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-- Posted Sunday, 19 February 2006 | Digg This Article
This piece was written several days ago and although it appears gold is working its way through this correction and consolidation rapidly; we’re going to post it anyway with the idea that perhaps there are some long term benefits to be gained by doing so. First and foremost is the idea that we are going to have more corrections along the golden path and it behooves us to learn from past lessons and not follow the other lemmings over the cliff. Keep your eye on the primary trend in gold, and whether or not there is any political will to reign in the spending and or slow down the printing presses. Will there be any plan to retire this enormous debt that has been built up over the past ten years in both the US and abroad? Finally, it is imperative to observe and understand the geopolitical ramifications of trading oil in currencies other than the dollar. And please, one more thing. For all those clairvoyant analysts and commentators who saw this intermediate top in gold around $550-$560, and are telling me retrospectively how sharp they were; in the future and in full advance of any such correction, please shout it out from the rooftops so I can get out of all my positions for a week, or even a month. I would also appreciate you telling me exactly when to re-enter the market, be it a week, or a month later. Of course, I will consider the impact of the double commissions, the short term capital gains tax, accounting fees, and all the stress in the equation. Where am I going with this? I don’t believe the average person; the Moms and Pops of this country make good traders. I think it is unfair to ask them to do so. Yes, there are “power up” trend lines and “power down” trend lines that we can use along with volume to guide us. But most folks simply don’t have the time to earn their diplomas in trading. Many, however, have spent a small fortune in that endeavor only to end up with empty pockets and a bare wall. However, that being said, I would recommend learning as much as possible about both technical and fundamental analysis and about the particular sector with which you’re involved. Senior Producers, Mid-level Producers, and Exploration companies are topics for future discovery. Actually, I do like Jimmy Sinclar’s concept (www.jsmineset.com) of selling one third of your particular position into strength on a periodic schedule when gold gets overbought (ahead of itself-too expensive) and then buying it back when it becomes oversold (behind itself or too inexpensive). Visit his site, go to his archives, find the topic, and he’ll guide you through the process. But you definitely have to do your homework! You’ll also need to invest in a ruler, and a copy of Investor’s Business Daily. I would encourage you to pick up a CD or two that he has assisted in creating because they will help you become better gold investors. I think we also have to understand what kinds of positions everyone is talking about. Are these positions in physical gold and silver, options, futures, junior mining companies, senior mining companies, or some exotic derivative instrument? What are they? I suggest building a portfolio of quality gold and silver companies utilizing evaluation criteria we have mentioned in past articles and then hold on to them for the long haul. And just so you know, you are not alone! We are not alone and I am not talking about aliens from outer space. We’ve all kicked ourselves in the butt or had someone do it for us, moaned about not buying this or that, selling too low, selling too high, not selling at all and everything in between. It’s OK. No one said it was going to be easy. But it can be easier if you settle in for the long haul and don’t get side tracked by a bunch of “carnies” trying to get you to join their circus. Try and stay focused on quality projects, experienced management, and integrity every step of the way. The gold and silver markets, if not the entire resource sector, and especially Uranium, are going to be very kind to you over the next several years. The greatest obstacle to our success will be ourselves! ******************************************* Part II February 15. 2006 I’m like to change tactics here and go for the laughs because I think that many people need a good chuckle right about now. I’m going to include what is attributed as George Carlin’s “Views on Aging” that was sent to me by a dear friend. Unfortunately, I can’t remember which one but it doesn’t matter. I’m getting older, and my memory is not what it used to be—you know the ‘key thing’, where’d I park the car, face looks familiar but I can’t remember the name, bed by 10:30 on New Years—wonderful reminders that I’m not 21 any longer.) I guess the point is they love me, I love you and Carlin (or his alter ego) loves all of us or he wouldn’t put such funny, yet “real and relatable stuff” to paper. I can just hear Carlin delivering this monologue in his own inimitable style. I hope you’ll visualize George as he does his thing with this material. Here it is then. (Then if you’d like to hear “Gold Talking” in an exclusive scoop see “Confessions”, down below) George Carlin's Views on Aging Do you realize that the only time in our lives when we like to get old is when we're kids? If you're less than 10 years old, you're so excited about aging that you think in fractions. "How old are you?" "I'm four and a half!" You're never thirty-six and a half. You're four and a half, going on five! That's the key. You get into your teens, now they can't hold you back. You jump to the next number, or even a few ahead. "How old are you?" "I'm gonna be 16!" You could be 13, but hey, you're gonna be 16! And then the greatest day of your life . . . you become 21. Even the words sound like a ceremony. YOU BECOME 21. YESSSS!!! But then you turn 30. Oooohh, what happened there? Makes you sound like bad milk! He TURNED; we had to throw him out. There's no fun now, you're just a sour-dumpling. What's wrong? What's changed? He Turned! You BECOME 21, you TURN 30, then you're PUSHING 40. Whoa! Put on the brakes, it's all slipping away. Before you know it, you REACH 50 ….and your dreams are gone. But wait!!! You MAKE it to 60. You didn't think you would! So you BECOME 21, TURN 30, PUSH 40, REACH 50 and MAKE it to 60. You've built up so much speed that you HIT 70! After that it's a day-by-day thing; you HIT Wednesday! You get into your 80s and every day is a complete cycle; you HIT lunch; you TURN 4:30; you REACH bedtime. And it doesn't end there. Into the 90s, you start going backwards; "I Was JUST 92." Then a strange thing happens. If you make it over 100, you become a little kid again. "I'm 100 and a half!" May you all make it to a healthy 100 and a half!! (The way to that 100 marker is not to sweat the little stuff! And guess what, most it is just that—little stuff! This correction in gold and the ones that will surely follow are the little stuff—the noise. Don’t pay attention to it—enjoy your family, read a book, take a walk on the beach or in the mountains. Gold is going to $1000.00 and beyond and don’t let this bull or the “naysayers” buck you off! DSA) HOW TO STAY YOUNG -- Carlin 1. Throw out nonessential numbers. This includes age, weight and height. Let the doctors worry about them. That is why you pay "them”. (Hmmm, I’m not sure about this one but it sounds good! DSA) 2. Keep only cheerful friends. The grouches pull you down. 3. Keep learning. Learn more about the computer, crafts, gardening, whatever. Never let the brain idle. "An idle mind is the devil's workshop." And the devil’s name is Alzheimer's. 4. Enjoy the simple things. 5. Laugh often, long and loud. Laugh until you gasp for breath. 6. The tears happen. Endure, grieve, and move on. The only person, who is with us our entire life, is ourselves. Be ALIVE while you are alive. 7. Surround yourself with what you love, whether it's family, pets, keepsakes, music, plants, hobbies, whatever. Your home is your refuge. 8. Cherish your health: If it is good, preserve it. If it is unstable, improve it. If it is beyond what you can improve, get help. 9. Don't take guilt trips. Take a trip to the mall, even to the next county; to a foreign country but NOT to where the guilt is. (Remember that guilt is a synthetic emotion—man-made, artificial, and not a real emotion-DSA) 10. Tell the people you love that you love them, at every opportunity. AND ALWAYS REMEMBER: Life is not measured by the number of breaths we take, but by the moments that take our breath away. (Ok, it’s a little corny, but hey, isn’t it true? DSA) And if you don't send this to at least 8 people - who cares? But do share this with someone. We all need to live life to its fullest each day!! *********************************** Again, this a little corny but it’s very true. We should all live life to the fullest. But if you’ve just lost your job, or a loved one, or a pet, or you’re in a bad relationship, or financial difficulties, it is not so easy to be Mr. and Mrs. Beaver Cleaver. This is still America—the good, the bad, and the ugly. Focus on the good. Most of us don’t live the Cleaver legacy: we’re overworked, in debt, juggling work and family or two jobs and two families and there is simply too much stuff going on. We’re usually in denial about some things in our lives. It’s difficult to relax but we should learn how. Allow me to humbly make this one suggestion. If there is a difficulty in your life, take the first step towards resolving it. Take the little baby step that gives you the motivation to take the next little baby step. If you need help, don’t be afraid to ask for it because Americans for the most part are still a good hearted lot. But you and only you, or me and only me, can take that first step. The very first step is to acknowledge the difficulty. Remember, internally, we really do know most of the answers to the important questions in our lives. What we need is validation. We need to be strong enough to validate ourselves. ************************************* Part III Secret Confessions of a Young Bull Market in Gold Now we should conduct a bit of business; actually it’s a pep rally but we shall not tell a soul if you won’t. The gold market has outward appearances of correcting and or consolidating and I sense many confused faces over the past week to ten days. I just don’t want you to become too morose because “it just ain’t that bad”. And guess what—you can look forward to going through it again and again! I can hear “Gold Talking”. ….but then again, I have little friends that only I can see. Does that make me a bad person? I don’t think so. I actually did this ”interview” with Gold about a week ago. “It’s funny, when things are going great guns and I, gold, am ripping to new highs everyone’s giddy and in a good mood. Listen, it’s only human nature. When my corrections or is that contractions arrive, and arrive they do—sometimes fast and furiously—you humans have a natural tendency to look around for reasons why and to seek out your favorite guru for answers. Humans, you already have the answers. What you’re seeking is validation. Again, it’s only human nature to want that validation because it helps to reinforce your own views. I have a secret confession to share with you. I love to see you humans scramble and squirm around. I get a kick out of seeing you change your views every other decade, but hey, I’m only an element, # 79, when I last glanced at the chart about 100 years ago. I still say I’m No. 1! But what do I know!? Geeze, time flies.” “My price?— it’s like a gold-darn yo-yo—it goes up and down depending upon all sorts of things—but here’s a secret I know from being around for 10,000 years or so. I’m the real deal. Wars have been fought over me—I’m not proud of that you know. Humans believe in me, they trust me and my brethren. There are not many of us left, or there never was a bunch of us found, relatively speaking of course, and there’s a whole lot of ‘paper’ trying to act like us. They’re imposters!” “Wannabees! It won’t work, I tell you. I’ve seen it over and over and over again. You’d think you humans would get it right by now, but noooooo. Oh yea, the secret confession of this chunk of mellow yellow—our price is going up. Too much of that ‘paper’ around, and it just isn’t any competition for us. It’s a no brainer for gold’s sake—you can make ‘paper’ in a Midas minute.” “Ole Mr. Greenscam should have put all his green paper on rolls and be done with it! Cheesta! By the way, King Tut—he was da man! Big ole statures made of me (OK, OK, us!) and it was the real deal. But wait now, the Aztecs, they were pretty sharp cookies and those Middle Eastern guys with their gold bathrooms. These humans know how to live. They appreciated us for what we are, for what we can do. Art-Statutes-Jewlery-Vases! No phony baloney for them. By the way if you see those Aztecs, tell’em we say hey. Now that was a culture until those stoopid Spaniards came a long (no offense) and melted us down into ingots. Where’s the respect? Some of us are still at the bottom of the ocean since 1492, not that we care, but we sure look a whole lot better buffed out AND ON DISPLAY. Do I make my point!? By the way, most of us are definitely not into the bar thing. We don’t want to visit them and we don’t like staying in them. You meet the tackiest stuff there! Platinum for gold’s sake! Then they stick us in a vault somewhere and forget about us—where’s the fun? You might as well stick all of us in the same vault. You know, a pretty big vault would work and we’d all fit. What is it, like one or two of those Egyptian Pyramids? Hey, we like family, just like you, what I can say!? But listen, we’re really show-offs and much prefer to be on display. Coins, rings, statures, bathroom fixtures? Now, here’s my sister from Brazil—she’ll give you a little of our basic family background because I’ve got to jump—back into that stream—but hey, good talking with you. That’s a nice ring—looks like my brother from Nevada. By the way, that necklace you’re wearing—it’s a fake—plated—looks like pieces of my nieces from Canada. She always did mix with the wrong crowd. I’m not into plated. I like me—I like the real thing. 24 Carrots and forget the Bugs Bunny if you catch my drift. “Thanks Bro—isn’t he a character—or is that characteristic? I’m, new to this secret confession thing but ole Bolivia Boy talked me into it.” “Hi there, I’m a gold from Brazil—we have a big family—all over the globe but just so you know what all the fuss is about.” “I’m a chemical element in the periodic table that has the symbol Au (from the Latin aurum) and atomic number 79. I’m a soft, shiny, yellow, dense, malleable, ductile (trivalent and univalent—whatever that means) transition metal, I don’t react with most chemicals but I despise chlorine, fluorine and aqua regia as they can attack me and I’m pretty resilient, along with being just a bit cocky. I occur as nuggets or grains in rocks and in alluvial deposits and lucky me, I’m one of the coinage metals—you know, back when the humans had their heads on straight, they made this thing called money out of me. It worked pretty well until I became worth more than the money I represented. Something about depreciation and paper and it’s all so confusing; but listen, one thing I know is that I’m just about irreplaceable or is that irresistible, I’m still learning the lingo you know. Oh yea, the most important thing? The chicks love me and so do the guys, but hey the chicks go crazy like I’m some kind of rock star (get it-“rock” star-like Mick Swagger from the Aging Clones or Shiny Stones or something like that? But listen, I can’t hang around—your neck, I’ve still got some work to do. I’ve got to get down this stream within the next forty years or my name is mud—no really, I mean it, they’re building a dam! Really, gotta run. Tell GoldSeek.com that we’ve been found. Best gold site on the Web but I hear they’re into heavy metal. Go figure.” Well, there you have it from gold itself, Atomic Element 79 Au, An Exclusive Interview, A true Confession! What do you make of that? They like to see us scramble. We change our views every other decade? And what is this about validation? Here’s what I think. The key is to be balanced in where you go for that validation. If we always read and follow the people who think like we do, then yes, we are going to get the validation we want. However, we need to be sure to read and understand people who don’t think like we do to gain access to the other side of the story. One guy who does that is Ron Paul, Congressman from Texas. He definitely does not think like the rest of his colleagues. Please read his February 15, 2006 message to Congress. This is serious commentary from one of America’s reigning Patriots. In fact, I’m going to append that speech to the bottom of this piece so we end this debacle with at least some dignity and intellect intact. The great investors are the ones who think for themselves. They don’t need huge amounts of validation from other people because they trust their own instincts, especially when calculating what numbers the markets are giving them. They also have to read between the lines because everything is not as it would appear. I believe that that Uncle Bill, Uncle Chris, and the entire GATA Conglomeration or Congregation if you will, have proven that fact time and again. And they’ve proven it beyond a reasonable doubt in the face of overwhelming resistance. Why? Because the “other side” would not have you acquire a balanced perspective. They don’t want you having the complete picture so you can make up your own mind. It’s called SPIN! Beware of SPIN, learn to recognize and to keep it in perspective. The world we live in, and especially America, is all about SPIN—turning or crafting a story so it will meet the parameters of what a particular special interest group wants to present. They don’t want you to understand that if 1% or less of all the fiat currency in the world were invested in gold and silver, we’d see it at $5000 and $1000 respectively ….or even more. Why Should I Ignore the Noise, the Little Stuff and focus on the “Big Picture?” Well look, we all have our pat answers, our own idiosyncratic mine-set as to why gold and the precious metals complex functions the way it does. For me, there are three things that define this gold bull market and until they change, I believe that guys like Russell, Buckler, Sinclair, Norini, Murphy, Powell, Howe, Casey, and many others have it down pat. There may be variations on the theme but for me, this is what makes the most sense. Gold will continue to rise in value against all odds and against all fiat paper because of Debt. Oil and the Payment for Oil via particular currencies will play a part in this debt equation. (Please See Congressman Paul’s excellent piece below.) The three reasons to own gold and silver and reasons not to worry when the next “take your breath away” correction occurs are: 1. Debt (U.S. Account Deficit, Trade Deficit, Budget Deficit ) 2. Debt (Too many dollars being created) 3. Debt (the need to preserve wealth in the face of that debt) Did I mention debt? Until there is the political will to reduce that debt and right the financial wrongs over the past 20 to 50 years—from both the Elephants and the Donkeys—there is going to be the need for wealth preservation. Gold and Silver are real money. It’s that simple. If you don’t believe that a crisis is looming on the horizon, then you do believe in the Easter Bunny—or I need to find the last ten cards in the deck for you! (But hey, this is from the guy who is talking with gold!) Has anything fundamentally changed regarding that debt? Is there still a need to preserve wealth? Are the supply demand fundamentals in gold and silver any different than they were two weeks ago, four weeks ago? Will they be any different six months from now? I personally don’t think so. You know the answers to all of these rhetorical questions. As I said in my last missive, do not be a trader or on margin in this market because it’s going to be volatile. Now listen, volatility is not a bad thing, it just means, like Mr. Gold said in the True Confessions Interview, that people are jumping all over the map in their perceptions of gold. Only instead of extreme volatility occurring every ten years or ten months, it is now every ten days! There’s more! But relax a bit—it’s the weekend, don’t sweat the little stuff, tell someone you love them, and be sure to take that first baby step if the need is there. And if possible, buy yourself a little gold or silver. No, not jewelry—you heard Mr. and Ms. Gold say he likes the real thing—no pieces of nieces. The real thing is American Gold Eagles and American Silver Eagles for starters. These are made for the United States Government. You won’t regret it. Until next time, D, Stewart Armstrong Consulting to the Junior Mining Sector consulting@seacoastpub.com Part IV Hon. Ron Paul’s Talk before the U.S. House of Representatives as Published on: www.lemetropolecafe.com HON. RON PAUL OF TEXAS
Before the U.S. House of Representatives
February 15, 2006
A hundred years ago it was called "dollar diplomacy." After World War II, and especially after the fall of the Soviet Union in 1989, that policy evolved into "dollar hegemony." But after all these many years of great success, our dollar dominance is coming to an end.
It has been said, rightly, that he who holds the gold makes the rules. In earlier times it was readily accepted that fair and honest trade required an exchange for something of real value.
First it was simply barter of goods. Then it was discovered that gold held a universal attraction, and was a convenient substitute for more cumbersome barter transactions. Not only did gold facilitate exchange of goods and services, it served as a store of value for those who wanted to save for a rainy day.
Though money developed naturally in the marketplace, as governments grew in power they assumed monopoly control over money. Sometimes governments succeeded in guaranteeing the quality and purity of gold, but in time governments learned to outspend their revenues. New or higher taxes always incurred the disapproval of the people, so it wasn’t long before Kings and Caesars learned how to inflate their currencies by reducing the amount of gold in each coin-- always hoping their subjects wouldn’t discover the fraud. But the people always did, and they strenuously objected.
This helped pressure leaders to seek more gold by conquering other nations. The people became accustomed to living beyond their means, and enjoyed the circuses and bread. Financing extravagances by conquering foreign lands seemed a logical alternative to working harder and producing more. Besides, conquering nations not only brought home gold, they brought home slaves as well. Taxing the people in conquered territories also provided an incentive to build empires. This system of government worked well for a while, but the moral decline of the people led to an unwillingness to produce for themselves. There was a limit to the number of countries that could be
sacked for their wealth, and this always brought empires to an end. When gold no longer could be obtained, their military might crumbled. In those days those who held the gold truly wrote the rules and lived well.
That general rule has held fast throughout the ages. When gold was used, and the rules protected honest commerce, productive nations thrived. Whenever wealthy nations-- those with powerful armies and gold—strived only for empire and easy fortunes to support welfare at home, those nations failed.
Today the principles are the same, but the process is quite different. Gold no longer is the currency of the realm; paper is. The truth now is: "He who prints the money makes the rules"-- at least for the time being. Although gold is not used, the goals are the same: compel foreign countries to produce and subsidize the country with military superiority and control over the monetary printing presses.
Since printing paper money is nothing short of counterfeiting, the issuer of the international currency must always be the country with the military might to guarantee control over the system. This magnificent scheme seems the perfect system for obtaining perpetual wealth for the country that issues the de facto world currency. The one problem, however, is that such a system destroys the character of the counterfeiting nation’s people--just as was the case when gold was the currency and it was obtained by conquering other nations. And this destroys the incentive to save and produce, while encouraging debt and runaway welfare.
The pressure at home to inflate the currency comes from the corporate welfare recipients, as well as those who demand handouts as compensation for their needs and perceived injuries by others. In both cases personal responsibility for one’s actions is rejected.
When paper money is rejected, or when gold runs out, wealth and political stability are lost. The country then must go from living beyond its means to living beneath its means, until the economic and political systems adjust to the new rules-- rules no longer written by those who ran the now defunct printing press.
"Dollar Diplomacy," a policy instituted by William Howard Taft and his Secretary of State Philander C. Knox, was designed to enhance U.S. commercial investments in Latin America and the Far East. McKinley concocted a war against Spain in 1898, and (Teddy) Roosevelt’s corollary to the Monroe Doctrine preceded Taft’s aggressive approach to using the U.S. dollar and diplomatic influence to secure U.S. investments abroad. This earned the popular title of "Dollar Diplomacy." The significance of Roosevelt’s change was that our intervention now could be justified by the mere "appearance" that a country of interest to us was politically or fiscally vulnerable to European control. Not only did we claim a right, but even an official U.S. government "obligation" to protect our commercial
interests from Europeans.
This new policy came on the heels of the "gunboat" diplomacy of the late 19th century, and it meant we could buy influence before resorting to the threat of force. By the time the "dollar diplomacy" of William Howard Taft
was clearly articulated, the seeds of American empire were planted. And they were destined to grow in the fertile political soil of a country that lost its love and respect for the republic bequeathed to us by the authors
of the Constitution. And indeed they did. It wasn’t too long before dollar "diplomacy" became dollar "hegemony" in the second half of the 20th century.
This transition only could have occurred with a dramatic change in monetary policy and the nature of the dollar itself.
Congress created the Federal Reserve System in 1913. Between then and 1971the principle of sound money was systematically undermined. Between 1913 and 1971, the Federal Reserve found it much easier to expand the money
supply at will for financing war or manipulating the economy with little resistance from Congress-- while benefiting the special interests that influence government.
Dollar dominance got a huge boost after World War II. We were spared the destruction that so many other nations suffered, and our coffers were filled with the world’s gold. But the world chose not to return to the discipline of the gold standard, and the politicians applauded. Printing money to pay the bills was a lot more popular than taxing or restraining unnecessary spending. In spite of the short-term benefits, imbalances were institutionalized for decades to come.
The 1944 Bretton Woods agreement solidified the dollar as the preeminent world reserve currency, replacing the British pound. Due to our political and military muscle, and because we had a huge amount of physical gold, the
world readily accepted our dollar (defined as 1/35th of an ounce of gold) as the world’s reserve currency. The dollar was said to be "as good as gold," and convertible to all foreign central banks at that rate. For American citizens, however, it remained illegal to own. This was agold-exchange standard that from inception was doomed to fail.
The U.S. did exactly what many predicted she would do. She printed more dollars for which there was no gold backing. But the world was content to accept those dollars for more than 25 years with little question-- until
the French and others in the late 1960s demanded we fulfill our promise to pay one ounce of gold for each $35 they delivered to the U.S. Treasury. This resulted in a huge gold drain that brought an end to a very poorly devised pseudo-gold standard.
It all ended on August 15, 1971, when Nixon closed the gold window and refused to pay out any of our remaining 280 million ounces of gold. In essence, we declared our insolvency and everyone recognized some other monetary system had to be devised in order to bring stability to the markets.
Amazingly, a new system was devised which allowed the U.S. to operate the printing presses for the world reserve currency with no restraints placed on it-- not even a pretense of gold convertibility, none whatsoever! Though the new policy was even more deeply flawed, it nevertheless opened the door for dollar hegemony to spread.
Realizing the world was embarking on something new and mind boggling, elite money managers, with especially strong support from U.S. authorities, struck an agreement with OPEC to price oil in U.S. dollars exclusively for
all worldwide transactions. This gave the dollar a special place among world currencies and in essence "backed" the dollar with oil. In return, the U.S. promised to protect the various oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup. This arrangement helped ignite the radical Islamic movement among those who resented our influence in the region. The arrangement gave the dollar artificial strength, with tremendous financial benefits for the United States. It allowed us to export our monetary inflation by buying oil and other goods at a great discount as dollar influence flourished.
This post-Bretton Woods system was much more fragile than the system that existed between 1945 and 1971. Though the dollar/oil arrangement was helpful, it was not nearly as stable as the pseudo gold standard under
Bretton Woods. It certainly was less stable than the gold standard of the late 19th century.
During the 1970s the dollar nearly collapsed, as oil prices surged and gold skyrocketed to $800 an ounce. By 1979 interest rates of 21% were required to rescue the system. The pressure on the dollar in the 1970s, in spite of the benefits accrued to it, reflected reckless budget deficits and monetary inflation during the 1960s. The markets were not fooled by LBJ’s claim that we could afford both "guns and butter."
Once again the dollar was rescued, and this ushered in the age of true dollar hegemony lasting from the early 1980s to the present. With tremendous cooperation coming from the central banks and international commercial banks, the dollar was accepted as if it were gold.
Fed Chair Alan Greenspan, on several occasions before the House Banking Committee, answered my challenges to him about his previously held favorable views on gold by claiming that he and other central bankers had gotten paper ney-- i.e. the dollar system-- to respond as if it were gold. Each time I strongly disagreed, and pointed out that if they had
achieved such a feat they would have defied centuries of economic history regarding the need for money to be something of real value. He smugly and confidently concurred with this.
In recent years central banks and various financial institutions, all with vested interests in maintaining a workable fiat dollar standard, were not secretive about selling and loaning large amounts of gold to the market even while decreasing gold prices raised serious questions about the wisdom of such a policy. They never admitted to gold price fixing, but the
evidence is abundant that they believed if the gold price fell it would convey a sense of confidence to the market, confidence that they indeed had achieved amazing success in turning paper into gold.
Increasing gold prices historically are viewed as an indicator of distrust in paper currency. This recent effort was not a whole lot different than the U.S. Treasury selling gold at $35 an ounce in the 1960s, in an attempt to convince the world the dollar was sound and as good as gold. Even during the Depression, one of Roosevelt’s first acts was to remove free market
gold pricing as an indication of a flawed monetary system by making it illegal for American citizens to own gold. Economic law eventually limited that effort, as it did in the early 1970s when our Treasury and the IMF tried to fix the price of gold by dumping tons into the market to dampen the enthusiasm of those seeking a safe haven for a falling dollar after gold ownership was re-legalized.
Once again the effort between 1980 and 2000 to fool the market as to the true value of the dollar proved unsuccessful. In the past 5 years the dollar has been devalued in terms of gold by more than 50%. You just can’t fool all the people all the time, even with the power of the mighty printing press and money creating system of the Federal Reserve.
Even with all the shortcomings of the fiat monetary system, dollar influence thrived. The results seemed beneficial, but gross distortions built into the system remained. And true to form, Washington politicians are only too anxious to solve the problems cropping up with window dressing, while failing to understand and deal with the underlying flawed policy. Protectionism, fixing exchange rates, punitive tariffs, politically motivated sanctions, corporate subsidies, international trade management,
price controls, interest rate and wage controls, super-nationalist sentiments, threats of force, and even war are resorted to—all to solve the problems artificially created by deeply flawed monetary and economic systems.
In the short run, the issuer of a fiat reserve currency can accrue great economic benefits. In the long run, it poses a threat to the country issuing the world currency. In this case that’s the United States. As long as foreign countries take our dollars in return for real goods, we come out ahead. This is a benefit many in Congress fail to recognize, as they bash China for maintaining a positive trade balance with us. But this leads to a loss of manufacturing jobs to overseas markets, as we become more dependent on others and less self-sufficient. Foreign countries accumulate our dollars due to their high savings rates, and graciously loan them back to us at low interest rates to finance our excessive consumption.
It sounds like a great deal for everyone, except the time will come when our dollars-- due to their depreciation-- will be received less enthusiastically or even be rejected by foreign countries. That could create a whole new ballgame and force us to pay a price for living beyond our means and our production. The shift in sentiment regarding the dollar has already started, but the worst is yet to come.
The agreement with OPEC in the 1970s to price oil in dollars has provided tremendous artificial strength to the dollar as the preeminent reserve currency. This has created a universal demand for the dollar, and soaks up the huge number of new dollars generated each year. Last year alone M3 increased over $700 billion.
The artificial demand for our dollar, along with our military might, places us in the unique position to "rule" the world without productive work or savings, and without limits on consumer spending or deficits. The problem is, it can’t last.
Price inflation is raising its ugly head, and the NASDAQ bubble—generated by easy money-- has burst. The housing bubble likewise created is deflating. Gold prices have doubled, and federal spending is out of sight with zero political will to rein it in. The trade deficit last year was over $728 billion. A $2 trillion war is raging, and plans are being laid to expand the war into Iran and possibly Syria. The only restraining force will be the world’s rejection of the dollar. It’s bound to come and create
conditions worse than 1979-1980, which required 21% interest rates to correct. But everything possible will be done to protect the dollar in the meantime. We have a shared interest with those who hold our dollars to keep the whole charade going.
Greenspan, in his first speech after leaving the Fed, said that gold prices were up because of concern about terrorism, and not because of monetary concerns or because he created too many dollars during his tenure. Gold has to be discredited and the dollar propped up. Even when the dollar comes under serious attack by market forces, the central banks and the IMF surely
will do everything conceivable to soak up the dollars in hope of restoring stability. Eventually they will fail.
Most importantly, the dollar/oil relationship has to be maintained to keep the dollar as a preeminent currency. Any attack on this relationship will be forcefully challenged—as it already has been. In November 2000 Saddam Hussein demanded Euros for his oil. His arrogance was a threat to the dollar; his lack of any military might was never a threat. At the first cabinet meeting with the new administration in 2001, as reported by Treasury Secretary Paul O’Neill, the major topic was how we
would get rid of Saddam Hussein-- though there was no evidence whatsoever he posed a threat to us. This deep concern for Saddam Hussein surprised and shocked O’Neill.
It now is common knowledge that the immediate reaction of the administration after 9/11 revolved around how they could connect Saddam Hussein to the attacks, to justify an invasion and overthrow of his government. Even with no evidence of any connection to 9/11, or evidence of weapons of mass destruction, public and congressional support was generated through distortions and flat out misrepresentation of the facts to justify overthrowing Saddam Hussein.
There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling oil in Euros. Many believe this was the real reason for our obsession with Iraq. I doubt it was the only reason, but it may well have played a significant role in our motivation to wage war. Within a very short period after the military victory, all Iraqi oil sales were carried out in dollars. The Euro was abandoned.
In 2001, Venezuela’s ambassador to Russia spoke of Venezuela switching to the Euro for all their oil sales. Within a year there was a coup attempt against Chavez, reportedly with assistance from our CIA.
After these attempts to nudge the Euro toward replacing the dollar as the world’s reserve currency were met with resistance, the sharp fall of the dollar against the Euro was reversed. These events may well have played a significant role in maintaining dollar dominance.
It’s become clear the U.S. administration was sympathetic to those who plotted the overthrow of Chavez, and was embarrassed by its failure. The fact that Chavez was democratically elected had little influence on which side we supported.
Now, a new attempt is being made against the petrodollar system. Iran, another member of the "axis of evil," has announced her plans to initiate an oil bourse in March of this year. Guess what, the oil sales will be priced Euros, not dollars.
Most Americans forget how our policies have systematically and needlessly antagonized the Iranians over the years. In 1953 the CIA helped overthrow a democratically elected president, Mohammed Mossadeqh, and install the authoritarian Shah, who was friendly to the U.S. The Iranians were still fuming over this when the hostages were seized in 1979. Our alliance with
Saddam Hussein in his invasion of Iran in the early 1980s did not help matters, and obviously did not do much for our relationship with Saddam Hussein. The administration announcement in 2001 that Iran was part of the axis of evil didn’t do much to improve the diplomatic relationship between our two countries. Recent threats over nuclear power, while ignoring the
fact that they are surrounded by countries with nuclear weapons, doesn’t seem to register with those who continue to provoke Iran. With what most Muslims perceive as our war against Islam, and this recent history, there’s little wonder why Iran might choose to harm America by undermining the dollar. Iran, like Iraq, has zero capability to attack us. But that didn’t stop us from turning Saddam Hussein into a modern day Hitler ready to take over the world. Now Iran, especially since she’s made plans for pricing oil in Euros, has been on the receiving end of a propaganda war not unlike that waged against Iraq before our invasion.
It’s not likely that maintaining dollar supremacy was the only motivating factor for the war against Iraq, nor for agitating against Iran. Though the real reasons for going to war are complex, we now know the reasons given before the war started, like the presence of weapons of mass destruction and Saddam Hussein’s connection to 9/11, were false. The dollar’s
importance is obvious, but this does not diminish the influence of the distinct plans laid out years ago by the neo-conservatives to remake the Middle East. Israel’s influence, as well as that of the Christian Zionists, likewise played a role in prosecuting this war. Protecting "our" oil supplies has influenced our Middle East policy for decades. But the truth is that paying the bills for this aggressive intervention is impossible the old fashioned way, with more taxes, more savings, and more production by the American people. Much of the expense of the Persian Gulf War in 1991 was shouldered by many of our willing allies. That’s not so today. Now, more than ever, the dollar hegemony-- it’s dominance as the world reserve currency-- is required to finance our huge war expenditures. This $2 trillion never-ending war must be paid for, one way or another. Dollar hegemony provides the vehicle to do just that.
For the most part the true victims aren’t aware of how they pay the bills. The license to create money out of thin air allows the bills to be paid through price inflation. American citizens, as well as average citizens of Japan, China, and other countries suffer from price inflation, which represents the "tax" that pays the bills for our military adventures. That is until the fraud is discovered, and the foreign producers decide not to take dollars nor hold them very long in payment for their goods. Everything possible is done to prevent the fraud of the monetary system from being exposed to the masses who suffer from it. If oil markets replace dollars with Euros, it would in time curtail our ability to continue to print, without restraint, the world’s reserve currency.
It is an unbelievable benefit to us to import valuable goods and export depreciating dollars. The exporting countries have become addicted to our purchases for their economic growth. This dependency makes them allies in continuing the fraud, and their participation keeps the dollar’s value artificially high. If this system were workable long term, American citizens would never have to work again. We too could enjoy "bread and circuses" just as the Romans did, but their gold finally ran out and the inability of Rome to continue to plunder conquered nations brought an end to her empire.
The same thing will happen to us if we don’t change our ways. Though we don’t occupy foreign countries to directly plunder, we nevertheless have spread our troops across 130 nations of the world. Our intense effort to spread our power in the oil-rich Middle East is not a coincidence. But unlike the old days, we don’t declare direct ownership of the natural resources-- we just insist that we can buy what we want and pay for it with our paper money. Any country that challenges our authority does so at great risk.
Once again Congress has bought into the war propaganda against Iran, just as it did against Iraq. Arguments are now made for attacking Iran economically, and militarily if necessary. These arguments are all based on Iraq.
Our whole economic system depends on continuing the current monetary arrangement, which means recycling the dollar is crucial. Currently, we borrow over $700 billion every year from our gracious benefactors, who work ard and take our paper for their goods. Then we borrow all the money we need to secure the empire (DOD budget $450 billion) plus more. The military might we enjoy becomes the "backing" of our currency. There are no other countries that can challenge our military superiority, and therefore they have little choice but to accept the dollars we declare are today’s "gold." This is why countries that challenge the system-- like Iraq, Iran and Venezuela-- become targets of our plans for regime change.
Ironically, dollar superiority depends on our strong military, and our strong military depends on the dollar. As long as foreign recipients take our dollars for real goods and are willing to finance our extravagant consumption and militarism, the status quo will continue regardless of how huge our foreign debt and current account deficit become.
But real threats come from our political adversaries who are incapable of confronting us militarily, yet are not bashful about confronting us economically. That’s why we see the new challenge from Iran being taken so seriously. The urgent arguments about Iran posing a military threat to the security of the United States are no more plausible than the false charges levied against Iraq. Yet there is no effort to resist this march to confrontation by those who grandstand for political reasons against the Iraq war.
It seems that the people and Congress are easily persuaded by the jingoism of the preemptive war promoters. It’s only after the cost in human life and dollars are tallied up that the people object to unwise militarism.
The strange thing is that the failure in Iraq is now apparent to a large majority of American people, yet they and Congress are acquiescing to the call for a needless and dangerous confrontation with Iran.
But then again, our failure to find Osama bin Laden and destroy his network did not dissuade us from taking on the Iraqis in a war totally unrelated to 9/11.
Concern for pricing oil only in dollars helps explain our willingness to drop everything and teach Saddam Hussein a lesson for his defiance in demanding Euros for oil.
And once again there’s this urgent call for sanctions and threats of force against Iran at the precise time Iran is opening a new oil exchange with all transactions in Euros.
Using force to compel people to accept money without real value can only work in the short run. It ultimately leads to economic dislocation, both domestic and international, and always ends with a price to be paid.
The economic law that honest exchange demands only things of real value as currency cannot be repealed. The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars
or Euros. The sooner the better.
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-- Posted Sunday, 19 February 2006 | Digg This Article
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