Inaugural Interview with Hard Assets Alliance – India’s War on Gold, Bitcoin in China and More…

This past week I sat down with Andy Duncan of the Hard Assets Alliance for an inaugural podcast and we discussed a variety of timely topics. From India’s “war on gold,” the emergence of new political parties around the world and, of course, Bitcoin.

This is the first interview in which I discuss my view that the Chinese attacks on Bitcoin are actually a sign of the regime’s weakness, and I take issue with certain gold bugs hoping for a Chinese run gold standard or something similar. I am of the adamant belief that we need to separate money from the state. Enjoy!

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Why China’s Attack on Bitcoin is a Sign of Weakness

For myself and many others back in the 2008/09 period, it seemed obvious what China should to do from an entirely nationalistic perspective on the grand geopolitical chessboard. With the reputation of the U.S. laying in tatters following a gigantic financial collapse and an utterly embarrassing, unlimited taxpayer bailout of the criminals that caused the crisis, the entire world (including Americans) was looking for something else. Something new, something more lawful. Something more just and more stable. The U.S. dollar and the Federal Reserve System had been exposed and entirely discredited in many people’s minds. One of history’s most bold and monumental geopolitical moves was ripe for the taking. China could attempt to back its currency with gold, something I discussed with Max Keiser in a May 2010 interview. Immediately, capital flows would flood into the country, Chinese consumer purchasing power would explode and a rebalancing of their economy would experience a traumatic, but monumental and necessary shift. They could have announced such a plan and then implemented it slowly and with safety nets for manufacturers. It wouldn’t have been easy, but the window of opportunity was open. Instead, they did nothing, and now I think it’s too late.

I think there are two obvious reasons why the Chinese authorities failed to take bold action on the world stage. First, many of the wealthiest billionaires and elites in China have benefited greatly from so-called “free trade” partnerships with the West. The ponzi relationship in which we print pieces of paper and give it to them for manufactured goods has resulted in fabulous fortunes for the Chinese power players. Not to mention their existing personal, social relationships with Western elites. So why rock the boat?

The second reason has to do with the likely political and social turmoil that would have resulted from such a move. The enormous economic rebalancing from such a power play would financially ruin many people during the transition period. Some of them might be locally powerful figures who could then rile up newly unemployed peasants and the conditions for revolution would be ripe. That’s not to say this would be the outcome, but pulling off such a grand move would open up the political situation to such a risk. A risk no one in power was willing to take. So they didn’t.

There is a third possible reason, and that is the U.S. quietly threatened China militarily if they attempted such a move. This is certainly possible as well.

All of these questions were on my mind back on May 2012 when I wrote an article titled: China Better Have a Plan. Here’s a passage from that piece:

The fact that the Central Planners in China are basically standing around like deer in headlights as their economy plunges into the abyss is nothing short of astounding.  Sure they have lowered the bank Reserve Requirement but so what?  That is an epic joke of a move in light of the gargantuan problems that economy is facing, and is blatantly pathetic in its irrelevance.  I’m not going into detail for the thousandth time why China’s economy is nothing more than a Keynesian Centrally Planned house of cards on steroids with mal-investments that make the U.S. housing market look benign.  I have done that too many times over too many years to exert energy on that topic once again.  That said, what I do want to do is look back at the post 2008 period and try to figure out why they never really took polices to rebalance the economy away from fixed asset investment toward consumption.  In fact, not only did they not rebalance but they doubled down on the prior strategy!  Well now the chickens have come home to roost and we are about to find out if China has any real “long term” plan to get themselves out of this mess.

Ultimately, what I think the authorities in China decided to do was let the U.S. hang itself. The Chinese elites didn’t want to be held responsible for the collapse of the U.S. dollar or the world monetary system. So instead, they decided to wait it out, buy gold and prepare to take over on the world stage once the monetary system imploded in on itself. This seemed like a reasonable plan, but they didn’t anticipate one very, very important thing. They didn’t anticipate Bitcoin.

Bitcoin is the monetary equivalent of some genius programmer coming to the global chessboard, picking it up over his or her head and then throwing it on the floor, scattering the pieces all over the place. This is why I and so many others were shocked that the control-freaks in China were seemingly supportive of it. I believe this was the result of some very forward thinking and brilliant Chinese entrepreneurs seeing the technological achievement for what it is and convincing others of its incredible potential. However, that didn’t last long. Why?

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Incredible Minutes from a 1974 Henry Kissinger Staff Meeting on Gold

The following excerpts are from a transcript of a 1974 meeting held by the then Secretary of State Henry Kissinger and his staff. This particular meeting was held on April 25, and focused on an European Commission Proposal to revalue their gold assets. What follows is an incredible insight into the minds of powerful American leaders scheming to maintain power and show other nations their place. What is most significant is how clearly they understood that demonetizing gold was a critical strategy to maintaining a dominant power position in the world.

So to those who continue to say that “gold doesn’t matter” because it hasn’t been used as an official asset in the monetary system for decades, I say give me a break. In fact, the reality of gold having been largely demonetized makes it an even greater threat going forward if the U.S. does not have all the gold it claims to, and other nations have more than they admit to.

Thanks to In Gold We Trust for bringing this to my attention. Choice excerpts are provided below, and breaks in the conversation are denoted with an “…” Enjoy.

Secondly, Mr. Secretary, it does present an opportunity though—and we should try to negotiate for this—to move towards a demonetization of gold, to begin to get gold moving out of the system.

Secretary Kissinger: But how do you do that?

Mr. Enders: Well, there are several ways. One way is we could say to them that they would accept this kind of arrangement, provided that the gold were channelled out through an international agency—either in the IMF or a special pool—and sold into the market, so there would be gradual increases.

Secretary Kissinger: But the French would never go for this.

Mr. Enders: We can have a counter-proposal. There’s a further proposal—and that is that the IMF begin selling its gold—which is now 7 billion—to the world market, and we should try to negotiate that. That would begin the demonetization of gold.

Secretary Kissinger:  Why are we so eager to get gold out of the system?

Mr. Enders: We were eager to get it out of the system—get started—because it’s a typical balancing of either forward or back. If this proposal goes back, it will go back into the centerpiece system.

Secretary Kissinger: But why is it against our interests? I understand the argument that it’s against our interest that the Europeans take a unilateral decision contrary to our policy. Why is it against our interest to have gold in the system?

Mr. Enders: It’s against our interest to have gold in the system because for it to remain there it would result in it being evaluated periodically. Although we have still some substantial gold holdings—about 11 billion—a larger part of the official gold in the world is concentrated in Western Europe. This gives them the dominant position in world reserves and the dominant means of creating reserves. We’ve been trying to get away from that into a system in which we can control—

Mr. Enders: Yes. But in order for them to do it anyway, they would have to be in violation of important articles of the IMF. So this would not be a total departure. (Laughter.) But there would be reluctance on the part of some Europeans to do this. We could also make it less interesting for them by beginning to sell our own gold in the market, and this would put pressure on them.

Mr. Maw: Why wouldn’t that fit if we start to sell our own gold at a price?

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China Better Have a Plan

Big Brother in the form of an increasingly powerful government and in an increasingly powerful private sector will pile the records high with reasons why privacy should give way to national security, to law and order, to efficiency of operation, to scientific advancement and the like.
- Justice William O. Douglas (1898-1980), U. S. Supreme Court Justice

Those who take the most from the table, teach contentment.  Those for whom the taxes are destined, demand sacrifice. Those who eat their fill, speak to the hungry, of wonderful times to come. Those who lead the country into the abyss, call ruling difficult, for ordinary folk.
- Bertolt Brecht (1898-1956) German dramatist, stage director, and poet

Idealism is the noble toga that political gentlemen drape over their will to power.
- Aldous Huxley

China Better Have a Plan
The fact that the Central Planners in China are basically standing around like deer in headlights as their economy plunges into the abyss is nothing short of astounding.  Sure they have lowered the bank Reserve Requirement but so what?  That is an epic joke of a move in light of the gargantuan problems that economy is facing, and is blatantly pathetic in its irrelevance.  I’m not going into detail for the thousandth time why China’s economy is nothing more than a Keynesian Centrally Planned house of cards on steroids with mal-investments that make the U.S. housing market look benign.  I have done that too many times over too many years to exert energy on that topic once again.  That said, what I do want to do is look back at the post 2008 period and try to figure out why they never really took polices to rebalance the economy away from fixed asset investment toward consumption.  In fact, not only did they not rebalance but they doubled down on the prior strategy!  Well now the chickens have come home to roost and we are about to find out if China has any real “long term” plan to get themselves out of this mess.

Although I never bought the “China bull” story over the last few years, where I did agree with a lot of these pundits was the notion that the Chinese currency, the yuan, was inevitably going to strengthen materially.  The primary reason that I agreed with this notion was the fact that I believed it to be the most effective means for the government to transfer global purchasing power to their citizens and also rebalance its economy more toward consumption.  Well the yuan did appreciate from mid 2010 to December of 2011, but the appreciation was a measly 8%.  That is basically nothing and in no way could have done anything to rebalance the economy in any way shape or form.  The lack of appreciation has been one of the biggest surprises to me, and indeed, now represents one of the scariest aspect of the macro backdrop globally.

As I mentioned recently in another piece, the cessation of the strengthening trend in the yuan back in July 2008 foreshadowed the collapse of the global economy.  Is the same thing happening now?

Chart of the Chinese Yuan (inverse so a decline represents strength vs. the U.S. dollar).

I have thought over and over again in my head why they didn’t allow the yuan to appreciate more, and at the end of the day, it comes down to one main point in my mind: Political Power.  As we all know, China is run by a very small group of bureaucrats that are fabulously wealthy and fabulously corrupt.  As is the case back here in the United States of Banana Republic, the Central Planners, politicians and financial/corporate oligarchs have made themselves fantastically wealthy and powerful through the parasitic controlled crony capitalist economy that they have put in place.  This is why they fight tooth and nail against reform.  Reform would restore power to the people and away from them; and of course, they don’t want that.  China and the United States are exactly the same in that regard, and since the old model has worked so well for the few in power they have been reluctant to change the model.  Indeed, they haven’t.

So here we are today and things are much different for China.  In fact, from a fundamental perspective it is now difficult to argue for a yuan appreciation.  The terms of trade have started to go against China and go against it strongly.  The entire export model was driven by the mobilization of rural workers from the interior to the coasts.  This seemingly endless cheap labor coupled with an undervalued currency made the cost of mass producing manufactured good exceedingly cheap relative to the rest of the world.  Factories in the West packed up and moved to China, the trade surplus boomed, and the rest is, well, history.

Those days are over.  Chinese wages have been skyrocketing and with global commodity prices elevated China’s trade surplus is not what it used to be.  There may even be a dollar shortage in China as the government foolish put its dollars into treasury bonds for some insane reason.  Why the government there would take a currency that is doomed in the long run and then put it in to an asset they will never be able to liquidate in an orderly manner is beyond my comprehension, but that is what they did and now they are stuck with that garbage.  There was a great article on this topic yesterday at FT Alphaville by Izabella Kaminska that I suggest everyone read.  You can find it here.

The following paragraphs I consider to be the most important part of the article:

The sad truth that many don’t realize is that these moves to internationalize the currency have less to do with Beijing’s wish to modernize and much more to do with a need to draw dollars into the system to cover the country’s growing “dollar short” position.

But what happens if the strategy fails? What happens if foreigners decide the last thing they want is yuan exposure (due to China economic bubble fears), and would much prefer to keep hold of their US dollars?

What happens if instead of a dollar inflow you get a mass capital outflow from China, with as many Chinese as possible converting yuan-denominated assets into dollars, seeing the yuan fall in value versus the dollar due to what is now an over-valued position?

Recent developments in offshore/onshore markets and forward markets, unfortunately, seem to suggest this is exactly what’s happening.

Wow, so if this article is correct then we have just made a 180 degree turn from where we were just a few years ago.  Rather than the market assuming a major appreciation in the Chinese currency, it seems as if financial players are becoming terrified of the currency considering the reversal in the terms of trade and the much more negative prospects for the economy going forward.  Believe me when I tell you that this is an absolutely terrifying scenario to be faced with for all of us.  If this is correct, the risk from China is likely to be as great if not greater than anything happening in Europe.  Here’s why.

The reason I say this is because I think there are two options from here, and both of them would have seismic effects on the global economy for the foreseeable future.  The first scenario assumes that China has a plan to deal with a loss of faith in its currency.  That plan in my view would be that they would come out with a gold backing to their currency.  This is something many people have written about for many, many years, including myself.  If China has enough gold to pull this off, they would immediately become the one currency in the world that everyone wants.  Capital would flee to China and the Chinese consumer would receive an overnight boost in purchasing power that will be written about for centuries to come.  This fits into the theme that I wrote about last year in my piece “Does China Need the U.S. to Collapse.”  The basic premise is that in a resource constrained world the only way China can ever actually utilize the massive excess capacity it has built is through a massive transfer in purchasing power to its citizens.  The West could collapse into third world status if this were to happen (it’s already on that path anyway).

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Herman Cain Backs the Gold Standard? – WSJ Op Ed

My Take:  This Op Ed was in the Wall Street Journal a few days ago and I can’t believe I missed it.  The content of it is so aggressively in favor of the gold standard and so anti the status quo it boggles the mind.  It’s hard for me to believe that the former chairman of the board of directors of the Federal Reserve Bank of Kansas City has only just now figured out what fraud and theft fiat money is.  More likely, he is politically astute enough to recognize that this game is over and he is trying to position himself as one of the “good guys” to be prominent in the aftermath of this gigantic nightmare financial system we are subjected to.  Nevertheless, it is an important signpost because he represents another establishment player jumping ship before it sinks to the bottom of the sea.  If we are going to keep Guantanamo Bay open, we may as well save some cells for bankster gangster Jaime Dimon and all of the others that are consciously stealing from the pockets of 99.9% of America through their giant ponzi scheme and Fed bailouts.

Key quotes:
I realize the Washington establishment goes ballistic at this suggestion. Gold is kryptonite to big-spending politicians. It is to the moochers and looters in government what sunlight and garlic are to vampires. The American people are another story. Nearly half (44%) support a return to a gold standard, according to an October 2011 Rasmussen Report. That support soars to 57% when respondents know it will “dramatically reduce the powers of bankers and the political class to steer the economy.”

The debate over sound money has moved from whether we need it to how we get there. The pieces are moving in the right direction, and we have an opportunity to make the dollar once again as good as gold.

Full article here.  You may need a subscription so the article is titled “Herman Cain: We Need a Dollar as Good as Gold,” if you want to find it through other means.

Central Planning for Dummies: There Will Be QE

The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations.

 Each central bank… sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world.
- Carroll Quigley (Bill Clinton’s mentor at Georgetown) from his 1964 book Tragedy and Hope

Crime Once Exposed Has no Refuge but in Audacity.

- Tacitus

Central Planning for Dummies: There Will Be QE

For several years now I have been sounding the alarm that if you want to be engaged in the financial markets you need to assume that markets are being managed (rigged) more aggressively than at any moment in any of our lives.  The Bernank and others on Wall Street and the District of Criminals understand that the situation is pretty much hopeless.  Ever since 2008 they have had one strategy.  From a monetary and fiscal standpoint, that strategy has been to pump massive amounts of liquidity into the system while at the same time borrow enormous amounts of money.  The thinking was that this would stabilize the situation, create confidence and thus ultimately a dynamic sustainable recovery.  They certainly bought a few years with this plan but confidence has not returned, nor has there been any sustainable recovery.  What we need to understand at the moment is that The Bernank and all of his fellow Keynesian Central Planning magicians know that they have failed.  This is why he is running around on college campuses presenting his sad and intellectually dishonest presentation of propaganda that even a six year old could refute.  In fact several people have done just that.  Here is one good article on it.  Moreover, Jim Grant recently gave an incredible speech at the belly of the beast itself -The New York Federal Reserve –where he completely undresses the Fed right to their face.  You must read this one.

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