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6.2 Economic Wild Cards |
What’s Going on Here?
Stocks, energy, debt, deficits, inflation, money supply and gold were all up in the spring of 2001.
What’s going down? Interest rates, savings rates, consumer confidence and national productivity.
Is it any wonder that economists, media pundits and the public are all so confused?
I will now touch on just a few new problems that could become far worse than the $4 trillion blood bath we saw in the NASDAQ last year. Any one of the following wild cards could easily trump Greenspan’s soft-landing approach and even perhaps develop into the worst economic event in world history.
Ed Yardeni, chief strategist for Deutsche Banc recently told CNNfn, “The Fed is setting the stage for bubble two.”
My goal is that this information will help you avoid this emerging crisis and perhaps even prosper by having a winning strategy regardless of the final short-term economic outcome.
The Blame Game
In the face of confusing economic indicators America has discovered a new game - the blame game. It seems Americans now want to pin all their troubles on a person or a group of people, regardless of whether the facts support it.
The lawyers love it.
And why not? For eight long years we witnessed the Clinton administration elevate the blame game to a new art form. Now it appears that the public has developed a ferocious appetite for finding someone to blame for all our woes - politically, socially and economically.
In 2000, the almighty U.S. stock market slowly unraveled and everyone from politicians to the average guy wanted someone to blame for the drop.
We first looked to Alan Greenspan's Federal Reserve. The public outcry was a popular blame-shifting mantra, “How could the financial genius Alan Greenspan allow such a loss of value occur? He should have cut interest rates sooner!”
Then some turned the blame toward then-presidential candidate George W. Bush, claiming his frank comments of concern about the faltering stock market and economy caused it to happen - as though talking about economic realities creates a self-fulfilling prophecy.
Next Americans began to blame the market downfall on the leaders of the tech boom, saying: “How could they waste so much money building their castles in the air?” As if someone had held a gun to their heads forcing them to follow the media pundits perpetual slogan, “Buy tech!”
I can't remember when any network program has ever mentioned that it may have been the greed of the average investor for long-term, double-digit returns that contributed and fueled the market excesses. Perhaps I missed it. Did you see it?
Then there’s the ever-popular blaming of Wall Street analysts. Fortune magazine’s cover story, “Where Mary Meeker Went Wrong” (5/14/01) said: “Meeker came to see herself not only as an analyst but as a player - a power broker, a dealmaker, a force to be reckoned with. Meeker was the unquestioned diva of the Internet Age. Tech companies begged her to cover them. Morgan Stanley paid her an eye-popping $15 million in 1999. That was then. Today Meeker has become something else entirely. Though she was Queen of the Bubble, Meeker hardly reigned alone.”
Prior to the tech wreck, inexperienced stock market investors just couldn’t conceive that corporations would not be able to turn in quarter-after-quarter of profits to support the excessive prices of their stocks. But by 2001 betrayed investors were looking to blame.
The Energy Blame Game
In the spring of 2001 we also faced a new energy crisis in America. Gasoline prices hit more than $2 per gallon in many cities and were projected to possibly hit $3 by the end of the summer. Yet incredibly, most of our energy seems to be spent on pointing the finger of blame rather than discussing viable solutions.
Predictably the blame for our energy crisis was first aimed at President Bush and his “oil buddies,” instead of the lack of attention this problem received from Bill Clinton and former Energy Secretary Bill Richardson. You remember him - he was blamed when secrets were leaked to the Chinese about the Los Alamos Laboratory on his watch.
Remember in 1999, when Clinton released the strategic oil stockpile to ease prices? The crude oil had to be sent overseas to be refined into gas and then sent back to the U.S. because our refineries were at full capacity. We must now find someone new to blame!
Perhaps we should blame the automobile manufacturers for building those gas-guzzling SUVs that have become so popular in America. Few have considered that part of the blame should be upon everyone of us that is using more gas or refuses to consider car pooling. Let’s not forget the overblown environmental worries that have created a political climate that deterred us from building any new oil refineries for more than 15 years in California.
California is the biggest example of the energy blame game. It is Governor Gray Davis’s fault, right? He is the one to blame - or is it those money-grubbing utility companies that are sucking the public dry by overcharging?
Breaking the Law of Supply & Demand
The California energy crisis is a perfect example of what happens when the free-market law of supply and demand is overridden by government regulators.
According to Hans Senhold, noted free-market economist, “The supply-and-demand principle points to three ways of creating an energy crisis. One, legislators and regulators fix energy rates that do not allow for rent, labor and profit to bring it thither. In modern terminology, they set energy prices below market prices. Two, legislators and regulators do not set rates but prevent producers from meeting a growing demand through stringent emissions and zoning rules, which causes the rates to soar until there will be a “rate crisis.” Third, legislators and regulators may do both, fix rates below the market and prevent the supply from adjusting to the demand, which is bound to create a double-prong crisis.
“California political leaders chose the double-prong approach. In 1996 California legislators unanimously passed a 67-page electricity- restructuring law. They called it “deregulation” by which, in typical political duplicity, they meant re-regulation.
“It contained something for all the different players. The number of regulators was increased with the addition of two new quasi-governmental organizations - the Power Exchange, which controls all transactions between utilities and electricity generators, and the Independent System Operator, which operates the electricity grid, purchases the needed power and charges the utilities.
“Consumer groups got an immediate 10 percent rate cut and price caps at roughly the 1995 level. Powerful environmental groups were reassured of stringent environmental rules and zoning restrictions. The utilities, finally, were given strong financial incentives to sell their fossil fuel-fired power plants. They subsequently reduced the self-generated power from 72 percent to just 20 percent, purchasing the balance on the market.
The government’s solution? Mr. Senhold concludes, “The legislature created another power authority: the California Consumer Power and Conservation Financing Authority which may issue bonds to build state power plants. Moreover, it is preparing legislation authorizing the State to issue more bonds to buy the transmission lines from the utilities. If they refuse to sell, the governor threatened to use the power of eminent domain. In short, the State is taking over the electricity industry.”
So the blame game is on a roll in California, but the entire country will pay the price as inflation continues to increase the cost of living. Face facts - big business and the government can avoid inflation's effects by increasing prices or decreasing services. The average citizen cannot unless they are willing to think outside the box created by today’s inflationary money system.
Inflationary Trends - Expecting the Inevitable
Inflationary pressures are rapidly changing. Some investments will soar, while many more plunge. And anyone who bets on a continually rising market in which everybody profits, is destined for failure.
Inflation is the one wild card that can whip investment markets into a frenzy, cut your true wealth by half in just a few years and completely derail an otherwise sound investment strategy.
In the late '60s inflationary surprises ripped through the stock market, dropping the Dow some 35 percent. In the 1970s stocks suffered through a tortuous two-year bear market as inflation spiraled. In the '80s Paul Volcker nearly plunged the U.S. into a 1920s-style depression when he miscalculated the effect of “runaway inflation.”
Now after years of relative calm on the inflation front, the risk of grievous error is just as strong as at any point in history.
USA Today (6/11/01) reported that “Inflation could outpace savings for the first time in seven years.” They went on to say that holders of CDs and Money Market funds yielding 3.5 to 4 percent are now facing a guaranteed loss due to rising inflation.
People who know me know that “doom and gloom” has never been my style. However, I do feel compelled to warn you about the risks looming ahead of you. Inflation poses an immediate danger, but also a long-term threat - especially as you reflect back on how easily you could have been protected by taking a few simple steps now.
Why do most investors overlook inflationary trends? Until recently productivity has rocketed ahead on the back of revolutionary technology that lets one worker do the job of 10. And billions of eager new capitalists have turned the bustling economies of Asia, Eastern Europe and Latin America into a competitive force like never before. But in 2001 it appears that inflation could skyrocket. Why?
Greenspan is Cornered
Faced with the onset of a business slowdown, falling stock prices, and the possibility of a recession, starting in January 2001 the Fed did just what everyone expected - they reduced the price of money. In fact, it did so more aggressively than any other time in history - dropping rates from 6.5 percent to 4 percent.
Chris Low, chief economist at First Tennessee Capital Markets confirms the inflationary implications: “Greenspan has become completely reactive. Either we'll have a recession, and he'll get blamed for being slow to ease, or he'll engineer a recovery, which will be accompanied by an inflation problem. Take your pick. Steering a middle course would be a miracle.”
Caught between inflation and recession - there is no doubt about which way Mr. Greenspan will steer the economy. He would rather risk the whirlpool of escalating prices than risk being eaten alive by recession.
“The Fed chairman has few tools in his workshop. He can regulate the quantity of money, or its price,” says International Speculator's Jim Grant, “but not both at once. For the past 20 years, the Fed has chosen to regulate the price, i.e., the federal funds rate. The quantity, i.e., the monetary base, is what it doesn't control.”
The Fed is doing what it said it would not do, easing policy in the teeth of rising inflation rates. Why? Because they believed inflation would not be a problem due to increased productivity.
Rising levels of productivity - providing more and more goods and services per unit of input - were supposed to offset increases in the supply of money. But what if U.S. productivity continues dropping, as it has for the last three quarters?
Productivity has been a key factor in the economy's last 10 years of growth - the longest expansion in U.S. history. As workers produce more per hour, companies can sell more, helping profits while keeping workers' wages in check and limiting inflation pressures.
Many economists have credited productivity gains in large part to businesses' investments in computers and other technology, but some fear that the productivity boom is over, at least for now.
Slowing productivity and rising labor costs raise the specter of inflation. Clearly inflationary pressure is building and lower interest rates offer Americans no guarantee that the money supply will not explode in the days ahead - causing double-digit inflation to crush any rally in the stock and bond markets.
Bill Bonner's Daily Reckoning confirms that the Fed cannot control the inflationary trend by dropping interest rates indefinitely:
“A lower fed funds rate - the rate that the Fed charges member banks to borrow money - allows the banks to lend at lower rates too. In a deflationary downturn, money becomes hard to get. People lose jobs, the values of stocks and other investments fall, sales and profits decline... and there are still big debts to pay. Lowering the price of money may have some effect, but not necessarily the desired one.”To protect your assets against inflation you must have your assets diversified into many areas - including tangibles like coins, gold and land. Yet this is a strategy that scarcely one network talking head will ever suggest because tangible assets are in competition with the debt and equity asset markets.
A Golden Spike
Forget about stocks for a moment, the attention now is shifting toward the gold market. Gold spiked $13.80 per ounce on May 18, 2001 - about 5 percent. This surprisingly strong advance was the long-slumbering precious metal's biggest gain in 15 months. Why?
Let’s add it up: the money supply is soaring... consumer prices are rising... and the Fed is cutting rates. No matter how you slice it, inflation is on the ascent.
In his frantic effort to avoid a recession Alan Greenspan has opened the floodgate of money - increasing the total money supply by a staggering 28 percent in the first three months of 2001.
According to Richard Russell's Dow Theory Letter, “Gold loves it. Throw an extra trillion dollars into the mix and it's got to stir up something. That something is housing, medical bills, restaurant prices, sports tickets, utility bills, and well - most of the items you buy in daily life.”
In fact, almost all measures of inflation are accelerating at a time when the Fed is stepping on the accelerator to stimulate demand.
Bloomberg.com said, “The Fed has lost sight of its long-run objective of price stability. Rising inflation would be one thing if the raw material of inflation - money - was signaling disinflation ahead. Instead, April will be the fifth consecutive month to see double-digit annualized increases in the broad monetary aggregates, M2 and M3.”
What will this inflationary trend mean for a skittish stock market, and how will increasing bankruptcies affect the banking system?
Good Times = Bad Loans
Years ago Americans watched in horror as the Savings and Loans precariously hung by a thread on the precipice of failure until the Resolution Trust Corp. was formed to bail them out at huge taxpayer expense.
In 1987 the banks single-handedly saved the U.S. stock market by pouring billions of dollars of liquidity to stop the bleeding of a 20 percent “correction.”
In the years since then the equity markets appeared to be the only game in the investment world. So much so, that the average person ignored the distinction between investment and savings and invested his life savings into a stock market which, by historical measure, was grossly overvalued.
During the prosperous '90s, many bank loans were made; everything from margin loans on inflated stock values to 150 percent mortgages on our homes, which fueled the economy and the stock market's growth.
With billions of dollars of freshly borrowed money, the world looked like a wonderful place. People were so drunk with the so-called “new era” that most even believed they could eat unlimited amounts of candy without ever gaining a pound or getting a cavity.
There is an old saying in the investment community: “Good loans are made in bad times and bad loans are made in good times,” made famous by Fed Chairman Alan Greenspan.
This statement makes sense. When times are bad, a bank or any lender for that matter will only lend money to those that they know have the ability to pay the money back. However, during good times a lender will loan to anybody who has even a remote chance of paying back the loan. The logic is that the lender has enough profitable loans to offset any losses.
Keep in mind we've just gone through one of the best ten-year periods of good times we have seen in the nation's history. Thus if the old saying is consistent, as it has been in the past, we have got a lot of bad loans out there that will surface soon.
Unlimited Money Supply = Zero Savings
If A+B=C, then we are in bigger trouble than we know. Just as the recent rash of school shootings illustrates a much deeper problem in society, so the rampant increase in the U.S. money supply should be sending us a clear economic distress signal.
As mentioned, the Fed has recently increased the money supply at a rate of 28 percent - an unprecedented rate. They are creating more liquidity than was made available during the crash of 1987 or in preparing for Y2K. They are also keeping interest rates low to make that money very attractive to borrow. The same magical formula that worked so well in 1987 appears to have little if any effect on the market or the economy. Why?
My opinion is that most people in America - and the world for that matter - are tapped out and scared. Both Time and Newsweek devoted several covers in spring 2001 to discussing the growing fear in America. Why all the fear suddenly?
I think most people are scared to death that the explosive stock growth (read: irrational exuberance) that we experienced for the last decade is gone now and it may not come back soon. America is afraid that we may just have to tighten our belts and live within our means and stop buying everything under the sun whether we can afford it or not.
A Confidence Crisis
Here's a troubling thought: Just because the Fed rate cuts are credited for rescuing the NASDAQ, thereby preventing Cisco shares from trading in single digits, it does not mean that the Fed has also saved us from recession.
It's quite possible that both the consumer and corporate America will avail themselves of easy credit, but will they use that credit to consume or invest? Not necessarily. Instead I think most will maintain their lifestyle and existing debt load rather than cutting back.
Economists and politicians know Americans are over their heads in debt. Lawmakers changed the bankruptcy laws in early 2001 to afford the credit card companies more protection. Incidentally, the credit card departments are the most profitable operation in a bank.
Politicians even pushed a tax cut through the House and Senate because they know people need money and that it irks the public to see budget surpluses sitting in government coffers instead of being returned to taxpayers.
Politicians are savvy enough to know that if the banks did falter, the whole charade is over. The banks and the Fed money system work completely on confidence - if that confidence fails, the entire system could collapse virtually overnight.
I'm not saying the banking system is collapsing, that would not be politically expedient. What I am suggesting however could be more devastating than a banking collapse. Keep in mind, in 1929 when the banks did collapse, the citizens knew the reality and could defend their savings and investments accordingly. It won't be that way this time.
A “too big to fail” philosophy exists today, and the accepted means of keeping the system intact is to inflate the money supply ad infinitum. This increases the liquidity to big businesses, while contracting liquidity to the average guy - allowing the effects of inflation to be shouldered by the public through higher prices, not by government or big business.
America's economic and banking systems are both in trouble and it is probably going to get worse before it gets better. And when the markets and the masses cry out to their savior Alan Greenspan for the answers, it will fall on deaf ears.
Mr. Greenspan knows that some pain has to come in order for the system to come back to some sense of reality. He warned us about “irrational exuberance.” He knew that P/E ratios could not stay at 200-300. He knew the banks could not keep making outrageous profits on the ignorance of the average person. Can anyone actually justify paying 18-21 percent on credit card debt? Yet millions of people do it every single day without giving it a second thought.
Ending The Blame Game
The fact is that we have no one to blame for most of these problems except ourselves - which means taking personal responsibility for the world around us. America’s Founding Fathers envisioned a nation of responsible, self-governing individuals and communities.
Instead of blaming, America's founders took responsibility. They willingly shed their blood and gave up personal fortunes to secure our future and the personal freedoms that we hold dear. Yet today the majority still want someone else to be in charge - to be the responsible party.
American statesmen like James Madison assumed that future generations would choose wise leaders to represent them and govern by putting the common good of the country ahead of their personal interest. They deduced that if elected officials violated our trust they would be removed from office and never re-elected. I guess they did not figure on such a high level of public complacency.
No, the Founding Fathers never foresaw that the population would become so caught up in the pursuit of wealth that they would vote their pocketbooks rather than their conscience. They thought “We the People” would always do the right thing because they always sought to do the right thing. History seems to prove that was a bad assumption.
Sadly, most Americans cannot even define money today, so when it disappears very quickly they are frustrated that their luck has run out and must blame someone. Perhaps the best way to end the blame game is to understand the “game” well before playing it at all.
Work, Risk & Luck
There are only three ways to create wealth...
Yet today the masses want wealth without risk, without much work and with good luck following them around like a shadow in the afternoon. Much of this is due to the rise of a lottery mentality, which is promoted at almost every level today.
There was a time in America when great invention and marvelous discoveries were sought after for the primary purpose of improving mankind. Most of America's great inventors cared more about making the world a better place than about the wealth that might follow - men (and women) like Edison, Salk, Franklin and Pasteur.
There was also a time when savings was a sign of maturity - when debt was shunned like the plague. But not today, it is just the opposite - and now Americans can't figure out why they feel like they are walking up a down escalator, financially. I believe we live in the greatest country of opportunity in the world, but we must keep things in proper prospective.
Yet when someone or some group in society doesn't have wealth our first reaction is often to blame someone or something else. Rarely do we consider that the reason someone doesn't have a job could be that they are just plain lazy or not skilled to do the job right. Or if you didn't make as much money as your friend on an investment, could it be he was willing to take more risk than you?
Could it be that we take inexpensive fuel for granted? Could it be we will be forced to discipline ourselves to drive less? If we have extended rolling blackouts in California, could the reason be that we don't hold our politicians and leaders responsible?
Could our country be in the present moral crisis because we elected, then re-elected, an immoral man to the White House? You see the problem with the blame game is that even if you do pin the blame tail on the right donkey it doesn't fix anything unless you do something with the donkey. What we need to do is to analyze the problem and see how we can fix it. Not the politicians - us! Until we begin to take responsibility and stop playing the blame game, I expect growing volatility in the financial markets and gold prices.
The Untold Story of Gold
Throughout history, civilization has always had a tremendous appetite for gold. As a symbol of beauty and wealth, gold has been desired by the New World explorers to the new Eurodollar bankers. Whether hunting for lost treasures or exploring new frontiers, mankind has made the ultimate sacrifice in its pursuit of the yellow metal.
Given the rich history of gold, I marvel at the countless articles written in the 90s discussing gold’s diminished role as a monetary asset. While nations once waged wars to get their share of the precious metal, recently central bankers of Belgium, the Netherlands and Australia have sold their gold reserves off at astonishingly low prices.
It was truly astounding that Australia would sell millions of ounces of gold, driving the price down and diminishing the value of their in-ground gold reserves in order to invest the proceeds into fixed income assets.
Leave it to politicians and bankers to violate two fundamental economic rules - value and timing.
Even more damaging to the gold price during the last few years has been the practice of gold loans by the large bullion banks. It had been a common practice for these banks, which had large positions of gold, to loan the metal to gold mining companies at low interest rates. The mining companies could repay the loans at the time of their production. Rather than speculation, this is referred to as hedging in the industry.
An analogy would be a farmer who harvests corn in September, but sells the contract in May when the prices are high so that he is guaranteed a nice profit for his future harvest. The bankers were making interest on a non-working asset - gold - and they decided to expand their gold loans. Large brokerage companies and hedge funds took advantage of low interest gold loans at 1 to 2 percent - that is where the hedging ended and the speculation began.
In 1998, Mr. Bill Murphy, a former professional football player and long-time commodities specialist, formed the Gold Anti-Trust Action Committee (GATA) to look into allegations of collu-sion and manipulation in the gold markets.
GATA hired Berger and Montague, a prominent anti-trust law firm, and gathered the support of the large gold mining companies. Together they went to the international press and the U.S. Congress to report on the reckless gold loans of the bullion banks.
Apparently, the hedge funds and brokerages that borrowed the gold at 1 to 2 percent sold the metal in the futures market and reinvested the proceeds into significantly higher-yielding investment vehicles.
As long as there was a continuous new supply of gold being loaned and sold, the price would continue dropping. It was then profitable for the funds to cover their short gold positions and buy back the metal at a lower price. If one sells an item high and buys it back low that is a guaranteed profit in the commodities futures market.
GATA and Murphy were dumfounded as to why the price of gold continued to drop while the prices of basic commodities (e.g. oil) were rising during the early part of 1999.
The last outrage occurred just when gold was rising in May to approximately $290/oz. Out of the blue, the Bank of England announced it was selling half its gold supply. However, before the first sale of 25 tons, the price plummeted to $30/oz. The British had lost millions of pounds prior to the sale!
Imagine a major mutual fund announcing that they plan to sell millions of shares of IBM and the stock then plummets before the sale is completed, causing the shareholders to lose millions. While the mutual fund shareholders would quickly reorganize management, the British had no recourse; no one took responsibility when their gold reserves as well as their pound currency lost value. GATA and Murphy believe that insiders at several major U.S. brokerage houses were colluding with insiders in England to drive the price down, believing they were short hundreds of tons of gold.
GATA's main concern, as expressed to the members of the U.S. Congress, is that the international banks recklessly loaned excessive amounts of gold. An analogy would be the reckless loans made by savings and loans executives in the early '80s, which left the government and taxpayers holding the bill of billions in “bad loans.”
GATA fears that up to 10,000 tons (not ounces) may have been loaned. With most of the borrowed gold having been sold and with a supply demand imbalance occurring, how will this gold be replaced?
If the price of gold escalates, these hedge funds must quickly cover their short positions, buy back the gold or risk going bankrupt. Is it possible that large financial institutions as well as large international hedge funds are at risk?
If Douglas Casey is right and we are now entering a "bull supercycle" in gold, the fireworks have already begun. Maybe the European bankers recognized their plight when they announced on September 26, 1999, a restraint in further gold loans, a tightening of credit on gold loans and a limit of gold sales to 400 tons per year. Hence, the price of gold exploded from $252 to more than $320 within just a two-week period.
Goldgate: Gold Derivative Banking Crisis
The following is “An Open Letter to Senate and House Banking Committee Members” by Bill Murphy, founder, GATA.
Read it carefully to understand why it is only a matter of time now before the truth is exposed and gold prices skyrocket.
Extensive research has led the Gold Anti-Trust Action Committee to the conclusion that the gold market is being recklessly manipulated and now poses a serious risk to the international financial system.
Annual gold demand, currently at record levels, exceeds the mine and scrap gold supply by more than 1,500 tons. In the Washington Agreement of September 26, 1999, 15 European central banks announced that they were capping their lending of gold and would limit their official sales of gold to 400 tons per year for the next five years.
Some major gold producers have reduced their forward sales, and speculators have reduced their borrowed gold selling. Commodity prices and wages are rising. Yet the price of gold has declined steadily. With demand so much greater than supply, the price of gold should be rising sharply.
According to the Office of the Controller of the Currency, the notional value of off-balance-sheet gold derivatives on the books of U.S. commercial banks exceeds $87 billion, which is greater than total U.S. official gold reserves of approximately 8,140 metric tons.
Gold derivatives surged from $63.4 billion in the third quarter of 1999 to $87.6 billion in the fourth quarter, after the Washington Agreement was announced. The notional amount of off-balance-sheet gold derivative contracts on the books of Morgan Guaranty Trust Co. went from $18.36 billion to $38.1 billion in the last six months of 1999.
Veneroso Associates estimates that the private- and official-sector gold loans stood at 9,000 to 10,000 tons at the end of 1999. Most of these loans represent gold that has been sold in the form of jewelry and cannot be retrieved. Mine supply of gold for all of 1999, according to trade sources, was only 2,579 tons. Thus the gold loans are far too big to be repaid in a short time. The swift $84 rise in the gold price following the Washington Agreement caused a panic among bullion bankers. But that was only a warning of what is to come.
Federal Reserve Chairman Alan Greenspan and Treasury Secretary Lawrence Summers, responding to GATA's inquiries through members of Congress, have denied any direct involvement in the gold market by the Fed and the Treasury Department. But they have declined to address whether the Exchange Stabilization Fund, which is under the control of the Treasury Secretary, is being used to manipulate the price of gold.
Several prominent New York bullion banks, particularly Goldman Sachs, from which the immediate past treasury secretary, Robert Rubin came to the Treasury Department, have moved to suppress the price of gold every time it has rallied during the last year.
The Gold Anti-Trust Action Committee believes that U.S. government officials and these bullion banks have induced other governments to add gold supply to the physical market in recent years to suppress the price. Britain's National Accounting Office is now investigating the Bank of England's decision to sell off more than half its gold. Contrary to proper accounting practice, reductions in gold in the earmarked accounts of foreign governments at the New York Federal Reserve Bank are being listed by the Commerce Department as the export of non-monetary gold. These exports from the Fed occur upon rallies in the gold price.
Why would anyone want to suppress the price of gold?
First, suppressing the price of gold has made it a cheap source of capital for New York bullion banks, which borrow it for as little as 1 percent of its value per year. Gold is borrowed from central banks and sold, and the proceeds are invested in the financial markets in securities that have much greater rates of return. As long as the price of gold remains low, this "gold carry trade" is a financial bonanza to a privileged few at the expense of the many, including the gold-producing countries, most of which are poor. If the price of gold were allowed to rise, the effective interest rate on gold loans would become prohibitive.
Second, suppressing the price of gold gives a false impression of the U.S. dollar's strength as an international reserve asset and a false reading of inflation in the United States.
Too much gold is being consumed at too cheap a price. Massive amounts of derivatives are being used to suppress the gold price. If this situation is not corrected soon, there will be a gold derivative credit and default crisis of epic proportions that will threaten the solvency of the largest international banks and the world standing of the dollar.
As you are aware, a 90-page document of our extraordinary findings was personally delivered to your offices last Thursday.
The Gold Anti-Trust Action Committee requests that a full and complete investigation be launched into this matter as soon as possible.
The longer the gold price is artificially held down, the bigger the eventual banking crisis.
Gold Anti-Trust Action Committee, Inc. Bill Murphy, Chairman, LePatron@LeMetropoleCafe.com Chris Powell, Secretary / Treasurer, GATAComm@aol.com Ethan B. Stroud, Attorney at law, formerly Justice Department, Treasury Department John R. Feather, Attorney at law, formerly legal staff, Federal Reserve Bank Suite 1203, 4718 Cole Avenue, Dallas, Texas 75205 (214) 522-3411 phone (214) 522-4432 fax - www.gata.org
GATA Delegation Progress (5/2000) By Bill Murphy, GATA
On Wednesday, May 10, 2000 at 11:30, the Gold Anti-Trust Action Committee consisting of Chris Powell (newspaper editor), Reginald Howe (lawyer), Frank Veneroso (macro-economist), a State Senator and I met with one of the most powerful politicians in Washington. It was only going to be a 15-minute meeting - it lasted an hour.
At the end of the meeting, we were excused from the room for several minutes. When the people we met with returned, we were told that they were going to try to set up a meeting with another influential politician at 2 p.m., but that we would have to call at 1:30 to confirm.
We were stunned to learn at 1:30 that this politician had said, "I am aware of the issue," and that he wanted to meet with the GATA delegation. The meeting took place and six members of his staff also attended. What was most remarkable is that this politician left the floor of Congress to attend our hastily arranged, unscheduled meeting.
This politician asked many questions and was very focused on what we had to say. So much so, that he was annoyed when a staff member left to deal with some other pending issue, saying that this was more important. He told us he had read our biographies before coming to the meeting and was a bit taken aback when he was handed the "Gold Derivative Banking Crisis" document with his name and state on it.
This knowledgeable politician said that he and his staff would look into our contentions and suggested that we might meet again. After this very intense one-hour meeting, he returned to Congress, which was in session. From there, we went on to meet with Dr. John Silvia, the Chief Economist of the Senate Banking Committee. I could tell he had spent some time on our presentation because he had highlighted material that I had sent to him.
Frank, Reg and Chris did a terrific job (as they did in all the meetings) explaining what we have learned through our extensive research. That meeting also lasted an hour and Dr. Silvia took copious notes.
Yesterday, I passed out 88 of the documents to the staff of all the Senators and Representatives on the banking committees. They were told to look for an open letter to all of them in Monday's Roll Call. For the Senate I went to the Dirksen, Russell and Hart buildings. For the House I went to the Rayburn, Longworth and Cannon buildings. It took me the entire day, but was well worth it. Congressman Lee Terry of Nebraska could not have been nicer and said he would read the document on his way back to his native state this weekend.
My last stop was the Rayburn Building and I smiled as I went by The Gold Room. It was the opinion of the entire Gold Anti-Trust Action Committee delegation that the trip was far more fruitful than any one of us dreamed possible. However, as we all know, that was just our first salvo. There is much to be done to win the day and we are already planning our next course of action.
When our adversaries realize how far we have come, we know that they will go all out to discredit us. If yesterday's meetings were any indication of making a serious impact on those who count in Washington, the other side has their work cut out for them.
The GATA Lawsuit Fed, Treasury and Five Investment Houses Sued (12/2000)
A lawsuit filed in U.S. District Court in Boston on December 7, 2000 with the support of the Gold Anti-Trust Action Committee (GATA) accuses five investment houses, the Bank for International Settlements, and top officials of the U.S. Treasury Department and U.S. Federal Reserve Board of conspiring to suppress the price of gold.
The lawsuit charges the defendants with price fixing, securities fraud and breach of fiduciary duty. The U.S. government officials are also accused of exceeding their constitutional authority.
The lawsuit's plaintiff is Reginald H. Howe, a lawyer, gold market analyst, consultant to GATA and a shareholder of the Bank for International Settlements.
The BIS's plan to cancel those of its shares in private hands so that the bank might become owned entirely by member central banks is at the center of the lawsuit.
The suit alleges that the BIS proposes to pay its private shareholders substantially less than fair value for their shares. The suit also claims that the BIS, owner of a substantial amount of gold, has been at the center of a scheme with central banks and the investment house defendants to coordinate the sale and leasing of
gold and the sale of gold derivatives to keep the price of gold low and thereby disguise inflation and weakness in the U.S. dollar, as well as to prevent losses on gold short positions held by certain banks.
Besides the BIS, the defendants include: Alan Greenspan, chairman of the Federal Reserve Board; William J. McDonough, president of the Federal Reserve Bank of New York; Lawrence H. Summers, former secretary of the Treasury; and J.P. Morgan & Co. Inc., Chase Manhattan Corp., Citigroup Inc., Goldman Sachs Group Inc., and Deutsche Bank AG.
The text of the lawsuit is posted online at: www.gata.org.
Indeed, the world is watching the price of gold and I am so thankful for the work that GATA has done calling our financial leaders into accountability. As of the publishing of this book the GATA lawsuit is pending a decision from the judge to proceed into the “discovery” stage. If this is granted, Mr. Greenspan, the BIS and all of those named in the lawsuit will be forced to give sworn testimony. Will the truth prevail? Time will tell.
The final chapter of Rediscovering Gold in the 21st Century is a transcript of an interview conducted by Pat Boone with myself and a few members of the Swiss America management team in May 2001. My hope is that this will answer any remaining questions and inspire you to rediscover gold for yourself in the days, weeks and years ahead.
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