And if you are wondering, “Like what kind of monetary idiocy, Magnificent Manly Mogambo (MMM)?” then all I have to do is smile enigmatically and silently point to where it shows that the Fed used some of the money that they created to buy up another whopping $9.3 billion in Treasury debt, agency debt and miscellaneous other worthless debt from banks last week. Last week!

The surprising thing to me about last week is that the reserves in the banks went down over $102 billion dollars in the same proverbial One Freaking Week (OFW), which is one of those things that seems like a lot, but what it really means to me is that the banks are flush with cash after selling their toxic assets to the Fed, and they were not using the Fed-supplied reserves because nobody was borrowing any money. Simple!

Not so surprising, but equally as simple, the Monetary Base went down by $103 billion last week, too, since bank reserves are included in it.

This must all be pretty unnerving to the foul Federal Reserve and the complicit Congress, as they all desperately want taxpayers to “eat the losses” of bankrupted morons-in-suits, which is, of course, an outrage, but that is, alas, the way it has to be because the numbers are Too, Too Huge (TTH), and the time when we could have averted all of this by getting our sorry butts back on the gold standard (as required by the Constitution!) was long, long ago in the ’60s and ’70s. If then!

Of course, we would never have become a gigantic “welfare state,” which is made manifest with something in the USA Today recently about how one out of every six dollars of income in America is now in the form of a government check for some kind of public assistance.

I sneer, as an increase in people wanting a government check is hardly news, and it goes along with how governments (local, state and federal) now have budgets so big that they, combined, spend half of all money spent in the USA, which is The Big, Big Problem (TBBP), and which has been growing since the ’60s when we stopped being a nation of people “yearning to breathe free” and able to “pursue happiness” in a free-market capitalist economy, and instead morphed, cancer-like, into one where the government equalizes outcomes by redistributing money from the successful (progressive taxation and “negative tax”) and jobs from the competent (affirmative action).

And since it is too late to stop now, and since there are no solutions (since nobody in all of history has been able to find a solution to the problems of a malignant, distorted, big-government “services” economy choking on obscene levels of debt both public and private), then there is only one thing left to do if you are using a paper money; attempt the impossible again by again printing up more money! Hahaha!

Of course, it is impossible from the start, sort of like how my “happy marriage” was impossible from the start, and we were hardly out of the church when she is yammering at me to get a job.

I mean, if the total output of goods and services of the course of a year (Gross Domestic Product) of the USA is around $14 trillion and the GDP of the whole world is around $50 trillion, it all pales to insignificance compared just to the sheer amount of losses at risk in derivatives alone, a clot of pure Vegas gambling contracts which is variously calculated as totaling from hundreds of trillions of dollars up into the quadrillions of dollars, which is not to mention the huge debts supporting bubbles in stock prices, bond prices, housing prices and size/spending of government, a situation made temporarily tolerable by abnormally low commodity/food/energy/ prices and insanely low interest rates.

This is, obviously, an absurd situation made only possible by the staggering stupidity and appalling arrogance of the Federal Reserve, a sad situation made horrifyingly manifest by its horrid chairman Alan Greenspan during the crucial period 1987-2006, where he blithely created all the money, credit and an “anything goes” lack of regulatory oversight that financed and allowed all the absurd debts incurred, an ignominious feat made possible by the almost-impossible-to-believe incompetence and self-serving arrogance of Congress, decade after decade, consistently deficit-spending and further distorting the economy with every dollar, and both were abetted by a corrupt education system that wasn’t smart enough to see the obvious historical fact that such a bizarre big-government system could not endure and a lamebrain “free press” that came to be populated by “journalists” who passed off the garbled facts of self-professed “expert economists”, woeful ignorance and personal biases as “news.”

Uh-oh. By that distasteful outburst, I can see that my medications are wearing off! I soon find that contemplating the iron-clad security of gold and silver doesn’t help much, and only the actual fondling of an ounce of gold and an ounce of silver in my hands can calm me down after getting worked up about how sheer incompetence destroyed America.

And after a few minutes alone with my gold and silver, securely ensconced in the fabulous Mogambo Bunker Of Ultimate Paranoia (MBOUP) and ruminating about how 4,500 years of human history says I am doing the smart thing by buying gold, I actually find myself saying, “Whee! This investing stuff is easy!”

Source: Beginning With Economic Impossibilites

Imagine a postcard-perfect mountain village. A-frame chateaus, old world door crests, cheery gas lamps – the kind of place you might see tucked away in the Pyrenees or the Swiss Alps. As a crowning touch, large flakes of snow are gently falling.

Now take a step back. Instead of an actual village, you are looking at the contents of a snow globe.

The snow globe is sitting on the edge of a large oak table.

Now you see the back of a large, well-manicured hand – perhaps a banker’s hand – accidentally sweep the snow globe over the edge of the table. The snow globe hurtles toward the cold marble floor, where it will shatter into a thousand pieces.

What you have just envisioned is a metaphor (or is it analogy, I forget) for Europe. The free fall is happening as I write.

The Horror

If Colonel Kurtz had been a European banker (rather than a deranged flyboy lost deep in the Congo), he would know exactly what to say about Europe’s fiscal predicament now:

“The horror… the horror.”

Here are some choice examples of what I mean:

• According to a recent Bloomberg story, “Germany and France may be forced to contemplate the bailout of entire nations [emphasis mine] rather than just individual banks.” A number of European countries are in the tight spot of hosting banks that are not just too big to fail, but potentially too big to bail… meaning the extent of bank losses could outweigh the host country’s GDP.
• BCA Research reports that, with Iceland serving as the “gold standard” of credit risk, the five sovereigns closest to an Icelandic fate are all European: Portugal, Ireland, Spain, Italy and the United Kingdom.
• Less than two weeks ago, the UK Telegraph got its hands on a “secret” Brussels document being circulated among high-profile finance ministers. According to the Telegraph, this highly confidential 17-page report suggests toxic asset bailout estimates as high as 16.3 trillion pounds, or more than $23 trillion U.S. That’s trillion with a T… more than the gross domestic product of all European Union countries combined. The estimate could be reduced by three-quarters and it would still be disaster.
• Eastern Europe is enduring its own special circle of forex hell, with the Prague and Warsaw exchanges plumbing multi-year lows. For example, the Polish Zloty has gone into free fall as a result of “toxic FX options” – the currency version of Credit Default Swaps. As the FT Alphaville blog reports, Polish banks flogged these toxic forex derivatives to corporate clients; when the Zloty fell below a certain level, the options triggered a daisy chain of spiraling corporate losses.

The New Odd Couple

The mass carnage unfolding in Europe further explains an extremely odd phenomenon: the bosom-buddy pairing of gold and the dollar.

When new traders get their first taste of the “macro” landscape – You mean this stuff is all connected? Wow! – the gold-dollar relationship is one of the first things they learn about.

Gold and the dollar, in short, are supposed to be like matter and anti-matter. When gold is strong, the dollar is generally weak (and vice versa). A steady-eddie greenback represents the triumph of central bankers and the taming of inflation… where rising gold, in contrast, represents banker’s folly and the ravages of the printing press. They are north and south, black and white, yin and yang – you get the picture.

That long-standing set-up explains why it’s been just plain weird to see gold and the dollar jointly kicking butt as of late. Both are exploring multi-month highs, as if the tandem climb were the most natural thing in the world. (In my latest Macro Trader briefing, I described the yellow metal and the greenback as “The New Odd Couple.”)

So how does this tie back in to Europe?

Simple: With an entire continent choking on the equivalent of toxic subprime squared, there are only three obvious places on Earth left for large pools of terrified financial capital to hide – gold, the U.S. dollar, and U.S. Treasury bonds. (And guess what… two of those three are booby-trapped!)

I’ll admit it. I didn’t foresee Europe getting itself into this much trouble. The “old world” is supposed to be more staid and conservative than the United States – in matters of finance at least – so who’d have thought that nose-in-the-air Brussels types could have layered on enough leverage to make a swaggering Texan blush?
Now What?

So where do we go from here? As I told Macro Trader members more than a week ago, the dollar is a mystery wrapped in a riddle for now. We shifted our trading bias from bearish to neutral on the buck without taking a forex stance either way. There are some currencies we like very much from a longer-term investment perspective, but from a trading perspective it’s watch and wait.

As for gold – which we have been long for weeks in Macro Trader via gold stocks and the metal itself – when the stars align, they really align. I think that’s the case for the yellow metal now.

To borrow a turn of phrase from an old Market Wizards interview, the sun has moved closer to the Earth and gold is the best zinc ointment money can buy. Greenbacks and U.S. treasuries, the second and third best alternatives in a world where Europe and Japan are imploding, offer broad and deep liquidity but make for seriously lousy sunscreen.

As you’d expect, I’ll keep an eye on the Europe situation (as well as the many other crazy developments unfolding right now) and keep you posted.

A few of you have also written in to say “Hey JL, what about all that gold in the vaults of the IMF and Fort Knox? Aren’t you worried they might try to dump it on the market?”

My answer: Nope, not really. Even if the powers-that-be had the stones to try such a maneuver (which I doubt), it would prove to be a suicide move. Next week I’ll tell you why…

Source: Europocalypse

In contrast, when the dollar was gold and gold was the dollar, “During the preceding 140 year period, the hard currency of the United States had actually maintained its value. Wholesale prices in 1913 were the same as in 1787.”

I thought that this would have ended the discussion, and thus our work was done and we could call it a day, go out for pizza and beer and maybe hit a few strip clubs, but suddenly at Bloomberg.com I read, “Gold Standard Is Wrong Salve for Global Ills”.

I agree with this only because there IS no soothing salve for the globe’s economic ills with which to effect a cure, which means that there is no economic “solution” to over-indebtedness and governmental stupidity that does not involve incredible pain, herein defined as incredible inflation in the necessities of life and the incredible deflation of everything that is not.

I am pretty smug about this because I already know that every other government in the Whole Freaking History Of The World (WFHOTW) wanted to spend more money than it could take in through taxes and plunder, and the ones that tried to use a fake, fatuous, foolhardy fiat currency made only of paper and promises ended up destroying themselves and ruining their people by creating so much money and credit, which is why the Founding Fathers, who knew this first-hand, wrote into the Constitution that the dollar shall only be of silver and gold, which is the only thing that can prevent the government from destroying the USA by the over-creation of money and credit!

And now the Fed and the Treasury are doing that very thing right now, creating money at rates that are completely unprecedented in American history and, probably, the history of the world!

Tragically, all of this money supply inflation will, as it must, result in consumer price inflation, which is the bane of all economies, although you would not know it from the deplorable Fredric Mishkin, whom the Bloomberg article refers to as “an economics professor at Columbia University’s Graduate School of Business and a former Federal Reserve governor.”

He says that with the price of gold futures fluctuating from $253 to $1,034 an ounce during the past nine years, this automatically means that pegging currencies to bullion “would probably not produce the price stability that the advocates of the gold standard seek.” Hahahaha!

The dollar goes to (in the original Spanish) El Grande Squatto Mundo because Mishkin and his brain-dead econometric cronies at the Fed and most of the nation’s universities keep encouraging interest rates to be constantly lower than the rate of inflation, which increases borrowing, which further inflates the money supply, which makes the prices of the assets go up a lot, and the prices of everything else to drift upward, too, in response to all of this new money and credit; so when gold goes up in response to the Fed’s irresponsible creation of money and credit creating inflation in prices by reducing the buying power of the dollar, Mishkin says that this means that gold is not stable! Hahaha! Too much! Hahahaha!

In fact, “hahaha” does not even BEGIN to cover it, and I will emend that last paragraph to end with “Hahahahahahahaha!” to indicate something really rude and disrespectful.

The Bloomberg article goes on that the gold standard is not necessary, although “no doubt, the abundant liquidity created by asset- securitization, derivatives and Asian countries amassing huge reserves while pegging their currencies to the dollar fed both bubbles and greed. Yet these excesses could – and should – have been harnessed by alert central banks acting in concert.” Hahahaha! Like that’s going to happen! “Trust us!” Hahaha!

This reminds me of Oscar Wilde saying, “I can resist everything except temptation”, and who also famously said, “The only way to get rid of a temptation is to yield to it.”

Source: No Soothing Salve for Economic Ills

Like a parent dispelling a childhood nightmare, FDR soothed the masses with the assurance that they had nothing to fear but fear itself. To this day, he is revered for turning a depression into the Great Depression. In the aftermath of the dot-com bubble, Fed Chairman Alan Greenspan came to the rescue with a brand-new bubble in real estate.

Even if there was someone out there who could pull off one more illusionary rescue, it would only delay the inevitable and worsen the pain. Pain now or more pain later. The compassionate solution is to let Adam Smith’s invisible hand guide us, as should have been happening all along. Almost no public figures have the backbone to speak honestly about what’s wrong. There is no free lunch. Still, voters believe the promise that “I will give you what you want and make someone else pay for it.” Neither Congress nor either presidential candidate can take us back to the fairytale world of mortgaged opulence we blissfully enjoyed in the recent past.

It pained me to see former Fed Chairman Alan Greenspan struggle to salvage some remnant of his tattered legacy under the brutal and self-righteous questioning of Henry Waxman’s House Oversight and Government Reform Committee. Waxman chided Greenspan that “The Federal Reserve had the authority to stop the irresponsible lending practices that fueled the subprime mortgage market.” Talk about the pot calling the kettle black! Greenspan failed to come to the defense of the free market, even conceding that his faith in free markets was “flawed.” He declined to remind Waxman that congressional pressure to make mortgage loans available to those who had no business living in a house, not to mention owning one, rendered the markets less than free.

How could this one-time compatriot of Ayn Rand have strayed so far from his roots? Even today, Greenspan’s 1966 essay “Gold and Economic Freedom” provides a refreshingly simple and straightforward explanation for how we arrived at this sorry state of affairs. The Maestro’s essay appeared in the newsletter The Objectivist in 1966 and was later reprinted in Rand’s Capitalism: The Unknown Ideal. This is what Greenspan wrote:

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense – perhaps more clearly and subtly than many consistent defenders of laissez-faire – that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.

Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term “luxury good” implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.

Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society’s divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.

A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.

When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion.

Thus, under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one-so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the “easy money” country, inducing tighter credit standards and a return to competitively higher interest rates again.

A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline – argued economic interventionists – why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks (”paper reserves”) could serve as legal tender to pay depositors.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve’s attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain’s gold loss and avoid the political embarrassment of having to raise interest rates. The “Fed” succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930’s.

With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain’s abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed “a mixed gold standard”; yet it is gold that took the blame.) But the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.

November 4 is right around the corner. Once again, the masses are clamoring for a savior. To rephrase Walt Kelly and the famous words of the possum Pogo, “We have met our savior and he is us.”

Donald Grove is a Washington D.C.-based lawyer and Washington correspondent for Casey Research, LLC., one of the nation’s oldest and most respected newsletter publishers, providing unbiased investment guidance for individual and institutional investors. You can now kick the tires on Casey Research’s flagship publication, The Casey Report, risk-free — learn more about our special $9.95 two-month trial offer. Click here.

By Donald Grove,
Washington Correspondent
Casey Research, LLC.- The Casey Report

Source: Why a Gold Standard

When Albert Hofmann — the Swiss chemist who discovered LSD — passed away at the start of this month, newspaper editors the world over reported it as the death of the man “who experienced the first ever bad trip.”

But Hofmann’s hallucinations seem little worse than most acid-induced visions. Or so people tell us…

“Beginning dizziness,” he wrote in his lab journal for 19 April 1943. Looking to find a stimulant for the circulatory and respiratory systems, he’d just concocted — and taken — a big dose of lysergic acid diethylamide-25.

“Feeling of anxiety,” he noted, before adding in due course “Difficulty in concentration. Visual disturbances. Desire to laugh.”

Finally, Hofmann scrawled the words “most severe crisis” and fled the lab on his bicycle. It seemed to stay stationary even as it wheeled him back home, where his neighbor — who brought him a nice glass of milk to calm him down — appeared as a witch in a colored mask.

He felt possessed by demons. The furniture in his bedroom began to menace him. All pretty run of the mill stuff if you dabble with psychotropics, in short.

But such “fantastic images” don’t always ease into the sensations of “good fortune and gratitude” Hofmann got to enjoy later that day. Hallucinations can still cause the “most severe crisis” — even without some fool laying Witches Hat by the Incredible String Band on the turntable.

“Inflation will return to the two percent target,” claimed Mervyn King, head of the Bank of England, and one half of the financial furry freak brothers running Anglo-American monetary policy.

“Growth will eventually recover to a sustainable rate.”

Just a central banker’s wide-eyed hallucination? Maybe not. Like Albert Hofmann’s wobbly bike-ride six decades ago, the credit cycle will get us home in good time, ready to turn once again from boom to bubble to bust. But like any powerful psychedelic, the trip gobbled down by Western investors could last much longer than anyone dares hope right now.

And just what was the Governor smoking when he claimed, “In these [current] circumstances, the household saving rate is likely to rise…”?

The Bank of England has been cutting U.K. interest rates since December. Its latest Inflation Report says it will continue to cut interest rates “in line with [bond] market expectations,” too.

And U.K. households have grown their savings only once when interest rates fell in the last four-and-half decades. That brief period lasted for two years at the start of the 1990s.

Both before and since — and most markedly during the previous post-war recessions (of 1974 and 1981) — people have tweaked their savings almost precisely in line with changes to the rate of interest, as set by the Bank of England itself.

King’s starry-eyed vision, however, “is part of a rebalancing of the U.K. economy, away from spending and importing, toward saving and exporting,” he told reporters last week.

The sky’s turned all purple in Washington too if U.S. policy-makers think the credit crunch will somehow boost household savings there.

Put another way, “who had heard of collateralized debt obligations just 10 years ago?” as Niall Ferguson, history professor at Harvard, asked in a speech opening New York’s new Museum of Finance back in January this year.

“Collateralized loan obligations? Credit derivatives? These forms of financial instrument are of very recent origin. So are the hedge funds; so are the private equity partnerships; so are the sovereign wealth funds; and so are those wonderfully named entities, the conduits…”

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And today reality has bitten hard. US stocks fell with a loud thud following missed earnings from industrial behemoth General Electric, whose dismal earnings report casting a gloomy light on upcoming profit reports.

According to Dow Jones MarketWatch, the Dow Jones industrials shed 148.59 points to 12,433.39, with 25 of its 30 components trading in the red.

The GE reported 6% drop in 1Q net profit.

Tumbling stocks isn’t investors only worry. Inflation and the weakening dollar are also threat invetors’ wealth.

“The only way for the United States and other economies to salvage their financial systems is to print credit, or aggressively grow their money-supply,” says Eric Roseman in the Offshore A-Letter.

“Over the next 12 months, I have no doubt that the Fed, ECB and other central banks will print credit like there’s no tomorrow. Money-supply must boom and inflation must prevail over deflation.

“The central bankers talk a tough game on inflation, yet history shows they have a pathetic scorecard. Fiat money has severely crimped our purchasing power since the demise of the gold standard under Nixon in 1971.”