Quote of the century: “Don’t buy gold – it’s not backed by anything. Unlike the U.S. Dollar which is backed by the government and is going to be around for awhile” WOW can you believe this?

Benko: Gold, the States, and Federal Monetary Policy

By: Ralph Benko
Senior Advisor, American Principles Project

Why are so many state legislators beginning to call for issuance of a form of gold money?The Constitution prohibits states from coining money but allows them make “gold and silver Coin a Tender in Payment of Debts….” By prohibiting everything except “gold and silver Coin” the Constitution clearly contemplates this as legitimate.

Legislators in a dozen states are looking at legislation about gold or silver-based currency, including, right now, Utah, South Carolina, Virginia and New Hampshire. States haven’t issued money for over a hundred years. So … why now? There is disgust by state legislators with the federal government’s promiscuously printing money. This reflects the views of those who wrote and adopted the United States Constitution.

The transcript of the debates in the original Constitutional Convention shows the attitude of the Founders toward paper money was one of disgust. In debate one delegate, Roger Sherman, called for the insertion of an absolute prohibition against states issuing their own paper money.

Mr. Wilson and Mr. Sherman moved to insert after the words ‘coin money’ the words ‘nor emit bills of credit, nor make any thing but gold and silver coin a tender in payment of debts’ making these prohibitions absolute…

Mr. Sherman thought this a “favourable” crisis for crushing paper money.

The Founders voted to adopt Sherman’s “crushing” of state-based paper money.

As for the federal government, the original draft of the Constitution included language permitting the federal government to issue unbacked paper money. The Founders objected strongly to this power. The objections were summed up by delegate Oliver Ellsworth:

Mr. Elsesworth thought this a favorable moment to shut and bar the door against paper money. The mischiefs of the various experiments which had been made, were now fresh in the public mind and had excited the disgust of all the respectable part of America. By witholding the power from the new Governt. more friends of influence would be gained to it than by almost any thing else. Paper money can in no case be necessary. Give the Government credit, and other resources will offer. The power may do harm, never good.

Those who wrote the Constitution decisively stripped the federal government of the power to issue inconvertible paper money. And stripped it stayed… until, temporarily, during the Civil War. Saving the Union was of transcendent importance. A strong constitutional argument exists for the legitimacy of paper money as an expedient. But it set a bad precedent.

“The American people are patient but we are not stupid.”

Ralph Benko
Senior Advisor, American Principles Project

For most of American history dollars were convertible into gold or sometimes silver. It is a 20th century innovation to have inconvertible money. FDR suspended domestic convertibility. And then… Richard Nixon’s 1971 suspension of the convertibility of the dollar into gold put the final nail into the dollar’s coffin. President Nixon announced this as a temporary suspension.

President Nixon made certain promises to America when he suspended convertibility of the dollar. August 15, 1971:

“I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold ….

Now, what is this action–which is very technical–what does it mean for you?

Let me lay to rest the bugaboo of what is called devaluation.

If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today.” (Emphasis supplied.)

Well. The dollar today is worth less than a quarter was worth in 1971.

Ralph Benko
Senior Advisor,
American Principles Project

The American people are patient but we are not stupid. We have noticed the steady erosion of the dollar’s buying power, that fact that our dollars are worth 80% less than the day of “the Nixon shock.” We have noted the bankruptcy of the assurances we were given.

Yet Washington has been curiously unresponsive to the suffering brought by its failed promise. Why? Washington has itself been a primary beneficiary of monetary depreciation.

The federal government spent $15 billion from 1789 – 1900. Not $15 billion a year. $15 billion cumulatively. Uncle Sam will spend $10 billion a day in 2011. The federal government spends more every two days than it did altogether for more than America’s first century. Although these sums are not adjusted for inflation they give a correct impression of the magnitude of the change from what our Founders set forth and our early statesmen delivered.

How does Washington get its hands on so much money? Three ways. Taxing us, on which it is maxed out. Borrowing — deficits — to which there is a growing massive resistance. And there is a third and even more pernicious way: printing dollars. Washington prints money – such as Chairman Bernanke’s massive $800B+ “quantitative easing.” Wildly printing money erodes the value of the dollar. It will damage every American’s hard-earned savings.

The power to print money at whim is wrong.

It is toxic to our personal and national wellbeing.

And it is unconstitutional.

So legislators in twelve states are exploring gold-based currency. It is reprehensible for national elites to deride those who are doing so. Whatever objections one might have to the mechanisms being considered the impulse is legitimate and even noble. State legislators are challenging the federal abuse of an unconstitutional power, challenging the issuance of unhinged paper money.

Federal officials should take these state initiatives as a cue. Federal officials have sworn to preserve, protect and defend the Constitution of the United States. Let them take their oath seriously and restore the convertibility of dollars to gold.

Source: http://www.cnbc.com/id/41665142

July 16, 2009
by Kristofer Neslund, CPA/DBA

…. the flaws in the Model TIEA overwhelm its positives.

Weaknesses

The OECD has frequently noted that havens that had agreed to adopt the TIEA failed to implement it. There is a real concern that some or many of the haven jurisdictions that rushed to announce their commitments to the TIEA were simply playing for time, hoping the furor will die down before they actually have to implement the agreements.

Domestic bank secrecy laws trump these agreements. Indeed, UBS has raised Swiss bank secrecy laws as its primary defense in the current John Doe summons enforcement proceeding.

Havens are exempt from supplying information they do not collect and they often collect little. The British Virgin Islands, for example, has more than 400,000 registered corporations but requires neither the identification of shareholders or directors nor the maintenance of financial records.

Severe procedural restrictions are imposed to preclude “fishing expeditions” — i.e., broad, general inquiries. Automatic information sharing is expressly excluded.

Tax practitioners should be rendering advice based on the reality, not the perception, of these agreements.

Kristofer Neslund, CPA/DBA, LLM, JD, is an associate professor of taxation at the Golden Gate University.
Read the full text in http://www.cpa

Source: http://mypanamalawyer.blogspot.com/2010/12….

BRUSSELS — The European Parliament on Thursday broadly rejected an agreement with the United States on sharing information about bank transfers that was aimed at tracking people suspected of being terrorists…..The United States could still rely on an agreement on mutual legal assistance to seek the data. But that could make the process of gathering the information more cumbersome.

Read the full article here.

Historically, every financial and economic crisis has been used to further centralize power and concentrate wealth. This one is no different, and in fact the moves being promoted by the Obama administration and the central banks of the Western powers will take the whole world to the pinnacle of financial despotism — unless enough people wake up and claim their own “money power.”

In recent months, the Fed has expanded its “assets” from about $800 billion to more than $2,000 billion. Those so-called assets are securities it bought from financial institutions and loans made to central banks in other countries. But the Fed refuses to name the specific recipients of those funds, while admitting that by doing so they are manipulating the value of the US dollar on foreign exchange markets. (Congressman Alan Grayson Grills Fed Vice Chair Donald Kohn.)

Where does the Fed get the money to buy those “assets” or to make those loans? Quite simply, it creates the money. Unlike you or me or any other economic entity, the Fed has the power to create Federal Reserve dollars by effectively writing a check against no funds. This is the function known as “Open Market Operations.”

What is the economy experiencing now, and what is in prospect for the future? Despite unprecedented inflation of the money supply, we are now (mid-July, 2009) in a period of depression. How can we have simultaneous inflation of the currency and still have economic depression?

It is a matter of where the money is going. While the public sector (federal government) is being lavishly funded to maintain a global empire, and the banks are being bailed out to try to keep a dysfunctional and destructive financial system from collapsing, the private productive sector is being starved for credit. As a result, businesses are bankrupting, people are losing their jobs and their incomes, and lower levels of government are being squeezed because their tax revenues are shrinking.

There is also the matter of the real estate bubble that was created by the financial institutions as they loaded up the private sector with a debt burden that was way beyond its ability to bear. Now that burden is being shifted to the public sector as the government assumes those “toxic” loans. Unfortunately, it is not the poor suckers who were lured into the debt trap that are being relieved, but the predatory lenders who laid the traps. So mortgages are being foreclosed at an unprecedented scale, people are losing their equity as housing values plunge, and more Americans are being made homeless.

These are the factors that have so far kept the effects of monetary inflation from becoming extreme. Ultimately, however, such abusive issuance of political money shows up as rising prices.

When will the price effects of hyper-inflation begin to kick in? How will the government respond to it? What will be the social and political fallout? What can ordinary people do to protect themselves from monetary and legislative abuses? These are the questions that beg for answers.

Already there are rumblings and signs that the U.S. dollar is about to lose its status as the global reserve currency. When that happens, imports of energy and other necessities will become more expensive. The U.S.’s massive trade deficits will not be sustained into the future. China, the OPEC countries, and others that have been buying massive amounts of U.S. government bonds with their dollar earnings, are indicating that their appetite has been sated. Bilateral and multilateral trade agreements are being made that bypass the use of the dollar for international trade.

One thing is clear — we cannot rely upon the government to act in the best interests of the people. Already, President Obama has moved to give the Federal Reserve even more power to control the people’s credit and financial resources. According to a June 18 article in the Wall Street Journal, “The central bank would win power to monitor risks across the financial system, and sweeping authority to examine any firm that could threaten financial stability, even if the Fed wouldn’t normally supervise the institution.” This is not a new plan; it was floated as a trial balloon during the Bush administration. As early as March 2008, then Treasury Secretary Paulson was proposing to “give the Federal Reserve broad new authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system.”

Ostensibly that would be done to prevent the errant financial institutions from repeating their sins of the recent past, but more likely it will have the effect of suppressing any private initiative that might compete with the financial cartel. The Fed is, after all, a private company run by the bankers for the bankers. A recent Reuters article is critical of Obama’s move because of the Fed’s lack of accountability. It is a plan that seeks to preserve at all costs the credit monopoly that exists under the central banking regime and to perpetuate the looting of the economy by monetization of federal government debts and other ultimately worthless “assets.”

During the Great Depression, President Franking Roosevelt, upon taking office in 1933, declared a “bank holiday.” He ordered all banks to close. Many of those banks never reopened and many people lost their savings. He also demanded that all Americans turn in their gold holdings in return for paper currency, which was one of the biggest robberies in history up to that time. Some pundits are predicting that another such bank holiday is being planned to put the brakes on price increases, once they begin in earnest, by depriving people of access to their savings, as was done in Argentina in 2002.

Governments that mismanage money invariably use the force of law to prevent the sheep from escaping from the shearing pen (or the slaughter house). So long as people are completely dependent upon political money and banks, they will docilely (or grudgingly) accept whatever “solutions” the political leadership puts forth, and do whatever the government demands of them.

Fortunately there is a way out. The primary purpose of money is to facilitate the exchange of goods and services in the markets. But it is possible to mediate the exchange process without using political money as the payment medium, and without borrowing from banks.

There is plenty of precedent for this sort of cashless trading. It involves a process of direct credit clearing among associated buyers and sellers. During the Great Depression the entrepreneurial middle class in Switzerland organized themselves into the WIR Economic Circle Cooperative. After 75 years, the WIR clearing circle continues to thrive with more than 60,000 member businesses trading the equivalent of about US$1.3 billion per year.

The past four decades have seen the emergence of a new industry comprised of commercial trade exchanges, sometimes called “barter” exchanges, that act as “third part record keepers” enabling the same sort of direct credit clearing for thousands of businesses in cities around the world. Efforts at the grassroots by social entrepreneurs to localize exchange and finance have been similarly widespread in many communities over the past twenty-five years.

Measures to properly reform the money and banking system by political means have about as much chance as the proverbial snowball in hell. However, what is possible, and what seems to be gaining traction to transcend the dominant system, is the materialization of voluntary, private initiatives that enable the cashless exchange of goods and services. As these systems continue to improve, proliferate, and scale up, they will provide a pathway toward a sustainable economy, greater local control, and a better quality of life for all.

Thomas H. Greco, Jr. is the director of the Community Information Resource Center, which he founded in 1992. CIRC is a nonprofit consulting organization and networking hub dedicated to economic equity, social justice, and community improvement, specializing in community currency and mutual credit design, development, and implementation. His newest book is The End of Money and the Future of Civilization.

http://www.alternet.org/workplace/141281/how_bad_will_the_economy_get_really,_really_bad/?page=1

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1998 Russia

Declining productivity, an artificially high fixed exchange rate between the ruble and foreign currencies to avoid public turmoil, and a chronic fiscal deficit were the background to Russia’s financial meltdown in 1998. The economic cost of the first war in Chechnya that is estimated at $5.5 billion was also a cause.

Prior to the culmination of the economic crisis, the government-issued GKO bonds policy had been described as similar to a Ponzi scheme, with the interest on matured obligations being paid off using the proceeds of newly issued obligations.

Two external shocks, the Asian financial crisis that had begun in 1997 and the following declines in demand for (and thus price of) crude oil and nonferrous metals, impacted Russian foreign exchange reserves. A political crisis came to a head in March when Russian president Boris Yeltsin suddenly dismissed Prime Minister Viktor Chernomyrdin and his entire cabinet in March.

The Asian crisis and political event rattled investor confidence caused foreign investors to sell off Russian stocks, bonds, and took a flight out of rubles.

The amount of GKO at some $150 billion was not a cause of concern for a $1 trillion economy. But with over 30% of GKO owned by foreigners, the foreign selloff caused havoc in equity, bond and the ruble.

Russian broad equity index down 90%+ from late 1997 to October 1998

Ruble went from 5 to 1 USD to 30 to 1 USD in June 1999

After the equity panic bottom in October 1998, Russian equity index, measured in rubles rebounded strongly in part thanks to the depreciating ruble.

However, measured in US dollars, Russian stocks didn’t make full recovery till some 5 years later.

2001 Argentina

In 1998, Argentina officially entered a recession, which lasted for three years and ended in a collapse as fears of the devaluation of the peso led to bank runs. This brought about grave amounts of protest and violence affecting many people and companies, causing several deaths.

In 2001 Argentina had US $100 billion of national debt, which is approximately 40% of its GDP. While the amount is containable relative to its GDP, the Argentines made a mistake of denominating its debt in US dollars. With shrinking current account surplus, the country wasn’t able to raise dollars to pay debt principal and interests in 2001 and eventually repudiated on the foreign debts. The fixed exchange rate was removed and the peso was quickly devalued. The exchange rate was then left to float, causing further devaluation (about 4 pesos per dollar)

Argentine equity index dived 60% in 2001

Peso went from 1 to 1 USD to 4 to 1 USD in early 2002 after the government allowed the Peso to float.

Although Argentine Equity Index recovered fully in 2002 in nominal terms, it wasn’t till 2004 before the stocks come back to pre-crisis level in US dollar terms.

Today USA

The US just experienced the biggest debt blowup known to man. Trillion dollar plus mortgage debts had to be bailed out. Lehman Brothers, Merrill Lynch, Bear Stearns, Countrywide, Fannie/Freddie’s have all become history. Even the American icon Citibank was brought to its knees at $1 before the government bailout. S&P500 was halved in 12 months.

America is privileged to have its dollars serving as the world’s reserve currency. America’s debt is denominated in dollars, which can be printed at will by the Fed. And printing is what the Fed did.

The Fed has printed over 1.5 trillion dollars to bail out various groups.

S&P 500 responded positively to monetary easing as it rose 40% since March in nominal terms. It shouldn’t be surprising to see the index recover to pre-crisis level. Equities have to rise as in Russian and Argentine cases, when currencies had been massively devalued.

In real terms however, when S&P 500 is measured in gold in the chart below, it likely takes many years before the index recovers.

Where does the dollar go from here?

When foreign investors took flight from Russian rubles and Argentine pesos, the dollar was the beneficiary. When global investors took flight from the dollar, which currency benefits?

Gold is the ultimate antithesis to the dollar. Gold is liquid, universally recognized, limited in quantity. Just like Russians and Argentines trying to anchor their currencies to the dollar, the US government devised various ways to slow down the rise of gold prices to maintain dollar’s soundness. However the massive money printing by the Fed and fast-eroding confidence in the dollar by international investors might just be the key to drive gold past the all illusive $1,000/oz level and not look back.

As we saw in the past crisis in Russia, Argentina, Thailand, and Brazil; equity markets eventually do return while the devalued currency never regained strength. The US case is no different. Further rebound by the equity market in nominal terms can be seen albeit with extreme volatility, and we will likely witness a 4-digit gold price in 2009 that will never look back. As the Chinese saying, crisis is spelled danger + opportunity. There is still time to diversify out of dollars before the world recognizes the dollar’s permanent debasement and demotion of status. Visit goldmau.com and sign up for our free market and stock updates.

John Lee, CFA
http://www.goldmau.com
jlee@goldmau.com
1.800.965.6404

ABOUT THE AUTHOR

John Lee, Mau Capital Management

John Lee is the founder and principal of Mau Capital Management and the portfolio manager of a mining equity hedge fund. He is a CFA charter holder and has degrees in Economics and Engineering from Rice University. Mr. Lee has a keen interest in the history of money and economics, and has previously studied under Mr. James Turk, a renowned authority on the gold market.

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