By Bron Suchecki, on April 8th, 2009
On 5th of April Safe Haven posted an article by a James Macfarlane titled Gold and Silver… How Do I Own Thee?… Let Me Count The Ways.
On thing I really like about the article is the way he distinguishes between physical and paper. His position is that if you don’t hold the physical yourself, you have a counterparty exposure, period. It is a position I hold but have seen very few, if any, make this point. Reading stuff on the internet gives me the feeling that a lot of people seem to think that because allocated is involved in whatever they are buying that somehow it is magically super safe!
The article then comprehensively discusses all the various paper options in a fairly balanced way (unusual these days). However, there are a few inaccuracies in his treatment of the Perth Mint which I discuss below. I have emailed James with the comments below and he was happy for me to publish them here and he will review/respond. The sections quoted in italics are from the article.
I also think the article could breakdown the paper options in a bit more detail. My view is that the risk hierarcy of paper gold products would be (there would be sub risks within the categories depending on the associated legals and trustworthyness of the provider of the service/facility):
Segregated Allocated – physically segregated specific coins and bars (including numbers) in your name.
Unsegregated Allocated – physically segregated gold (usually in bar form) in the name of the storage service provider where title resides with the holders as a group but no one bit of gold is exclusively identified as owned by a specific holder. Examples would be GoldMoney, BullionVault, Central Fund of Canada. ETFs can be included if you believe they have the gold, although considering the lack of accountability in the legals of some they may not qualify for this category from a risk point of view).
Unsegregated Physical Backed – an unsecured claim on a provider where the claim is backed 100% by physical in various forms. This is the strict definition of the Mint’s unallocated. No different to unsegregated allocated except that title to the gold does not directly reside with the holders. Has to be ranked below the one above because the lack of direct title means you are relying on no other problems in the provider’s balance sheet, even if they have 100% gold. In this sense you have true counterparty exposure as commonly understood. In retrospect, the Mint should never have used “unallocated” as this is commonly understood as defined below, which is not what we do.
Unallocated Fully Hedged - an unsecured claim on a provider where the claim is fully hedged by one or all of physical gold, futures, options etc. You are relying on this ability to hedge this properly – physical gold 1:1 is a perfect hedge, anything else is less perfect as it may not be able to be timed exactly with actual liquidations.
Unallocated Unhedged – an unsecured claim on a provider where the provider may or may not hedge the exposure, eg just hold your cash if they think the price is going down, hedge it if they think it is going up, they keep all the profits, if they make losses you are relying on the strength of their balance sheet.
Anyway, my comments to the article are:
“An allocated account is very different. In an allocated account the bullion must exist, and the amount you purchase is stored in your name. You hold actual title to your precious metals. The dealer in this case is guaranteeing that it has the same amount of assets in bullion as there are claims against those assets.”
I would pick a technical detail with this statement about the dealer holding the “same amount of assets”. This is not the strict definition of allocated, which is specific bars or coins in your name. In its most common form, this means you have specific bar numbers allocated to you. This is different to what he then leads in to discuss regarding GoldMoney etc. In fact, allocated at the Mint (or another other depository, eg Delaware Depository) would have to be safer than GoldMoney type systems because clients have title to specific bars or coins, not an “undivided interest in” allocated bars (from GoldMoney’s user agreement). Being undivided, one could argue that GoldMoney is really an unallocated allocated system! I would suggest that for completeness and accuracy true allocated should be separated from “undivided interest in allocated” systems. This is not to say that I think there is any problem with the GoldMoney or Bullion Vault type systems, on the contrary, just that they are different to true allocated in the traditional sense.
“from the Perth Mint in Sydney, Australia”
I think there has been some confusion here as the Perth Mint does not have an office in Sydney, it is based entirely in Perth. I note that at the bottom of the second part of the article the link to the Perth Mint has one of our Perth Mint Certificate dealers who is based in Sydney, so that might account for it.
“there is precious little on the mints’ website indicating how rigorously the allocated accounts are audited, particularly the independent verification that the amount of bullion in storage matches the number of certificates issued. It appears that at least some holdings may be audited by a third party, but the mint never responded to a query as to the details”
The Mint’s FAQ page says “Allocated precious metal holders may inspect or collect their deposits at The Perth Mint … a third party nominated by you will be permitted to audit your deposit on presentation of an acceptable instruction from you to the Client Relations Executive of the Perth Mint Depository. The unsegregated nature of unallocated deposits, which are backed by the working inventory of the Mint, means it is not possible for an individual to audit them. Unallocated investors will need to rely on the Mint’s audited Annual Reports, which are signed off by the State Auditor-General to ensure compliance with the Financial Administration & Audit Act 1985 and the Gold Corporation Act 1987”
Now on looking at our website and annual report, I note that there is no mention of who the State Auditor-General gets to do our audits, which is a bit remiss of us. One can be left with the impression that the Auditor-General’s Department does it, which I would concede is not as strong as an audit by a party independent of the Government. For the record, both our internal and external auditors are independent “big 4” audit firms. In this sense we are therefore no different to GoldMoney and Bullion Vault. In fact, having the State Auditor General appoint an independent auditor adds another layer of control, as the auditor’s work is then reviewed by the State Auditor General.
“the Western Australian government has a law already on the books that allows for all gold to be confiscated”
It is a Federal law, not state. To be balanced I think the article should also have mentioned that this applies to any other storage service as most countries have this risk, whether a law exists in a suspended state as in Australia or a new law needs to be enacted.
“For one thing, you cannot take delivery of your gold without first converting to an allocated account and paying additional fees”
These “additional fees” are simply fabrication and delivery costs, the same that you would pay if you bought allocated in the first place.
“The Perth Mint will not be liable or responsible for delivery delays due to causes beyond its control”
This text is a standard type of force majeure. I would point out that it refers to “delays”, not failure to do it at all. The nature of force majeure is that when the condition that brings it into play has finished, the obligations come back into existence – it is only referring to temporary events. For comparison, note the following similar clauses in the GoldMoney user agreement:
Net-Gold shall not be responsible for errors, negligence or inability to execute orders, nor shall Net-Gold be responsible for any delays in the transmission, delivery or execution of the User’s order due to breakdown or failure of transmission or communication facilities, or to any other cause or causes beyond Net-Gold’s reasonable control or anticipation including (without limitation) volatile markets or trading disruptions.
Whilst GoldMoney makes its best efforts to prevent unauthorised or fraudulent use of its system, GoldMoney disclaims itself from all liability for loss or damage, of whatever nature, caused as a result of the unauthorised or fraudulent use of a User’s Holding number and Passphrase to the fullest extent permitted by law but excluding unauthorised or fraudulent use by GoldMoney and Net-Gold
GoldMoney shall be relieved from its obligations under this Agreement if and to the extent that it is unable to carry out all or any of its obligations hereunder owing to: i. Wars, civil commotion, vis major, act of God, strikes, riots, lockouts, governmental controls or restrictions, non-availability of any equipment or telecommunications or computer systems or any other causes beyond the reasonable control of GoldMoney
I think if one digs into any of the other storage services they will find similar force majeure clauses. This is standard business practice and is not at all sinister. I don’t think people should interpret these as the Mint, GoldMoney or others as trying to get out of their obligations permanently.
Personally I think the article makes the differences between the Mint and GoldMoney and Bullion Vault too wide. The five part process described for GoldMoney also applies to the Mint:
1. The Mint is regulated and supervised just as much if not more than private companies. We have to comply with the same laws that apply to private companies plus the additional requirements of being part of a Government.
2. All bullion we hold is LBMA standard and/or internationally accepted and in the case of work in progress, we can easily make it into LBMA standard.
3. We store it ourselves, so there are fewer counterparties involved and to argue with in the event of any problem.
4. All our metal (unallocated and allocated) is insured by Lloyds, in addition to being guaranteed by the West Australian government.
5. Our accounts are audited by big 4 firms, the audit including verification of physical stocktakes and corresponding unallocated and allocated liabilities.
Nothwithstanding the above, I think the article is worth reading and should be reference material for first time gold buyers, as long as it says nice things about the Perth Mint of course.
By Winton Bates, on April 7th, 2009
“To some extent, commercial bankers lend out their own capital and money acquired by CDs (certificates of deposit). But most commercial banking is “deposit banking” based on a gigantic scam: the idea, which most depositors believe, that their money is down at the bank, ready to be redeemed in cash at any time. If Jim has a checking account of $1,000 at a local bank, Jim knows that this is a “demand deposit,” that is, that the bank pledges to pay him $1,000 in cash, on demand, anytime he wishes to “get his money out.” Naturally, the Jims of this world are convinced that their money is safely there, in the bank, for them to take out at any time.” Murray N Rothbard, ‘Fractional Reserve Banking’.
When my friend Jim asked my reaction to this quote, I said that I didn’t know that he knew Murray Rothbard. Jim replied: “I didn’t know that he knew me, but I think he is making a good point.”
I asked Jim whether he thought most people really believed that banks were like warehouses that kept the money deposited with them until people wanted to withdraw it. Jim said: “Most people know that banks lend the funds deposited with them to other people, but the point is that banks do promise to repay deposits on demand. They know that they can’t keep this promise if everyone wants their money back at the same time. Banks shouldn’t be allowed to make promises they can’t keep.”
I tried to argue that the financial system generally works well even though exceptional circumstances can arise where financial intermediaries make promises that they cannot keep. I suggested that it is very rare for situations to arise when a high proportion of borrowers do not meet their commitments and the value of the security held by banks falls below the value of loans outstanding.
Jim said: “Look, you can’t pretend that these situations where banks can’t keep their promises occur so infrequently that they should be ignored. Democratic governments don’t just look the other way when banks go bust. Do you think that the best solution for this problem is for governments to get involved by offering deposit insurance, guarantees that banks will not be allowed to fail and close supervision and regulation to ensure that such guarantee do not result in irresponsible behaviour? Don’t you see that this government intervention has arisen because banks are allowed to make promises that they can’t keep.”
I asked Jim whether he was suggesting that instead of promising to repay deposits on demand, banks should convert themselves into unit trusts. That would mean that the amount that investors could get back on demand would vary according to the market value of the financial institution’s loan portfolio.
Jim replied: “I don’t think many people would view that system as a good substitute for conventional bank deposits that are repayable on demand. What I have in mind is that a bank would specify in its agreement with depositors that in the event that it could not meet its promise to repay deposits in full within, say, a month of the request being made, then equity holdings in the bank would immediately be canceled and re-issued to depositors in proportion to the nominal value of their deposits. The former depositors could decide whether they wanted to liquidate these equity holdings immediately by selling them on the stock market, or to hold on in the hope that the bank’s financial situation would improve.”
I have been thinking about Jim’s proposal. I do not imagine that the conversion of deposits in a troubled bank into equity holdings would be as quick and simple as Jim envisages. Nevertheless his proposal seems to me to be preferable to the current shambles that has arisen as government regulators have sought to substitute their assurances for dodgy promises that financial institutions are not able to keep.
By D H Smith, on April 7th, 2009
Gosh, I’m so sick of their commercials. Where do they get the goofball with the infinitely joyful sing-song voice, who is always offering ever more fantastic deals on clothing that no one needs!
Buy three suits, get five free!!! For what, dude? Don’t have no job, don’t need no suit!
Or if you had a job to which you might otherwise have worn a suit, the Security Department of your company has sent out a memo telling you to dress like a plumber or electrician just in case demonstrators think you’re a bonus recipient and throw garbage at you, or worse.
This is my modest proposal to Jos. A Bank. It’s a variation of the old wheeze where you open a CD at the bank and they give you a toaster. I’ll buy the goddamn suit, and I’ll allow you, Jos. A. Bank, to give me a bank. You’ve got banks, right? That’s why you’re called that! Plus, if you don’t have enough banks to give to the thirteen men in America today who might be persuaded to buy a junky suit if they got a bank with it, you can get more from the TARP. A suit is body cover, and what better to cover bodies than TARP?
Great deal. You unload surplus suits, government unloads surplus banks, I recapitalize my bank by taking Bazooka Joe wrappers and SH Green Stamps to the Fed discount window. Everyone’s a winner.
By Bron Suchecki, on April 6th, 2009
An extract from the book Money by Hartley Withers, 1935:
Since, then, it seems to be true that prices vary with fluctuations in the quantity of money, and since the quantity of gold, and consequently of gold-paper money, has certainly varied considerably in the past, and price have varied with them, the critics of the gold standard have logic on their side when they argue that stability in buying power has not been secured by it; that money is defective as a measure of value when the amount of commodities that it will command is subject to variation; and that it would be just as sensible to use, for measuring lengths of timber or pieces of land, a yard-stick made of an elastic material.
But having thus seen that there is much truth in the premises of the critics’ argument, is it necessary that we should follow them to their conclusion and abolish the gold standard? It is a long step from admitting that the gold standard has not been perfect to replacing it by one which, when tried, has shown the same imperfection in a highly exaggerated form. During and after the war we had no gold standard, but money that was paper, issued, at the will and pleasure of governments, by governments or by central banks acting at their bidding; and prices whirled up in a mad witches’ dance. It is true that the circumstances were enormously exceptional, but the experience has left, in the minds of most of us, a deep mistrust of any change that would leave our money in the hands of politicians who could multiply its amount whenever they preferred that mode of paying their way to taking money out of our pockets by taxation.
It is so easy and tempting, and politicians are so human. In fact, Mr. Stanley Baldwin, an austere but kindly judge, has stated publicly that there was no government on earth that he would trust to manage a currency, and the one outstanding advantage to his mind of a gold currency was that, so far as anything in the world could be, a gold currency was knave-proof. Moreover, recent exceptional experience has shown that the power of public authority to endow pieces of paper with buying power fails if it is worked too hard. A government can make certain money legal tender for the payment of debts, but it cannot compel shopkeepers to party with their goods in exchange for it if they do not want to, as was shown in Germany when the printing press was producing its most monstrous effects, and the trade and business of the country began to be done in dollars and other foreign currencies.
For the present the gold standard, in spite of the hard truths that are behind many of the criticisms with which it is bespattered, holds the field as a working scheme, under which, during the century before the war, immense and unprecedented progress was made in improving the material conditions of man’s existence. The circumstances which led to its collapse in 1931, chief among which were panic in America and political funk in Europe, seriously though unreasonably discredited it. But its loss showed how valuable was the work that it did, in steadying rates of exchange, and so promoting commercial and financial intercourse between the nations.
By Winton Bates, on April 6th, 2009
As I was reading Tyler Cowen’s book “Discover Your Inner Economist” I wished that I had read it sooner.
The cover of the book and the table of contents did not give me good reasons to buy the book. The cover invites potential readers to use incentives to fall in love, survive their next meeting and motivate their dentist. The contents page suggests that the book is about things like how to control the world, possess all the great art ever made and practice the art of self-deception. Since I do not aspire to be a master of the universe I have given higher priority to reading other books, such as Tim Harford’s book about the economic logic of life and Dan Ariely’s book about hidden forces that can tend to make decisions predictably irrational (discussed here).
If I had read some reviews of Tyler’s book I would have discovered that it is really about how your inner economist can help you to live a good life. I would also have discovered that Tyler’s inner economist does not try to apply market place logic to all aspects of life. The book is full of parables drawn from every day life and suggestions about how to live well – including suggestions on how to make visits to art galleries and museums more rewarding and how to eat well on a limited budget.
If someone had asked me to describe my inner economist before I had read this book I would probably have said that it was the inner voice that kept telling me things like: incentives matter; resources are scarce; don’t forget about opportunity costs; sunk costs are irrelevant to current decisions; and human behavior is motivated by self interest. I would probably have mentioned that, like any other sensible human, any sensible economist also has other inner voices (e.g. the voices of ethicists, psychologists and sociologists) questioning whether the advice of the inner economist is appropriate to the circumstances. I might also have said that there is always potential for an inner voice of reason to preside over this inner babble and say things like “on the one hand …” and “on the other hand …” and for an inner executive to conclude “on balance, it seems to me …”.
One obvious problem with my initial perception of the inner economist is that economists have a well deserved reputation for saying “on the one hand” and “on the other hand”. Good economics takes account of insights from other disciplines where they are relevant – it involves more than just an exploration of what might happen if people behave in the way economists have often assumed that they will behave in simple models of market behaviour.
Tyler sets up pattern recognition as the most important function of the inner economist: “Your Inner Economist sees patterns that you might not be seeing at first glance” (p 8). He argues against the view promoted by some economists that monetary incentives, markets and property rights should be applied to all aspects of life, including family life. “Our Inner Economist knows that money cannot buy love, respect or peace of mind” (p 3). But our inner economist can recognize the circumstances in which monetary incentives will work well (e.g. where performance is highly responsive to extra effort or where intrinsic motivation is weak).
Tyler identifies a major drawback of rewards and penalties as follows: “We use them to influence the behavior of other people. And this is precisely what makes those people feel a lack of control and a lack of freedom” (p 33).
If aspiring masters of the universe were the intended audience for this book, I hope a lot of them have bought it. However, I doubt whether many of them would have enjoyed reading it as much as I did.
By D H Smith, on April 3rd, 2009
Whatever you think of the young administration of President Barack Obama, you have to admit the man does not lack for ambition. He promised that sea levels would fall and the lame would walk, and everyone understands that will take at least a couple more months. But taking over the motor industry, well that’s just the work of a couple of the President’s bright sparks over the weekend. It’s great knowing that I’ll be able to go into my Congressman’s constituent services office when I need parts for my old Dodge truck.
My sources in Washington tell me that the next thing to come out of the salvation lab is a major currency reform. The American Dollar, the Yankee Greenback, it has served us so well for so long, but now it’s lame too. Better just to repudiate all claims and start over, as they are wont to do in the countries of South America that have lately emerged as models of public administration.
I hear the new buck will be called the O-buck.
By Winton Bates, on April 3rd, 2009
When Jim asked me whether I was an economic rationalist I thought he was just stirring. The term “economic rationalist” has been used mainly in Australia and doesn’t seem to be used much anywhere these days. I don’t think there were ever many people in Canberra who called themselves economic rationalists. Those of us advocating economically rational policies just thought of ourselves as economists doing what economists should be doing. We knew that when people referred to us as economic rationalists they were probably intending to be offensive, just as most of those who refer to classical liberals as neo-liberals are intending to be offensive. But I don’t think the label worried us much. When people referred to me as an economic rationalist I knew that I was among good company.
I admitted to Jim that people had sometimes referred to me as an economic rationalist. Jim then asked me if I thought John Smith (name changed to protect Jim) would be an economic rationalist. I don’t know that I have ever met Smith but he has the reputation of being a good economist, having held senior positions in the Treasury as well as other government departments at a time when major economic reforms were being undertaken. I told Jim that I thought that Smith could be relied on to provide good public policy advice.
Jim then seemed to change the topic of conversation. He asked: “Do you think economic considerations should be taken into account in quarantine policy?” I replied that economic considerations were obviously relevant. For example, it doesn’t make economic sense to implement policies that will raise consumer prices by a huge amount in order to protect a tiny domestic industry, even if scientific evidence suggests a high probability that diseased imports will damage this industry.
Jim said: “So, are you suggesting that quarantine decisions should all be subject to a full blown 100-page cost benefit analysis?” I acknowledged that a full-blown analysis would be too expensive to do every time and is not necessary in most cases because the answer that such a study would come up with was usually obvious. I suggested that the legislation should incorporate a national interest test and require that the economic advice used to apply that test should be made public when decisions are made.
Jim replied: “But wouldn’t that make it difficult for politicians to take account of things like impacts that are concentrated in particular electorates, their concerns that voters might attribute damage to industries from highly improbable events to their mismanagement – and other irrationality that people exhibit on risk.” I said: “So what! If you are designing public policy rules in the interests of the whole community then you want the rules to make life difficult for populist politicians who pander to such concerns”.
Jim said: “I thought you might say that. But John Smith tried to sell me a very different line when I spoke to him in Canberra recently. He said that it would be important for the analysis of quarantine matters by the advisory economist to place higher weights on extreme events and on things with concentrated impacts and to make other adjustments to account for the irrationality that people exhibit on risk.”
I was stunned. All I could say at the time was that I could now understand why Jim had asked me whether John Smith was an economic rationalist.
Jim’s story makes me wonder how many other Canberra people who once advocated economically rational policies have lost their marbles by getting too close to politicians.
By Trace Mayer, on April 3rd, 2009
Accurate, transparent, comparable and thorough financial statements are essential tools for performing mental calculations of value. Being able to assess and weigh the performance of a going concern is vital for a holder of capital considering allocation to more productive uses which benefit humanity. Trust in the accuracy, transparency, comparability and thoroughness of financial statements is indispensable. When that trust is lost then holders of capital rapidly retreat from risk and seek safer and less risky assets.
The Financial Accounting Standards Board asserts, “The capital markets and government are comprised of many participants with competing demands, requirements, and proprietary interests. As independent entities without a political or commercial stake in a particular outcome, the FAF’s standard-setting Boards, the FASB and the GASB, provide objectivity and integrity to our country’s financial reporting system.”
THE SPINELESS GELATINOUS FASB
Financial companies have used their agents, U.S. lawmakers, to pressure the FASB to relax fair-value accounting rules. Yahoo! Finance reports, “The changes will allow the assets to be valued at what they would go for in an “orderly” sale, as opposed to a forced or distressed sale. The new guidelines will apply to the second quarter that began this month.” Bloomberg reports, “Wells Fargo and other banks argue the rule doesn’t make sense when trading has dried up because it forces companies to write down assets to fire-sale prices.”
WOULD BE A FUNNY STORY IF IT WERE NOT SO SAD
Months ago at a conference I was talking with a senior partner at DLA Piper. We discussed mark-to-market accounting and I made the assertion that if there is no bid then the asset may be worthless. He retorted with, ‘It is hard to say that a 60 story office building in New York is worthless.’ As the conversation progressed he told me a story.
One of his clients bought $1B of assets from Lehman Brothers which were to be sold back within a month. Two weeks after the sale Lehman Brothers evaporated and the client received a tough lesson regarding counter-party risk. His client left a quagmire of documents they assumed would never be read because of ‘orderly’ sales and instead asked what him what they owned.
After several weeks of reading and analyzing the documents while being paid hundreds of dollars per hour to do so he came back with some grim conclusions. They owned about 65 various real estate assets; including one large condominium complex in Texas. Many of the various assets had clauses which required further capital injections so the European bank has opened an office in New York and relocated employees to service the assets. But those assets all pale in comparison to this condominium complex.
Only about 15% of the units had been sold, it was built on shifting sand, the local government had condemned it and decreed it would have to be demolished. With a sly smirk I responded, “It seems the skyscraper with no bid is worth less than worthless.”
FAIR VALUE LYING
The recent FASB changes to relax fair-value accounting have a secondary purpose: To perpetuate fair value lying to protect the worthless, or in some cases worse than worthless, financial statements of zombie banks. The vernerable banking behemoths, Bank of America and Citigroup, have become Single Digit Midgets. What type of objectivity and integrity do these rules have?
 How long will it take other banks like Wells Fargo, US Bancorp or Credit Suisse Group with their approximately $15.50, $15.50 and $34.50 share price respectively and below $65B, $27B and $40B market cap respectively to join the ranks of the single digit midgets?
Sure, they were profitable for a quarter but it was all an illusion based on bailout money funneled through the apparation AIG. These stolen funds also found their way, of course, to Goldman Sachs, JP Morgan, and $35B ended up in European banks like Deutsche Bank. Is it any surprise that there is a new dress code for bankers at parties like those outside the G-20?
CONCLUSION
But the primary purpose of these changes that have their catalyst in Washington and Wall Street appear to be to intentionally exacerbate the greater depression and postpone the credit contraction.
Perhaps the inmates infected with the financial insanity virus who are running the asylum have a King Canute complex where he decreed, “And then he spoke to the rising sea saying “You are part of my dominion, and the ground that I am seated upon is mine, nor has anyone disobeyed my orders with impunity. Therefore, I order you not to rise onto my land, nor to wet the clothes or body of your Lord”.
The great credit contraction should not be feared but embraced. The result is that the malinvestment during the credit expansion which has severely damaged the world economy is liquidated and no additional malinvestment results. This is because capital seeks safer and more liquid assets as it moves down the liquidity pyramid. It is important to point out that the ETFs GLD and SLV have problems and do not have the same risk or liquidity profile as physical gold or silver.
The institution of fair-value lying and Geithner’s plan for toxic assets, which is how the banks will siphon more wealth out of the world economy to feed their parasitical vampiric appetite, are but vain attempts to entice capital to move up the liquidity pyramid. Gold loves truth and has no fear of accurate, transparent, comparable and thorough financial statements and those who trust in it build their financial castle on the immortal unchanging element. In contrast, fiat currency loves lies, cannot withstand the sun of scrutiny and those who trust in it are building their financial condominium on sand. The great credit contraction has arrived and only begun.
Disclosure: Long physical gold and silver with no positions in GLD, SLV, BAC, C, WFC, USB, CS, GS, JPM.
By Trace Mayer, on April 2nd, 2009
Keeping yourself, your family and your assets safe during a credit contraction can be a particularly daunting task but I am sure you are up for it. Gold is the currency. Irredeemable tickets, like the FRN$, Euro, Pound and Yen merely function like the common stock of nations. Like a falling share price of a corporation; when those irredeemable tickets, either digital or paper, lose purchasing power it does not bode well for the nation.
PAST PARTIES
 Charles I in 1649 seemed to lose his head when the English partied in their revolution. Then the scoundrel sociopath John Law was instrumental in starting a massive inflationary credit expansion that was followed predictably by a deflationary credit contraction that decimated the French economy.
The working class decided to protect themselves by using gold and silver in their ordinary daily transactions. John Law got the insane idea to institute the death penalty for those using the precious metals. The People responded by rounding up the criminal gangs costumed in government regalia, like King Louis XIV, in the public squares and giving them a free ride on the guillotine.
This is an effective way of dealing with dangerous rabid animals which cannot be rehabilitated. But I prefer the American method which involves the due process of law and not the blind rage of a mob. Under Section 19 of the Coinage Act of 1792 when costumed governmental officials engage in counterfeiting they ’shall suffer death’.
PARTY IN LONDON
The G-20 will be holding a party in London on 2 April 2009 at the Bank of England. Flash mobs are extremely popular in England and it appears everyone has been invited to the G-20 party.
Well, everyone except the red-headed step child Ireland. Perhaps it is because Ireland’s credit rating was cut from AAA to AA+ by the S&P and they can no longer keep up. The G20 countries attending are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, and the United States.
Because of the dire straits England is in and with the Bank of England engaging in quantitative easing the British Pound has lost over 30% of its value in the last year. Perhaps that is why, as the BBC reports, “six police forces are part of the £7.5m security plan’ and some 84,000 police man-hours have been expended. ”All police leave has been cancelled in London for Wednesday and Thursday.”
Some police will probably be in uniform while others will be like the undercover agent provocateurs at one of Canada’s parties. But what happens when the brutalizing class no longer accepts the irredeemable tickets for payment? Then even the police get to party.
 ARGENTINA LIKES TO PARTY
The Argentinian Peso has been declining, like usual, so the Argentineans have been partying, like usual. Last week I decided to talk a short walk around Buenos Aires. Nothing gets the blood of a journalist flowing like wandering unexpectedly into a giant protest of about 10,000.
That picture was taken with my iPhone on Nuevo de Julio which is the largest avenue in the world. While the full street is not shown it is extremely wide with many lanes of traffic.
It seems everyone is partying these days; Greece, China, Iceland, and even the United Snakes is having tea parties.
After all, in the United States partying is protected under the First Amendment of the Constitution. ”Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof, or abridging the freedom of speech, or of the press; or of the right of people peaceably to assemble, and to petition the Government for the redress of grievances.”
How fun!
PARTY ETIQUETTE IN LONDON
 There is suitable dress for bankers when attending the party. For those who are in London please encourage all your banker associates to be extremely helpful and bring their own tie.
Bloomberg reported on the many websites that purport to provide advice for party etiquette while in London. One website gave this advice: ”How to keep warm during the credit crunch …. BURN A BANKER!”
If only Wall Street and Washington were viewed as sociopaths infected with the financial insanity virus who are intentionally exacerbating the greater depression then there would be a lot of rounding up to do.
NATIONAL CURRENCIES WILL CONTINUE DECLINING
Investors are usually worried when there are parties like these. Their property, plant and equipment may get damaged. As a result, they seek to allocate capital to safer and more liquid assets.
To date capital has been moving into the FRN$ resulting in Treasury yields being pushed near 0%. Despite the ’safety’ of government paper; auctions are failing in Britain and Germany. China and Russia are getting increasingly anxious about the FRN$ and its role as the world’s reserve currency will surely be a hot topic at the party in London. Eventually the Treasury bubble will burst as capital continues moving into physical gold and silver; not paper apparitions like the problematic ETFs GLD and SLV.
THE G-20 CAN DO NOTHING PRODUCTIVE
The system, financial, economic, political and social does no collapse but evaporate. The costumed criminal gangs are being increasingly viewed with less moral authority. The derivative illusion is rapidly dissipating. Capital is fleeing into safer more liquid assets and global trade is collapsing. Political risk is increasing and parties break out everywhere. But do not worry the G-20 has everything under control and everything will be fine. April fools!
All the G-20 can do is attempt to pontificate a unified statement they will all give lip service to but in action be completely fractionated. The scope of The Great Credit Contraction is simply too massive. As Jim Sinclair said, “A very good, simple and clear representation of the problem lacking a practical solution.”
Disclosures: Long real gold and silver with no position in Treasury bills, GLD, SLV, Irish debt and no party invitations.
By J.D. Seagraves, on April 2nd, 2009
In ECON 101, we are taught the concept of “structural unemployment.” Government economists say that structural unemployment, which refers to the segment of the work force unemployed due to “structural change” in the economy, is unavoidable. Therefore, a good 3-5 percent of Americans can be out of work and the government will still say we have “full employment.”
In truth, “structural unemployment” is created by the misallocation of financial resources resulting from the Federal Reserve’s fiat-money central banking regime and other government interventions into the economy, most notably minimum wage laws. Under a gold standard and laissez-faire, there would be real full employment. But of the myriad cockamamie government intrusions into the market unnecessarily causing unemployment, one that deserves special focus amid the current economic depression is unemployment insurance.
From Textbooks to Real Life
Let’s make this personal. I have a younger brother, of whom I’m very proud, who decided to start his life over in Medford, Oregon, 2,300 miles away from his home in South East Michigan. Moving out there with nothing more than he could fit in his car, he quickly got a sales job at Circuit City. A few weeks later, he was promoted to a management position. That was a little over six months ago now.
Now, as you know if you keep up with the business press, Circuit City declared bankruptcy a while back and is now on the verge of being forced into liquidation. Many of the firm’s stores have been closed, but my brother’s in Medford, OR is still open—for now. If they are shut down, then my brother will receive 80 percent of his wages for a full year as part of Oregon’s unemployment insurance program. The only catch: he can’t find another job in the meantime.
Now who in their right mind would want to find a new job given this scenario? Imagine your boss coming in and telling you he has to cut your pay by 10 percent—but the good news is, you only have to work one day a week. Ninety percent of your pay for 20 percent as much work would seem like a pretty good deal, wouldn’t it? How about 80 percent of your pay for zero percent as much work? Who would screw up a sweetheart deal like that by going out and finding a new job?
Disincentivizing Work
Theoretically, of course, my brother could find a job that offered him higher pay. In that case, he might be smart to take it. But when a company goes bankrupt, one of the factors contributing to their insolvency is that they were paying inefficient employees too much money. My brother is a great salesman, but he’s undoubtedly the exception to the rule. After all, if Circuit City were paying their employees the “right” amount, they wouldn’t be going under. If they were overpaying by, oh say 20 percent, then their former workers from Oregon would have a hard time finding new jobs that paid them as much as they’ll receive just for staying home and doing nothing. Where is the incentive to find work?
This mismatch of incentives doesn’t apply only to firms that have gone belly-up, either. Even employees who are laid off have generally been paid too much: if their marginal utility was higher than the wage they were being paid, then the company would have kept them—so of course they’re going to have to take a pay cut to find another job! Why, then, does the government incentivize not finding a lower-paying job?
President-elect Barack Obama, of course, wants to extend unemployment benefits across the nation (and who knows, maybe the world, too). This is obviously a prescription for extended mass unemployment and a deepening of the current depression. If the government must intervene, and apparently it must, then the concept of “wage insurance” makes a lot more sense.
Wage Insurance: An Alternative Idea
Wage insurance is a program whereby displaced workers receive benefits—but only once they find a new job. For example, if a factory worker who had been making $20 per hour were laid off and got a job at a convenience store for $10 an hour, wage insurance would make up part (or all) of the $10 differential between his previous wage rate and his new, lower wage rate. Over time, this benefit would be scaled back as the worker learned new skills that would presumably result in salary increases.
Now as you can see, unemployment insurance incentivizes not finding a job, while wage insurance incentivizes actually procuring employment. Which one do you think would do more to get us out of recession? Even better, unlike unemployment insurance which could never be handled by the free market (due to its incentivizing of bad behavior), wage insurance could be: workers could pay optional insurance premiums for individualized wage-insurance policies. Insurers would be happy to underwrite these moral hazard-free contracts.
Contrast this to our current situation: productive workers are forced to sacrifice their earnings through reduced wages and higher taxes to subsidize the unproductive and non-working. Only the government could set up such a perversely counterproductive and destructive scenario and call that which ails us—over-regulation—a miracle cure.
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