A wise and learned man from Braintree – that spoke much truth about politics
“There are two ways to conquer and enslave a country. One is by the sword. The other is by debt.”
— John Adams
Note: there are claims that John Adams never actually said this. Even so, it is a great quote – wish that I had said it … 😉
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Alan Greenspan receiving acknowledgement for being one of the biggest trouble makers in financial history
“What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment”
Alan Greenspan, September 9th 2009
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© Copyright MMXII RagingGoldenBull.com
Benjamin Franklin understood Liberty
“People willing to trade their freedom for temporary security deserve neither and will lose both.”
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In many countries the government has assigned exclusive power to issue or print its national currency to a central bank. For example, in the USA, The Federal Reserve Bank does this.
The government treasury must pay off government debt either with money it already holds or by financing it by issuing new bonds which are sold to either the public directly or the central bank, in order to raise the funds required to satisfy the debt. In this latter case where bonds are placed with the central bank, the central bank will create the needed money by conducting an open market purchase, i.e. by increasing the monetary base through the money creation process. This process of financing government spending is called monetizing the debt.
Monetizing debt is thus a two-step process where the government issues debt to finance its spending and the central bank purchases the debt, leaving the system with an increased supply of base money.
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UBS are getting hammered (as they should be):
“ZURICH–UBS AG (UBS) is close to a settlement with U.S. and U.K. authorities and is expected pay more than $450 million over claims that some of its employees reported false Libor rates to boost the bank’s profit, the New York Times reported Sunday, citing anonymous officials briefed on the matter.
If the Zurich-based bank agrees to the deals with various authorities, the collective penalties would yield the largest total fine to date related to the rate-rigging inquiry and would increase the likelihood that other financial institutions would face stiff penalties, it reported.
UBS wasn’t immediately available to comment on the report.
Authorities dealt their first blow in the rate-rigging case in June, when U.K. bank Barclays Plc (BARC.LN) agreed to a $450 million settlement.
U.S. officials are hoping to complete a deal with UBS by the middle of the month, according to officials briefed on the matter, the paper reported.”
see the full story:
http://www.nasdaq.com/article/ubs-to-pay-over-450-million-to-settle-libor-probe-20121203-00132
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Here is a recent interview with John Embry for the Hera Research Newletter (HRN):
HRN: Thank you for joining us today. Let’s talk about gold stocks.
John Embry: Gold stocks represent a tremendous value in relation to the price of gold and to the fundamentals of the sector. There has been tremendous shorting activity by hedge funds and, as a result, dedicated gold funds have experienced redemptions. Retail investors, who are natural buyers of these stocks, have been annihilated by the price action. This has created one of the finest opportunities, if not the finest opportunity, that I have ever seen.
HRN: Do you have a short term price target?
John Embry: I don’t look at short term price charts for gold. In a market as heavily interfered with as this one, charts can be made to look any way you want in the short run. As I see it, if you don’t like gold at these prices, then you must like currencies. My partner Eric Sprott often says, the U.S. dollar is the best looking horse in the glue factory. If the U.S. dollar is the world’s strongest currency, that’s the best endorsement for gold that I can think of.
HRN: Do you believe that currencies are losing value?
John Embry: The fact is that economies are slowly melting down. The problem is excessive debt in almost every corner of the world. The only way to deal with the debt is through aggressive growth, but fabricating growth through more debt won’t work. The idea that you can get the economy to move forward by creating even more debt just doesn’t wash. We can’t service the existing debt, even at artificially low interest rates. I don’t see any easy way out. We have to get the excessive debt out of the financial system. Either policy makers are going to create mounting inflation or there will be a deflationary debt collapse.
HRN: Europe seems to be a case in point. Do you think the Euro will break up?
John Embry: The Eurocrats who constructed the currency aren’t going to give it up easily. The key is how much the Germans are going to go along with. They realize that there’s a huge loss for them if the Euro falls apart. I wouldn’t want to be in German Chancellor Angela Merkel’s shoes. Germany is trapped in the Euro because it relies on exports and German banks hold the debt of other European countries. Despite the bailouts and the inflationary policies of the European Central Bank (ECB), Germany doesn’t have much choice.
HRN: How can European governments solve their debt problems?
John Embry: The problem is that it would take a horrific debt collapse to set the stage for future expansion. There is no politician on earth that wants that to happen on their watch. Consequently, policy makers will resist deflation and we’re going down the opposite road, which means mounting inflation or possibly hyperinflation. I don’t think politicians will change the system. I think the system will change the politicians.
HRN: Can the economy recover in a high inflation scenario?
John Embry: Creating even more debt is not going to work. To me, high inflation is the most corrosive thing that can happen to an economy or to a country. I’m really worried that neoclassical, Keynesian economists like Paul Krugman, who are prescribing even more debt, will bring about a collapse.
HRN: Are these problems the result of Keynesian economics?
John Embry: If you really applied Keynesianism as Keynes originally envisioned it, the government was supposed to run surpluses when the economy was growing to pay for the deficits that would be created during downturns. That’s been conveniently forgotten. We’ve had an astounding build up of debt. I don’t think people fully realize how serious this is. I’m amazed at how complacent people are. We’ve never been in a position like this in the entire history of the world.
HRN: Why do you think people are so complacent?
John Embry: I think it’s cognitive dissonance. When confronted with something that’s really unpleasant, and to which there’s no easy solution, the average person will basically block it out and look for somebody to tell them that everything is fine. The mainstream news media and the government are doing that as we speak. Consequently, the average person doesn’t have a chance of understanding what’s going on. The man in the street doesn’t have a clue what’s coming.
HRN: What about investment professionals?
John Embry: I have a lot of close friends who have been in the investment business for 40 years and they don’t want to hear it.
HRN: Won’t the Federal Reserve and other central banks simply bail out the system?
John Embry: They think that printing money will buoy the markets and that that’s good, but it won’t solve any of the problems. Although you may get a momentary lift in the financial markets, when it plays itself out we’ll be back in the same situation, but with money that’s being systematically destroyed.
HRN: Does printing money work in the short term?
John Embry: There are nominal prices and real prices. Printing money is very deceptive and people are confused by its effects. I am only interested in real returns, not nominal returns. If you have a nominal return that’s caused by inflation, you’re losing money because governments tax nominal gains.
HRN: Can governments inflate their way out of debt?
John Embry: The U.S. federal government, for example, has reached a stage where forty cents of every dollar spent at the federal level is borrowed and a lot of that money has been printed. There has never been a case in history where that hasn’t led to financial disaster. If you study any empirical evidence, they’re in a hopeless position. They’ve only been able to get away with it so far because the U.S. dollar is the world reserve currency. If the United States wasn’t able to print money and was trapped in the European Union, it would just be a massive Spain.
HRN: So, governments can’t inflate away their debt?
John Embry: Inflation is the easier, more expedient route to take, but I would not rule out an accident. For example, if policy makers push austerity too far they could trigger a deflationary spiral that would be impossible to reverse. I subscribe to the Austrian theory of economics. In his book Human Action, Ludwig von Mises wrote that there is no way to avoid the collapse of a credit boom and that more credit expansion simply destroys the currency.
HRN: Don’t inflationary policies help banks and support the financial system?
John Embry: The ECB could do another Long-Term Refinancing Operation (LTRO) or the Federal Reserve could buy more U.S. Treasuries in the open market but that’s not really solving the problem. If you actually evaluated the banking system and marked all the assets to market, the system would be insolvent.
HRN: And the basic problem is too much debt and leverage?
John Embry: The over the counter (OTC) derivatives situation is so surreal I can’t begin to express it. Correctly calculated, the notional value of all OTC derivatives is in excess of one quadrillion dollars globally. The vast majority are related to interest rates. Central banks have to keep creating liquidity to prevent these instruments from collapsing.
HRN: What can the Federal Reserve and other central banks do?
John Embry: They’re lost either way. They’re running a massive lab experiment with monetary policy and don’t have a clue what the outcome is going to be.
HRN: Do you think the U.S. economy can grow its way out of debt?
John Embry: When I was a kid back in the 1950’s, most women didn’t work. Americans maintained their standard of living by putting a second person to work. When that was expended they made up the difference by going into debt and, eventually, they used their homes as cash machines. Now student loans total more than $1 trillion. I just don’t see where the consumer demand is going to come from going forward. You can’t get blood out of a stone.
HRN: What do you think the outcome is going be?
John Embry: I believe that before this is over we’ll have a new currency system, probably backed by gold.
HRN: Do you support the gold standard?
John Embry: One of the greatest periods of wealth creation was when we had a gold standard in the second half of the 19th century. It’s hard to believe that it’s going to be 41 years since there has been gold backing for any of the major currencies in the world. That is what has allowed the massive build up of debt that we have today. If there had been a gold standard, we wouldn’t be in the position we are in. Western governments don’t want the gold standard because it restricts their ability to dole out favors.
HRN: But the gold standard doesn’t prevent financial panics.
John Embry: There are always going to be financial panics, but, under the gold standard they tend to be short term. If we had had a gold standard, there would have been a number of cleansing periods where excess debt was eliminated. The Federal Reserve allowed the build up of debt that led to the stock market bubble and crash of 1929 and to the Great Depression, which was followed by World War II. It took about a decade to build up the debt and more than a decade to deal with the fallout. It’s taken more than 40 years to build up the debt we have today and I don’t know how long it’s going to take to correct it.
HRN: What does this mean for the average person?
John Embry: I think living standards of most people in the world, particularly in the West are going to decline precipitously. The Federal Reserve recently reported that the net worth of the median American family has fallen nearly 40% since 2007 after adjusting for inflation. Before this all plays out, I think the percentages are going to be far larger.
HRN: Do you foresee any wider impact on society?
John Embry: When I was growing up in the United States after World War II, I didn’t realize how remarkably fortunate we were as a society to have such a strong middle class. Seldom in history has there been a middle class to equal what transpired in the U.S. and Canada from the 1950s to the 1980s. We basically took it for granted because that’s all we ever knew. The middle class in the United States is disappearing. What happens is that you have massive poverty and a small wealthy class. It’s one of the worst things that can happen to a society and it can lead to civil unrest. If there’s no reason to buy into the system, people will act up.
HRN: Do you view gold and silver as commodities?
John Embry: I view gold and silver as monetary metals. The mainstream news media conflates gold and silver with industrial commodities, but they’re really a competitor to the currency system. Gold is the antithesis of paper money.
HRN: I’ve read that central banks are buying gold.
John Embry: Confidence in currencies is misplaced. There is a strong flow of gold from West to East. The Chinese, Indians, Russians and Vietnamese know perfectly well what’s going on with the U.S. dollar and the Euro. They are buying physical gold and the West has been stupid enough to sell it to them.
HRN: What’s your view on China?
John Embry: I’m not optimistic on China in the short run. The People’s Bank of China (PBoC) recently cut bank reserve requirements by 150 basis points to stimulate 1.2 trillion yuan ($190 billion) of new lending because they don’t want growth to fall from around 8% to 7%. As I see it, they’ve dined out on Western profligacy for 20 years and have become the most unbalanced economy in the world. An inordinate amount of China’s economic activity is generated by exports and by all manner of capital spending on manufacturing, real estate, infrastructure and more. The slowdown in the world economy has revealed massive overcapacity in many sectors.
HRN: Can China develop a consumer-driven economy?
John Embry: The idea that China’s economy can morph into a consumer-driven economy is preposterous. The very same consumers are employed in sectors like manufacturing where there is massive overcapacity. If the world slides into another global recession, which is not beyond the realm of possibility, I don’t see how China stays out of it and if they don’t then there’s no engine of growth left in the world.
HRN: So, even with a rising middle class, China remains dependent on exports?
John Embry: The fact is that China has become the world’s manufacturer but the ability of their two largest customers, Europe and the United States, to consume is being constrained. China is not going to be able to keep selling more year over year. The HSBC manufacturing index has fallen to recessionary levels.
HRN: It has been predicted that China will become the world’s largest economy. Do you think that’s true?
John Embry: I think China will probably dominate the 21st century. The U.S. dominated the 20th century but it went through some very tough times in the first half of the century.
HRN: With a slowdown in China, what’s your view on commodities like copper or crude oil?
John Embry: In the short term, I’m worried about commodities. In a deep global recession, I expect there will be extreme monetary debasement, which will hold up the nominal prices of commodities more than supply and demand factors would suggest.
HRN: Do you foresee a bear market in commodities?
John Embry: We are in a short-term bear market that will be arrested by monetary debasement.
HRN: But there are value buying opportunities?
John Embry: Given my views on currencies, commodities that are already depressed could be decent repositories for wealth. I like agricultural products. As the global economy continues to develop, I think the supply of food is going to be a major issue.
HRN: How can investors protect their assets in a global recession?
John Embry: The only things I’m comfortable holding are precious metals and, because they are so cheap now, precious metals mining shares.
HRN: Where do you think the price of gold will end up?
John Embry: I’m more concerned with how many ounces I own than with how many U.S. dollars I can get for them at any given point in time. Gold and paper money are going in opposite directions.
HRN: Thank you for your valuable time.
John Embry: It was my pleasure.
© Copyright MMXII RagingGoldenBull.com
Here is one that I have dug up from my archives, just to show how apt, and how long this has been comming – the smart investors got on this phase back in 2002 and have been chugging ever since. John Embry from Sprott assett management gives us 15 fundame ntal reasons for us to own gold (note that this article was written back in September 26 2003 – and it is just as informed as it was then):
The US dollar is fundamentally & technically very weak and should fall dramatically. However, other countries are very reluctant to see their currencies appreciate and are resisting the fall of the US dollar. Thus, we are in the early stages of a massive global currency debasement which will see tangibles, and most particularly gold, rise significantly in price.
When the crowd recognizes what is unfolding, they will seek an alternative to paper currencies and financial assets and this will create an enormous investment demand for gold. To facilitate this demand, a number of new vehicles like Central Gold Trust and gold Exchange Traded Funds (Elf’s) are being created.
In the space of two years, the federal government budget surplus has been transformed into a yawning deficit, which will persist as far as the eye can see. At the same time, the current account deficit has reached levels which have portended currency collapse in virtually every other instance in history.
To combat the deteriorating financial conditions in the US, interest rates have been dropped to rock bottom levels, real interest rates are now negative and, according to statements from the Fed spokesmen, are expected to remain so for some time. There has been a very strong historical relationship between negative real interest rates and stronger gold prices.
US authorities are terrified about the prospects for deflation given the unprecedented debt burden at all levels of society in the US. Fed Governor Ben Bernanke is on record as saying the Fed has a printing press and will use it to combat deflation if necessary. Other nations are following in the US’s footsteps and global money supply is accelerating. This is very gold friendly.
Gold mine supply is roughly 2500 tonnes per annum and traditional demand (jewellery, industrial users, etc.) has exceeded this by a considerable margin for a number of years. Some of this gap has been filled by recycled scrap but central bank gold has been the primary source of above-ground supply.
Even if traditional demand continues to erode due to ongoing worldwide economic weakness, the supply-demand imbalance is expected to persist due to a decline in mine supply. Mine supply will contract in the next several years, irrespective of gold prices, due to a dearth of exploration in the post Bre-X era, a shift away from high grading which was necessary for survival in the sub-economic gold price environment of the past five years and the natural exhaustion of existing mines.
To fill the gap between mine supply and demand, central bank gold has been mobilized primarily through the leasing mechanism, which facilitated producer hedging and financial speculation. Strong evidence suggests that between 10,000 and 16,000 tonnes (30- 50% of all central bank gold) is currently in the market. This is owed to the central banks by the bullion banks, which are the counter party in the transactions.
Rates are low and falling. With low rates, there isn’t sufficient contango to create higher prices in the out years. Thus there is little incentive to hedge, and gold producers are not only not hedging, they are reducing their existing hedge positions, thus removing gold from the market.
When gold prices were continuously falling and financial speculators could access central bank gold at a minimal leasing rate (0.5 – 1% per annum), sell it and reinvest the proceeds in a high yielding bond or Treasury bill, the trade was viewed as a lay up. Everyone did it and now there are numerous stale short positions. However, these trades now make no sense with a rising gold price and declining interest rates.
The central banks have supplied too much already via the leasing mechanism. In addition, Far Eastern central banks who are accumulating enormous quantities of US dollars are rumored to be buyers of gold to diversify away from the US dollar.
Gold is seen in a much more positive light in countries beginning to come to the forefront on the world scene. Prominent developing countries such as China, India and Russia have been accumulating gold. In fact, China with its 1.3 billion people recently established a National Gold Exchange and relaxed control over the asset. Demand in China is expected to rise sharply and could reach 500 tonnes in the next few years.
Islamic nations are investigating a currency backed by gold (the Gold Dinar), the new President of Argentina proposed, during his campaign, a gold backed peso as an antidote for the financial catastrophe which his country has experienced and Russia is talking about a fully convertible currency with gold backing.
The deteriorating conditions in the Middle East, the US occupation of Iraq, the nuclear ambitions of North Korea and the growing conflict between the US and China due to China’s refusal to allow its currency to appreciate against the US dollar headline the geopolitical issues, which could explode at anytime. A fearful public has a tendency to gravitate towards gold.
All the physical gold in existence is worth somewhat more than $1 trillion US dollars while the value of all the publicly traded gold companies in the world is less than $100 billion US dollars. When the fundamentals ultimately encourage a strong flow of capital towards gold and gold equities, the trillions upon trillions worth of paper money could propel both to unfathomably high levels.
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Yra Harris is called a “trader’s trader.” He says the latest deal on Greek debt is just
“pretend and extend. . . . “
The real problem is Spain because they’re big, they’re in debt and they have 27% unemployment.” Everyone in the Western world is dealing with the sovereign debt mess by printing money and suppressing interest rates.
Harris predicts:
“As long as real yields are negative, of course, gold is going to go up.”
Harris is afraid inflation could get out of control and says:
“It’s like being a little pregnant, you can’t really control it. Nothing destroys democracy like inflation–end of story.”
If Democrats and Republicans can’t reach a deal to avoid the so-called “fiscal cliff,” then Harris contends,
“Deflation . . . is bullish for gold because everybody knows what the central bank will do to answer the call . . . the Fed will become that much more aggressive.”
No matter what, Harris is betting that
“gold will be higher by the end of the year.”
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