffin, author of “The Creature from Jekyll Island,” explains,
“The main mechanism that people will feel most directly will be the loss of value or purchasing power for their currency. The dollar will buy less and less and less as it has been doing, but it’s been sort of gradual and we get used to it… When you look at the real cost of living, inflation is really pretty high now, but you haven’t seen anything yet compared to when the rest of the world does what it is now saying it is going to do. They are going to stop using the Federal Reserve Note as the international reserve currency. When they stop that, then we have no place to get rid of all these extra dollars we make up in the digital printing press… When that stops, all those trillions and trillions of dollars that we have put overseas will come back to us because the people who hold them, like China for example, will say we can’t use these. Then they will use them to buy up anything they can here. They’ll buy our products . . . but they’ll also buy up our stocks and bonds and real estate. They’ll buy up our politicians or anything else that is for sale to get rid of those dollars as quickly as possible. When that happens all of these dollars will be flooding through our economy. You could say the price of a loaf of bread will be $100, and that is the kind of thing we will see and it maybe even worse. It will be just like we saw in Zimbabwe or Germany in the Weimar Republic. These things happen in history . . . and the United States is not exempt of the laws of economics. It is going to happen here.
All is not lost, according to Griffin, and it starts with something he calls “The Creed of Freedom.” Griffin is working on global solutions to this massive bad leadership problem.
WARNING: Alt Energy Insider — The Elite Are In A PANIC