16th June 2011

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A stepchange to resolving the fiscal impasse:

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David Walker is uniquely well positioned to help steer Washington’s fiscal impasse towards an acceptable compromise. He is a former US Comptroller General, a potent crusader for fiscal responsibility and, in Paul Volcker’s words, ’ nobody has worked harder, been armed with more facts, written more clearly and been more dedicated to the mission of restoring confidence in our fiscal affairs and trust in government.’ News that Walker is now actively engaged supporting Vice President Biden’s congressional bipartisan task force must be a step change in the direction of progress.

In a CNBC interview last week Walker spelled out a path to resolution of the debt limit and ongoing fiscal challenges. The priority is to agree an increase in the debt ceiling by the 2nd August 2011 deadline. It will be conditional on and associated with both spending cuts effective now and a commitment to agreed debt to GDP relationships effective September 2012 . Breaches will trigger automatic mandatory spending cuts, PAYGO compliance and revenue requirements. With the ‘automatic’ safety net in place politicians will be free to take their plans to their constituencies in the Presidential elections. In Walker’s words they will be ‘off to the races.’

There is some room for optimism on a stepchange that should improve the perception of Washington’s debate from politics with brinksmanship to politics with pragmatism. Walker’s bean counter credentials will also placate commentators who correctly remind politicians the laws of arithmetic prevail; and even those with more anxious views, like Barry Eichengreen, who warns ‘evidence that the inmates are running the asylum would almost certainly precipitate the wholesale liquidation of US Treasury Bonds. ‘

Walker and the fiscal gap:

The Goldwatcher, pages 116 ff, concentrated on Walker’s analysis while he was the United States’s Comptroller General and Head of the Government Accountability Office (GAO.) The analysis explained why the US fiscal gap was unsustainable and too large for the country to ‘grow’ out of. His January 2007 GAO report : Fiscal Stewardship : A Critical Challenge Facing our Nation details the source material quoted in The Goldwatcher. The closing paragraph of the report read: ‘The “fiscal gap” is a quantitative measure of long-term fiscal imbalance. Under GAO’s more realistic simulation, even if the federal government continued to borrow money from the public at the current share of the economy (i.e., GDP), closing the fiscal gap would require spending cuts or tax increases equal to 8 percent of the entire economy each year over the next 75 years, or a total of about $61 trillion in present value terms. To put this in perspective, closing the gap would require an immediate and permanent increase in federal tax revenues of more than 40 percent or an equivalent reduction in federal program spending (i.e., in all spending except for interest on the debt held by the public, which cannot be directly controlled).

Goldwatcher postings on David Walker since he resigned as Comptroller General include: AMERICA’S AUDITOR RESIGNS TO JOG BERNANKE’S & OTHER MEMORIES

CAN DAVID WALKER AND $1 BILLION OF PETE PETERSON’S MONEY STOP THE DOLLAR’S JOURNEY ON THE PATH TO RUIN?

Gold and the fiscal gap:

Any positive sentiment towards the US economy can potentially be adverse for the gold price. But before breathing a huge sigh of relief on the end of the impasse we will have to see what is eventually agreed. The challenges are formidable.

Press Digest:

#8th July 2011 : Follow Walker on Twitter @DaveWalkerCAI

#7th July 2001: Bloomberg : David Walker US in $62 trillion hole.

# 6th July 2001 : President Obama will be answering questions about the debt ceiling, economy and jobs submitted by Twitter users with the hashtag #AskObama. Twitter co-founder and executive chairman Jack Dorsey will moderate the conversation.

# 5th July 2001 : Stealing from tomorrow to pay for today : Jagadeesh Gokhale Cato Institute : ‘…The debt limit is only at $14.3 trillion today. That means the entire implicit debt accumulated in the past has not yet been converted into explicit debt on the government’s books……Increasing the debt limit without simultaneously guaranteeing fiscal discipline will mean that “we” ..risk creating the mother of all economic depressions. Just look at Greece today.’

# 1st July 2011 : Bloomberg Fail-Safe plan could prevent US default disaster - Walker: “ When you’re playing with a tactical nuclear weapon, you don’t want to take the timing device down to the last seconds.”

# 30th June : Samuelson Washington Post onDebt Ceiling Roulette.

# 28th June : Walker :Bloomberg Obama Debt Plan Needs Transparency

28th June : Walker World Fiscal Responsibility Index grades United States 28th among 34 countries - with only Hungary, Ireland, Japan, Iceland, Portugal and Greece more irresponsible

#28th June 2011 : Washington Post: President Obama formally entered debt talks Monday with a pair of Oval Office meetings with Senate leaders, hoping that face-to-face talks could set the stage for detailed negotiations. Supported by graphic guide to understanding the federal debt.

#24th June : David Stockman : Taking Tax Increases off the table is putting default on the table.

# 23rd June : Reuters Republicans walk out of Biden led Budget talks. President Obama to progress further discussions.

#17th June 2011 : WSJ Biden talks aimed at $4 trillion in cuts over ten years

# 16th June 2011 : China Daily : China Treasury Purchases strong in April

#15th June 2011 : Pimco’s El Erian on America’s Dangerous Debt Ceiling Debate …political paralysis on key economic issues is increasingly unsettling for the U.S. private sector, and for other countries that rely on a strong U.S. at the core of the global economy

#22nd June 2011 : Excess Debt puts US at risk of a second crisis : Professor Alan Meltzer

#12th June 2001: CBO 2011 Long Term US Budget Outlook

Economist Debt Clock

$40 TRILLION

PUBLIC DEBT ACROSS THE PLANET

ECONOMIST INTERACTIVE RESOURCE

2nd JUNE 2011 $039,600,500,000,000

10th JUNE 2011 $039,626,500,000,000

30th June 2911 $039,758,000,000,000

The Economist’s World Debt Clock and National Debt Comparison:

The resource is introduced with these paragraphs:

‘The clock is ticking. Every second, it seems, someone in the world takes on more debt. The idea of a debt clock for an individual nation is familiar to anyone who has been to Times Square in New York, where the American public shortfall is revealed. Our clock shows the global figure for all (or almost all) government debts in dollar terms.

Does it matter? After all, world governments owe the money to their own citizens, not to the Martians. But the rising total is important for two reasons. First, when debt rises faster than economic output (as it has been doing in recent years), higher government debt implies more state interference in the economy and higher taxes in the future. Second, debt must be rolled over at regular intervals. This creates a recurring popularity test for individual governments, rather as reality TV show contestants face a public phone vote every week. Fail that vote, as the Greek government did in early 2010, and the country can be plunged into imminent crisis. So the higher the global government debt total, the greater the risk of fiscal crisis, and the bigger the economic impact such crises will have.’

Gold and Soaring National Debts:

The Economist Interactive reveals an unprecedented escalation in debt literally across the planet. It’s all paper money and almost all debt that must be rolled over and won’t ever be repaid.

Gold is the ultimate protection against Sovereign Money Printing and Public Debt excesses.

See also the April 26th 2010 Goldwatcher posting W hen the cans of worms are open will gold be the last enduring Triple A Security?

5th June 2011 : King World Audio with Eric Sprott on leveraging, money printing, paying down debt or delevering

5th June 2011: Chris Masterson Death by Debt

12th June : Satirical Video on Bankrupt Nations bailing out Bankrupt Nations

Link to video with Strauss Kahn on route to DNA test

Guilty until proved innocent?

Newspapers dubbed the sequence “Porschegate“ when Dominique Strauss-Kahn, IMF Managing Director and potential socialist candidate for the French Presidency, was pictured alongside a $150,000 Porsche sports car. The photo led to resentment among socialists over his luxurious lifestyle. Pictures posted on television screens and in newspapers throughout the world over the last two days revealed a bewildered, exhausted, disheveled and handcuffed Strauss-Kahn being marched to and from court and appearing in court as an accused criminal. What has Strauss Kahn’s spectacular fall from grace to do with gold?

I will explain in the following paragraphs why these events are likely to support interest in gold. We entrusted Strauss-Kahn with management of the world’s financial affairs. In that capacity he served us well and was a key player in co-ordinating international initiatives that nudged us away from a global financial meltdown. But, if he is found guilty, his seniority and status as a world leader will not exempt him from the severe penalties prescribed for the crimes alleged. We expect punishment to follow a guilty verdict at a trial. But the public humiliation meted out to him as instant punishment after his arrest was not expected.

The general impression now is that Strauss-Kahn is guilty of rape as charged. In law he is innocent until proved guilty and, unless he has acted in a way consistent with being a flight risk, he was entitled to bail. However he was refused bail - notwithstanding that his Counsel made the case that he was not a flight risk for these reasons:

1: The flight he boarded to Paris on Sunday was to attend a key international meeting with Europe’s heads of state - a meeting everyone knew about. The flight wasn’t hastily booked for him to flee the United States after the alleged attempted rape. It was booked several days before as part of scheduled arrangements for his official duties.

2: If he tried to escape the United States, with his pictures published all over the world, he would be recognised by airport, customs, immigration and law enforcement officers everywhere and by almost everyone on the planet.

3: He phoned the hotel where the alleged offence took place from the airport requesting them to arrange delivery to his flight of a mobile phone he left at the hotel.

4: If granted bail he had made arrangements to live with his daughter in her New York flat until the trial, would have been fitted with an electronic tag, reported to local police and complied with other conditions that secure bail arrangements

5: He could post $1 million bail and, if required to, may have been able to arrange more.

After he was denied bail he was remanded in custody at a notoriously harsh prison. The trial in New York is likely to be scheduled towards the end of the year. His next appearance in Court is scheduled for over a month ahead. Presumably his lawyers will make a fresh bail application before then. But, as things stand now, he is being treated as guilty until proved innocent. And that isn’t right.

Unexpected Events:

The essential characteristic of unexpected events is, of course, that they are unexpected. Strauss-Kahn, a serial womaniser, never expected he would find his life destroyed after an encounter that, to him, may have been a minor incident. Now we can see what happened to him. From Porschegate to Prison Gate within a week.

Yet, in our everyday lives, even when we should, we don’t pay much attention to unexpected events . Today we read these alarming comments Uncle Sam has maxed out his credit cards:

‘The U.S. government yesterday reached its legally mandated $14.3 trillion debt ceiling…Weeks of partisan wrangling by Congress failed to produce agreement to raise the cap, leaving the nation on the cusp of defaulting on its debts…U.S. Treasury Secretary Timothy Geithner used gimmicks to postpone a default until Aug. 2, warning Congress to cut a deal by then to “avoid catastrophic economic consequences.” ‘

Catastrophic economic consequences. We don’t expect that could ever happen to us! But could it?

Paper money currencies tend to become worth less and less until they are worth less than the paper they are printed on. It’s happened before and can happen again.

By contrast gold is money that retains purchasing power.

Press Digest:

#5th July 2011 : Dershowitz on presumption of innocence and likelihood of Prosecution failing : Bloomberg video

#2nd July 2011: Bloomberg Editorial Strauss-Kahn and the end of the presumption of innocence

#lst July 2011 BBC Strauss-Kahn bail refunded & released on his own recognisance.

#1st July 2011 : The Guardian : Strauss-Kahn case ‘close to collapse.’

#1st July 2011: Evening Standard : Doubts over maid’s story rock French politics

#28th June : IMF Executive Board Selects Christine Lagarde as Managing Director

#9th June 2011: Time Magazine : How D.S.K. could still save his political career

#24th May 2011: Naomi Wolf - A Tale of Two Rape Charges

#19th May 2011 : Likely successors as IMF Managing Director (see graphic below)

#19th May2011 : Strauss-Kahn resigns from IMF

# 19th May 2011 : Strauss-Kahn indicted and granted bail.

18th May 2011 : Bloomberg. Video Interview with Niall Ferguson : Strauss-Kahn made important contribution in resolving Euro crises: His absence leaves void : IMF needs leadership as risk of sovereign debt systemic crisis in Europe, contagion and defaults. Ferguson also uneasy over American politicians playing Russian roulette over financial issues while the economy is near the cliff edge

#17th May 2011 :BBC : Pressure grows on Strauss-Kahn to resign

#17th May 2011 : NPR : Geithner : Strauss-Kahn not in a position to run the IMF

 

Time Cover 2nd May 2011 US FEDERAL DEBT PROJECTIONS SOURCE CBO

A New Turning Point:

After 9/11 Osama Bin Laden never had the capacity to destroy the American economy, whether he was living in a cave in Bora Bora, a villa in Pakistan or anywhere else. His legacy is also no threat. But Washington is. Lawmakers are playing politics with a fragile economic recovery and menacing fiscal gap. And, all this, while America’s debt soars to stratospheric and unsustainable levels .

President Obama’s ‘yes we can‘ mantra won him a landslide Presidential election victory. He has now, after some setbacks, won back his mojo But are we at a turning point where the President can secure the bi-partisan support he must have to fix the economy?

Addressing this prospect a Time Magazine’s Bin Laden feature commences:

‘One of the most notable outcomes of the dramatic news that Osama bin Laden has been killed is the feeling of unity across the American political and social spectrums. The event has triggered a shared sense of achievement, pride and common purpose. It is a mood that the U.S. has not felt for years as increasingly polarized political debates, on both serious and trivial issues, gradually gutted the operational middle of the country’s political system.

The following Gallup Economic Confidence Index chart illustrates the spike in national confidence that followed Osama’s death:

‘

Recognising the sentiment factor in his contribution to Time Magazine’s Bin Laden feature, Pimco CEO Mohamed El Erian added ’…if the spirit of cooperation can be translated into broad-based, bipartisan progress on economic issues that are central to the long-term well-being of the country and the world….Bin Laden’s death has the potential to become a turning point. ‘

House Speaker Boehner has acknowledged ’Bringing justice to Bin Laden was an important moment for America and all of the free world.’ But, in his talk to the Economic Club of New York last night (link to video) the gist of his message was ‘..the big myth of the current budget debate is the notion that, in order to balance the budget, we have to raise taxes..’ Accordingly Boehner has ruled all tax increases are off the agenda. Full stop.

Unless Boehner budges from his dogma, instead of a turning point for the good, we could see a Wile E Coyote moment for the dollar. (see paragraph 3)

Harvard economist Jeff Frankel has reviewed the no tax rise implication of Boehner’s party ’pledge to America.’ He brands it Pledging to Repeal the Laws of Arithmetic. A conclusion matching El Erian’s view that solving the debt and deficit problems can only be achieved with ‘…simultaneous reforms to both expenditures and revenues… not only budget cuts but also tax reform.’

Obama at the crossroads:

Obama missed the opportunity to secure a mandate for radical economic reform in the run up to his election as President in 2008. Politicians no longer win elections when they propose tax increases. In the televised debate with his opponent Senator McCain Obama even fell for the Joe The Plumber nonsense . A Goldwatcher posting on the 8th October 2008, the day following that debate, commented:

‘…In a nutshell the message is that Americans have been living on borrowed money for too long and are now also living on borrowed time.. …On its present trajectory the debt burden is heading for the stratosphere. There’s going to be an unholy thud when it falls back to earth. That’s not the message either candidate gave in the debate.’ Instead they dodged any confrontation with reality.

But they won’t be able to dodge the confrontation with reality again. Standard and Poors have at last woken up to the borrowed time problem and downgraded the outlook on American Sovereign Debt to negative. Solvency issues can’t be kicked into the long grass.

President Obama has shaken off the drubbing from last year’s mid term election defeat and recovered his mojo. But he can’t erase the loss of his party’s majority in the House and will have to deal with the ‘myth’ that the budget can be balanced without increasing taxes.

The gold price has surged as America lives on borrowed time and money :

CHART COURTESY WWW.KITCO.COM

Analysis in Chapter 6 in The Goldwatcher explained why US fiscal policy was unsustainable. The above chart illustrates the relentless rise in the price of gold since 9/11, continuing through George W. Bush’s two terms as President and President Obama’s first term

The recent Congression Budget Office Chart at the top of this page illustrates why US Fiscal policy remains unsustainable. The following Chart from the October 2008 lost debate Goldwatcher posting has the same message. The rise in America’s debt illustrated in the following chart follows a similar trajectory to the rise in gold prices. Gold was under $800 in October 2008. It’s not surprising its $1500 now.

Gold’s stateless money franchise remains a valuable and trusted hedge against currency and other uncertainties.

Press Digest:

#12th May 2011 : Fortune Magazine Gold in Pimco’s Eqs Pathfinder Fund. Manager Anne Gudefin : ‘The largest position in the fund is gold, which we think is a very good form of protection against what can go wrong. We were encouraged by the fact that a lot of the central banks, especially in Asia, are big buyers. We think that’s an underlying trend that’s very favorable for gold.’

# 13th May 2011 : Bloomberg : Investors pessimistic over bi-partisan deal on tax increases;

# 13th May 2011 : Financial Times : Gillian Tett on Political Paralysis in the US:

‘… Tarp shows that America can break political gridlock. Better still, this can sometimes produce better than expected results. But, the dismal truth is that it took a full-blown market crisis to spark the crucial policy switch.

‘If America is ever going to produce a proper, bipartisan deal on its debt, in other words, it will probably need to suffer a bond market shock first.’

#10th June 2011 : Former CIA Chief Woolsey on need for energy independence (CNBC Video)

#20th June 2011 : Obama must fear ‘the economy’ rather than political adversaries The Guardian

 

Fed Chairman Bernanke arrives to Meet the Press

JEREMY GRANTHAM : THE DAYS OF FALLING PRICES ARE OVER FOREVER :

Jeremy Grantham’s April letter commences it’s ‘Time to Wake Up. The Days of Abundant Resources and Falling Prices Are Over Forever.’ (Access to the GMO Website is free - but you must register) In his must read letter Grantham writes:

’The purpose… is to persuade investors with an interest in the long term to change their whole frame of reference: to recognize that we now live in a different, more constrained, world in which prices of raw materials will rise and shortages will be common…Accelerated demand from developing countries, especially China, has caused an unprecedented shift in the price structure of resources: after 100 hundred years or more of price declines, they are now rising, and in the last 8 years have undone, remarkably, the effects of the last 100-year decline! Statistically, also, the level of price rises makes it extremely unlikely that the old trend is still in place.’

Essentially Grantham bases his conclusions on the global population explosion and expanded global per capita earnings. In 1938 when he was born world population was 2 billion. Now it’s about 7 billion and heading for 10 billion within a few decades. But, as resources are finite, he concludes we are experiencing ‘A Great Paradigm Shift…leading to rising prices.’

Policy makers have yet to acknowledged this.

Bernanke on a tightrope without a safety net calls price rises transitory :

Commenting on Fed Chairman Bernanke’s first ‘Meet The Press Session,’ after yesterday’s FOMC meeting, the FT noted: ’The Federal Reserve has raised its inflation forecast for this year above its goal, but chairman Ben Bernanke told a first-of-its-kind news conference that the rise in prices would be “transitory.” Mr Bernanke’s comments on Wednesday show the tightrope that the Fed is walking as it tries to keep policy loose to support a stuttering economy while reassuring the public about inflation driven by rising oil prices.’

The Goldwatcher (Page 182) forecast ‘…policy makers will find themselves obliged to walk a tightrope between consumer price inflation and asset price deflation. They are likely to recognise deflation as the greater of the two evils and inflation as the lesser.’ Bernanke’s comments yesterday were in line with expectations. However, the price inflation Bernanke calls ‘transitory.’ Grantham recognises as a ‘paradigm shift and a time to change our frame of reference.’

Investors will find Grantham’s analysis compelling. They will also find James Turk’s analysis on gold retaining purchasing power compelling. When commodity prices are rising, without importing deflation, fiat money can not retain purchasing power.

If Bernanke continues walking the inflation deflation tightrope without acknowledging the paradigm shift in commodity prices he risks finding himself without a safety net when he is bound to need it most.

 

Press Digest:

4thy June 2011 : NY Times : A warming planet struggles to feed itself :

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Bernard-Henry Levy and President Sarkozy with Libyan Rebel Leaders

Fire Ready Aim:

The Goldwatcher introduced the Chapter on The Economic Consequence of 9/11 and George W. Bush under the heading ‘Fire Ready Aim’ - the perverse sequence associated with the invasion of Iraq. Remember the Iraqis were going to kiss us in the streets as liberators? The war was going to cost hardly anything? It would be over within months?

Repairing the country after the war wasn’t even an issue? Additional money wasn’t needed to wage the war? And, of course, those as yet undiscovered weapons of mass destruction that were poised to destroy us all.

Has the West learned nothing from the Iraq and Afghanistan debacles?After ten years we can’t even begin to justify the loss of life and trillions of dollars borrowed from China for the wars. Nor can we pay the interest on the borrowings without more borrowings on which more interest will accrue.

Trapped in Libya’s Civil War:

We all saw Gafaffi’s provocation and lying on our television screens in the run up to the Libyan civil war. We supported initiatives to prevent the civilian bloodbath he threatened and initiatives for humanatarian aid to refugees and others affected by the war.

But only the naive would have believed that by bringing in the bombers would outcomes be ‘different this time.’Prior to the bombing no concerted United Nations initiatives were launched to negotiate and monitor a truce with the support of Arab and African States. Instead, absent effective international diplomacy, the liberal French philosopher Bernard-Henry Levy seized the opportunity to thrust the cause of the Libyan rebel leaders through the doors of the Elysee Palace into the waiting arms of President Sarkozy. Inspired by the opportunity to appear great and powerful he instantly anointed the the Rebel Leaders the official representatives of all the people of Libya and promised them international support.

Costing The Libyan Civil War:

Wars were profitable for the victors in previous centuries with loot, bounty, colonies, slaves, rape and pillage etc. It’s different now. There are no perks and the costs are astronomic. One Tomahawk missile is reported to cost about $1 million.

An ABC news program over two weeks back put the cost of the war to the United States at that stage at over $0.5 billion. Over $1 billion has probably been spent by now.nWill China lend us the money to pay for the war again ?

In a 31st March Guardian article article Simon Jenkins writes if the coalition really wants Gaddafi gone ‘they should just get on with it…the trouble with liberal interventionism is that it lacks the courage of its neo-imperialist conviction… glories in bombing to get its way. But when push comes to shove it backs off…If this is liberalism, you can keep it.’

Concerns over engagement in the Libyan Civil War, costs of the war and the plight of refugees and the dispossed are now among the factors driving gold and silver prices to multi year peaks. And there are unfortunately no quick solutions to these crises.

PRESS DIGEST:

#2nd July 2011 : Rebel chief clears way for Gaddafi to stay in Libya

# 27th June 2011 : France 24 : 100 days since bombing started - What has been achieved?

# 22nd June 2011 : Sky News UK spend not in £ hundreds of millions not tens as first indicated

#20th June 2001: Nato admits causing civilian deaths in Tripoli strike

#16th June 2011 : Washington Post : Federal Court action commenced against President Obama by ten House members for taking military action in Libya without first seeking congressional approval .

#16th June 2011 : Washington Post : ‘Boehner: Obama’s Libya report ‘doesn’t pass the straight-face test….I think it’s time for the president to outline to the American people why we are there, what the mission is and what our goals are and how do we exit this’

#16th June 2011: White House Report on Libya denies Congressional oversight

#15th June 2011 : Obama warned Libyan engagement skating on thin ice

# 14th June 2011 : Prolonged UK Libya effort unsustainable, warns Navy chief

# 24th May : Obama and Cameron fuelling Muslim Anger : Simon Jenkins

#24th May : UK War Costs on course to £1 billion

#24th May 2011 : US Libya War Costs Gates & Others

# 22nd March 2011 : FT Calls for a ceasefire in Libya ring louder

Published: June F.T. | Calls for a ceasefire in Libya’s civil war ’grew on Wednesday as Nato’s bombing campaign approached its 100th day with an end to the risis nowhere in sight. China urged a solution “through political channels” and Italy said it would support an immediate end to hostilities to allow humanitarian aid in, while the Arab world’s top diplomat spoke of his “misgivings” about civilian deaths from Nato air strikes.’

February 11, 2011:

John Maynard Keynes: In the long run we are all dead

Standard & Poors Kraemer : In the long run we are all debt. James Turk : GoldMoney Over the long term gold preserves purchasing power. James Turk’s Cheviot Presentation: At the recent Cheviot Hard Asset Conference James Turk’s presentation The Gold Price Will Rise Because Gold Is Money was, in a word, compelling. Cheviot has published a video of their conference on line ( his talk is item 2) and James has given us access to his Power Point Presentation for the talk accessible on j-turk-cheviot-conf-27-jan-2011.ppt. I urge all readers to find an hour to listen to what he has to say with the support of the information in the Power Point. His GoldMoney and Free Gold Money Report websites have data, charts and other information supporting the presentation.Summarising a presentation always dilutes the message but, in my opinion, four elements underpin James Turk’s positive stance on gold and silver:

1: Loss of value with fiat currencies: In the Cheviot talk he spells out the extent of gold’s outperformance over other financial assets; gold’s consistent long term value retention compared to the cost of energy while fiat currencies have consistently lost value; and how gold and silver have outperformed all major currencies over the last decade. The following Extract of a GoldMoney Table illustrates the averaged annual depreciation of all major currencies to gold over the period 2001 to 2010. (The GoldMoney table includes details for each year.)

USD

AUD

CAD

CNY

EUR

INR

JPY

CHF

GBP

GOLD

18.4%

11.7%

13.8%

15.7%

14.6%

17.8%

14.9%

12.2%

18.3%

SILVER

24.3%

15.7%

18.5%

21.6%

20.9%

22.7%

21.0%

18.0%

23.0%

2: Clear explanations of why it’s vital to differentiate between money and currencies and between investments and liquidity demystify the utility of gold in the 21st century. Gold is both money and liquidity. But it’s not an investment. Gold’s utility is that, as money, it retains purchasing power and, as liquidity, it can be used to make investments and to measure the true value of investments and other assets.

3: Analysis of the evolution of our banking arrangements starts with the establishment of the Bank of England in 1694; covers Newton’s gold standard; the global hegemony of the British Empire built on the stability of the gold standard; how fiat currencies came to usurp gold after it was demonetised in 1971 and the stage we have reached now, where fiat currencies and credit have been created without any limit and without any realistic prospect of all debts being paid. 4: Addressing the consequences of fiat currency and credit expansions that have led to our present impasse with ‘too big too fail banks’ facing insolvency being bailed out by governments, now burdened with liabilities they can’t service, at risk of insolvency

.5: The explanation of his GoldMoney facility. It’s not the same as a gold standard, but GoldMoney facilitates holding liquid funds in gold (or other precious metals) instead of vulnerable fiat currencies; assures absolute security of ownership; low cost storage and a means of transacting in gold with other GoldMoney clients. Keynes, Kraemer & Turk:This web page could be the only time John Maynard Keynes and James Turk are pictured together on the same page. They are not bedfellows. The Austrian School of Economists, to which Turk subscribes, are implacable opponents of Keynesian economics and Turk advocates a gold standard. Keynes branded the gold standard a barbarous relic. Keynesian economists argue governments must smooth out the bumps in business cycles with stimulus spending and tax breaks etc introduced to stimulate the economy. By contrast Austrian economists oppose government intervention and rely on market forces for correction and recovery.However, with the excesses of so-called Keynesian intervention addressing structural debt problems and casino bank bail outs, I must agree with James Turk. Our major currencies are on track for a financial disaster. And, James Turk’s comment that if Keynes knew the excesses of government intervention being undertaken in his name, he would ‘turn in his grave,’ must be correct.Including Standard and Poors’ Moritz Kraemer in this blog calls for less explanation. Moritz tweaked Keynes’s long run aphorism to in the long run we are all debt. (The Goldwatcher Page 120). Kraemer’s acerbic title fits well with James Turk’s analysis. Gold and other precious metals are essential protection against erosion in the purchasing power of the the currencies of countries overburdened with debt.

PRESS DIGEST:# 5th June 2011 : Ron Paul Video Bloomberg Interview on debt ceiling and loss of $ purchasing power

# 2oth June 2011 : S&P’s Kraemer on Bloomberg : Any arrangement that has the effect of creditors receiving less than contracted will constitute a default

Abdullah Azzam

The Detailed LBMA Forecast:

The detailed LBMA 2011 analysts’ forecast is now accessible. It’s essential reading. The introduction notes:

‘All forecasters expect gold to hit record highs again this year, with a predicted average high of $1,633.Continued macro-economic problems were the main drivers cited for a continued climb in 2011. Political tensions in

North Korea and the middle east combined with eurozone debt issues were also indicated as major factors in the continuation of the gold bull market. The average forecast silver price was £29.88, only 1% above the price in the week the forecast was made. While macro-economic fear and industrial demand will play a role as drivers of the silver price, most contributors forecast that investment will be the most influential. The average predicted range is the broadest since the start of the survey, so expect a thrilling ride with silver in 2011.’ Egypt’s D Day :

Today is D Day in Cairo –‘D’ for the Departure of Mubarek demanded by Mohamed Elbaradei, the representative of the political opposition and by the protestors in Tahir square. Marc Faber’s most recent comment is titled ‘When there are few facts there are many experts.’ Being no expert on Egypt I won’t join the quasi commentators. But, if I was a betting man, I would bet Mubarak isn’t leaving today. He believes he has served his country at least as well as his two predecessors Gamal Abdel Nasser and Anwar Sadat. A crowd of two million lined the streets for Nasser’s funeral. Anwar Sadat was assasinated by members of an organisation associted with the Muslim Brotherhood and was honoured with a state funeral. Mubarak has survived six known assasination attempts.Christiane Amanpour interviewd Marabek and Suleiman last night for ABC Television.

Beware what you wish for:

While researching The Goldwatcher I covered the messages of Abdullah Azzam, his connections with Osama Bin Laden and his long term goal of restoring the Islamic Caliphate. (Pages 22 and 23.) Azzam’s links with the Muslim Brotherhood are well documented.A useful starting point with Egypt may be ‘Beware what you wish for. Your wish may be granted.’

# Note added 07.02.o9 : Al Jazeera profile of Muslim Brotherhood includes this accurate observation ‘The movement’s ideology revolves around cementing the Quran and Islamic teachings as a way of life, reviving the Caliphate and rejecting colonial rule.’ But it omits to mention their fully documented common purpose, support and association with the Nazis before and during World War 2 and their ongoing promotion of Nazi and other anti semitic propaganda

# Note added 06.02.2011 BBC Review on History and aims of Muslim Brotherhood

# Note added 14th February 2011 : Reuters Video on Mubarek’s Legacy

# Note added 09.o2.2011 Suleiman warns of coup as tensions rise

# Note added: 06.02.2011 : CNN Interview with Dr.Essam El-Erian spokesman for Muslim Brotherhood on meeting with VP Suleiman #Note added 04.02.2011 : FT Article : Arab Awakening

#Note added 13.20 - 04.02.2011: Reuters Article’

Iran’s supreme leader saluted on Friday what he termed an “Islamic liberation movement” in the Arab world.

# 02.06.2011 : ft Video on Muslaim Brotherhood and other political parties http://video.ft.com/v/971333152001/Egypt-s-Muslim-Brotherhood-and-the-future

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President Obama center with Senator Shumer on the left and Congressman Reid on the right:

Gold is a hardy perennial…It provides a psychological and material safe haven for people all around the world, and its invocation still produces a deep-seated visceral reaction……it is not surprising then, that when economic conditions are unfavourable, proposals to strengthen the role of gold in the monetary system find an audience much wider than the ‘gold-bugs’ who have always seen the demise of the gold standard as the negative turning point in Western Civilisation. Professor R.N. Cooper. 1982 (The Goldwatcher Page 49). Currency Chaos:

Investors with substantial gold exposure are reviewing strategies to cover downside risks while preserving the upside opportunity. Encouraging signs of recovery in the

US and the global economy are being seen but, with the

US and other economies still on government stimulus life support, withdrawing stimulus now and raising interest rates will have consequences. A meaningful rise in interest rates could be negative for gold while moving the economy off the recovery track could be positive.

When he delivers his State of the Union address today President Obama will, to his credit, have achieved a surge in his political capital. However, he will still have to contend on one side with Senator Charles Shumer and those in his party calling for punitive actions against China - actions he doesn’t support. And, on the other side he will have Congressman Paul Ryan with the lawmakers demanding drastic cuts in Government spending - cuts that aren’t aligned to his economic policies.

Germany and other core Euroland states have supported bailouts for European banks exposed to losses, for Greece and for Ireland, and are seeking a formula to fund other member states as necessary. But arranging the resources to meet all potential Eurozone failures is still work in progress. Against this background Harvard Professor Kenneth Rogoff expects in 2011 ’we will see a mix of currency wars, currency collapses, and currency chaos… ’ But he adds ‘ this won’t spell the end of the economic recovery, much less the end of the world.’ A comment matching the title of his article Armageddon Can Wait - but difficult to reconcile with the currency ‘chaos’ he predicts.

# Note added 29th January 2011 : Rogoff FT article January 12th 2010 ‘Euro looks set to win race to the bottom’ includes comment : ‘ All in all, 2011 is shaping up as a race to the bottom for currency values. In this currency war, does any country truly want to be the victor? No wonder gold has been so attractive.’

#Note added 6th February 2011 : Rand Paul intends calling for $500 billion spending cut

# Note added 28th January 2011 : Moody’s says time running out for US as S&P cuts Japan.

# Note added 28th January 2011: F.T. video : George Soros warns Eurozone’s sovereign debt crisis could perpetuate a two-speed economy which, in turn, will drive Europe apart.

Default, Inflation and Brinkmanship:

Adressing America’s impaired financial state and competitive disadvantages in her book ‘How the West Was Lost Fifty Years of Economic Folly - And The Stark Choices Ahead ’ Dambisa Moyo suggests, if it becomes necessary, America will go protectionist and may even default. Not as panic responses. But in the context of brinkmanship. She makes the case for America to fight back and ‘fight fire with fire’ using brinkmanship - ’pushing a dangerous situation to the verge of disaster in order to achieve the most advantageous outcome.’ Without a strategy of default, she argues, America will be ’locked in a stranglehold of debt and dependence.’

If America were to default, Moyo argues consequences in the bond market and elsewhere would, for a while, be severe ‘ (but)..a default could be viewed as a necessary and temporary reset of the economy.’ … America’s reputation would ‘…take a knock. But for how long’ she asks? Her guess is that if Russia is anything to go by ‘financial markets would be willing to lend again within six months.’

Dambiso Moyo’s book isn’t about gold. But her informed, insightful and clear analysis makes one of the most compelling cases for owning gold I have seen. She may be right that within six months bond markets would be lending to America again. But, if a brinkmanship and default sequence starts, we will all rush to increase our gold holdings. And, the ‘reset’ mechanism she proposes could well be a return to a form of gold standard.

Chaostan:

Richard Maybury invented the word Chaostan in 1992 for the area from the Arctic Ocean to the Indian Ocean and Poland to the Pacific, including North Africa and the Middle East. A troubled region for so long we incline to forget the consequences if mass revolt flares up and regimes start falling like dominos.

The flare up has started in Tunisia and already protesters are gathering in the streets of Jordan and elsewhere. The flare up may not encourage those of us in the West, China and India to buy more gold now. But demand for gold will surge from people living in Egypt, Jordan and other Chaostan countries. And from us if the riots spread to oil producing states and pro West regimes are replaced by anti West extremists.

Note added 30.01.2001 : Tunisian Islamist leader Rachid Ghannouchi returns home

Note added 26.01.2011 : Tension rises as jets buzz Cairo square

Note added 26.01.2001 : Prepared text of President Obama’s State of the Union speech

1st June 2011 : David Stockman on debt reduction and raising taxes

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Blarney Stone, Blarney Castle and a Blarney Poem

Irish Blarney, the ‘deceptive nonsense’ always fun for holidaymakers and lovers, hasn’t been fun for the country. Over the last two decades Euro membership brought the easy borrowings that fuelled a property boom, phantom banking boom and ’economic miracle.’ When the property bubble burst and the banks were in trouble the Irish Government first bailed out the depositors, then they bailed out the banks and bankrupted the country. After negotiating emergency loans from other European states and the IMF Ireland is facing unemployment rising above 15%, output down by over 10% and a debt burden future generations will be challenged to service. The economic miracle became a nightmare.

Of course that couldn’t happen to us Or could it?

Dambisa Moyo on How the West Was Lost:

Dr. Moyo is as far from the ’self seeking blarney’ we still hear from many politicians and policy makers as we are from the moon. All credit to her as author of the book being launched this week ‘How the West was Lost: Fifty Years of Economic Folly and the Stark Choices Ahead.’ She spells out the dangers of a myopic political culture with a warning that protectionism and a debt default by the US are real dangers. This extract from her blog gives insight on her approach:

‘.. over the past 50 years, a confluence of well-intentioned policies have, inadvertently, put Western countries on a perilous journey of economic demise ..solutions to remedy the economic malaise are necessarily drastic..many developed countries find themselves with untenable debt burdens, gapping deficits and seemingly intractable problems such as the looming pension problems and soaring healthcare costs… Politicians are, for the most part, driven by attaining and retaining political power…across the world there has emerged a myopic political culture where politicians (and the decisions they make) are rewarded for focussing on shorter term (more tactical issues), rather than critical longer-term (more structural issues).’

Dr. Moyo’s analysis resonates with a 1984 comment from Financial Times Associate Editor Martin Wolf quoted on Page 15 of The Goldwatcher (not necessarily his current view) : ‘Let’s be blunt about it. The US is now on the unsustainable path to ruin…driven along a road of ever rising deficits and debt, both external and fiscal… destroying the country’s credit and the global role of the currency…’ And it’s not just the US now. Europe is on the same tracks.

Over to the Politicians:

Within a few weeks the US Congress will urgently address raising the nation’s debt ceiling above the current $14.28 trillion limit. The present limit could be breached as early as March. In a January 6th letter to lawmakers US Treasury Secretary Geithner notes ‘even a very short-term or limited default would have catastrophic economic consequences.’ And there can be no doubt the consequences could be Catastrophic with a Capital C.

Among the politicians elected to Congress last month are many who made fresh promises on tackling debt and deficits. They intend to be effective But the risk of triggering a US debt default now will be a high a price to pay for brinkmanship. A compromise is likely on a raised debt ceiling with more deficit spending and more key issues kicked into the long grass. Or, put another way, more papering over the cracks.

Motivation, timing and strategies for invesing in gold:Dr. Moyo’s astute reference to ‘a myopic political culture where politicians… are rewarded for focussing on shorter term (more tactical issues), rather than critical longer-term (more structural issues)’ highlghts risks in the system and encourages us to protect our assets by addressing long term risks.When The Goldwatcher manuscript was delivered to the publishers three years ago neither the extent of losses that would flow from the global financial crisis, nor the extent to which governments would be called on to fund the losses to arrest global financial meltdown could be measured. Now, even after trillions of dollars and euros have been expended the extent of the losses still can’t be measured and sovereign credit ratings could be at risk. This unholy financial mess supports motivation to invest in gold as a financial asset not connected to debt, derivatives or domestic fiat currency issues. Motivation supported by acknowledgement that the the dollar’s unique role ‘is not an eternal god-given constant of the universe.’John Paulson, the billionaire hedge fund manager now heavily invested in gold, claims he is a risk arbitrager seeking to protect his assets against erosion in the value of his dollar exposure. Other money managers have expressed similar views. I expect with the gold genie out of the bottle, global currency wars, potential issues on sovereign credit ratings and ongoing political blarney more will follow.

Gold and silver currency:

Talk of reintroducing gold and silver coins in circulation as legal tender would , until very recently, have been seen as wildly maverick. However the landscape has changed since Word Bank Chairman Robert Zoellick suggested gold should be considered as a value measure for currencies. Prominent monetary economists, including Harvard Professor Jeffrey Frankel, have also acknowledged gold is back in the system. Writing about Gold: A Rival for the Dollar Frankel notes ‘ The dollar’s unique role is not an eternal god-given constant of the universe…And, yes, gold too has re-joined the world monetary system. Gold was seen as an anachronism as recently as a couple of years ago… But all that changed in 2009…central banks in Asia have bought gold. Understandably, they want to diversify their reserves…This is a multiple reserve asset system.‘

Dr Ron Paul, a veteran hard money advocate, now Chairman of the House Finance Committee overseeing the Federal Reserve, wants gold and silver coinage back in general circulation alongside the fiat dollar currency. Now, less extreme and less maverick than he has been in the past, Ron Paul commented recently in Fortune Magazine:

‘… All I say is allow the constitution to be used – you can use gold and silver as legal tender, that’s what the law still says. We have multiple currencies being used around the world all the time. There’s no reason why we can’t have a couple of currencies circulating here in this country. So we should be allowed to have gold and silver as legal tender to pay our debt.’

Re-introducing gold and silver coinage in wide circulation as legal tender may yet be approved some time in the future. Private and institutional investors haven’t had to wait for that approval. They have sought exposure to gold and will continue to until the time comes when they are comfortable all the blarney is out of the system.Notes added on articles and selected quotes since posting:18th January : Tocqueville Gold 2010 Year-End Investor Letter: ” ‘Two significant developments boosted the gold price in 2010. First the Greek debt crisis in the spring contributed to doubts as to the safety of the euro. In our opinion, many investors who took refuge in the euro to escape from the U.S. dollar learned a tough lesson—-that no paper currency deserves safe haven status. As investors dumped their euro holdings, the dollar appreciated and gave the appearance of strength. Dollar strength has usually been associated with a weak gold price. However, in this instance, the gold price rallied in both in U.S. dollar and euro terms. More important, gold broke out to an all time high in euro terms. As a side note, it is remarkable but unsurprising that the European sovereign debt crisis remains unresolved… At the moment, finance ministers in Europe are scrambling to rescue Ireland, while spreads for Greek sovereign debt have widened to levels that exceed those when Greece was front page news in May. In our opinion, permanent resolution of the credit woes afflicting the weaker European economies (PIIGS-Portugal, Italy, Ireland, Greece, and Spain) will remain elusive. Bailouts and rescues resolve nothing and have only bought time while potentially fueling inflation by further undermining confidence in the euro.

The second key development was the launch of a second round of quantitative easing (QE2) by the Federal Reserve. While economists debate whether additional money printing by the Fed was necessary or will have a positive effect on economic activity, the rationale put forth by Chairman Bernanke and other Fed officials was quite disturbing to foreign holders of U.S. dollars. That rationale unequivocally stated that the purpose of QE2 was to create inflation. Such statements coincided with a new upward leg in the gold price, which rose from $1,308.35 at the end of September to an all time high of $1,431.25 on December 7, 2010. On the day after the Fed officially announced that it would proceed with QE2, the gold price rallied 3% in a single day. The action was met with a storm of criticism from academia, former Fed officials, and ministries of our trading partners claiming Fed actions would result in dollar debasement……The Tocqueville Equity Gold Strategy was named as the top performing strategy over the past one and five years by Pensions & Investments magazine. ‘

Bill Gross at Barrons Roundtable January 15th : ‘We are looking at a currency (the $) that almost certainly will depreciate relative to other, stronger currencies in developing countries that have lower levels of debt and higher growth potential. And, on the short end of the yield curve, we are looking at creditors receiving negative real interest rates for a long, long time. That, in effect, is a default. Ultimately creditors and investors are at the behest of a central bank and policymakers that will rob them of their money… .Felix Zulauf at Barrons Roundtable January 15th : ‘At its 1980 peak of $850 an ounce, gold represented 3% of the market capitalization of global equities, bonds and money-market assets. Today it is 0.6%. The price has a long way to go.’January 20th : Audio of Dambisa Moyo’s talk at the LSEJanuary 18th : Audio of Dambisa Moyo’s talk at RSAJanuary 20th : 3 Part Article on The European Debt Crisis by Satyajit Das : Part 1 Part2 Part3January 18th: FT Article Yu Yongding - China’s Best Way ForwardJanuary 14th FT on Debt CeilingJanuary 15th FT Article ‘Brace for a perfect storm in gold.’June 1st 2001 : Fareed Zakaria on Post Financial Crisis American World http://www.bloomberg.com/video/70344112/June 1st 2001 : Roubini says Ireland plunging into disasterous crisis : http://www.bloomberg.com/news/2011-05-27/roubini-says-banks-to-plunge-irish-into-disastrous-crisis.html 3rd June 2011: Dambiso Moyo discusses The West and the Rest3RD June 2011 : Dambiso Moyo discusses How the Wesy was Lost on Book TV

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