Video: Richard Duncan on The New Depression

Podcast: Philip Coggan's Paper Promises - Money, Debt and the New World Order

Below is the podcast of Coggan's book talk, and here is a good review of Paper Promises.

Speaker(s): Philip Coggan

Chair: Professor Christopher Polk

Recorded on 19 January 2012 in Sheikh Zayed Theatre, New Academic Building.

The world is drowning in debt. Greece is on the verge of default. In Britain, the coalition government is pushing through an austerity programme in the face of economic weakness. The US government almost shut down in August because of a dispute over the size of government debt.

Our latest crisis may seem to have started in 2007, with the collapse of the American housing market. But as Philip Coggan shows in this new book, Paper Promises: Money, Debt and the new World Order which he will talk about in this lecture, the crisis is part of an age-old battle between creditors and borrowers. And that battle has been fought over the nature of money. Creditors always want sound money to ensure that they are paid back in full; borrowers want easy money to reduce the burden of repaying their debts. Money was once linked to gold, a commodity in limited supply; now central banks can create it with the click of a computer mouse.

Time and again, this cycle has resulted in financial and economic crises. In the 1930s, countries abandoned the gold standard in the face of the Great Depression. In the 1970s, they abandoned the system of fixed exchange rates and ushered in a period of paper money. The results have been a long series of asset bubbles, from dotcom stocks to housing, and the elevation of the financial sector to economic dominance.

The current crisis not only pits creditors against debtors, but taxpayers against public sector workers, young against old and the western world against Asia. As in the 1930s and 1970s, a new monetary system will emerge; the rules for which will likely be set by the world's rising economic power, China.

Philip Coggan was a Financial Times journalist for over twenty years, including spells as a Lex columnist, personal finance editor and investment editor, and is now the Buttonwood columnist of The Economist. In 2009, he was awarded the title of Senior Financial Journalist in the Harold Wincott awards and was voted Best Communicator at the Business Journalist of the Year Awards. Philip Coggan is the author of the business classic, The Money Machine.

Recommended links

1. Is there a shadowy plot behind gold? (FT)

2. Ray Dalio video interview (Charlie Rose). Ray doesn't have the most compelling television presence, but as the world's largest hedge fund manager he's clearly doing something right. Here is an interesting earlier read from the New Yorker on him and his firm, Bridgewater.

3. Eurozone summit - despair and backbiting in the corridors of power (Telegraph)

4. Steve Jobs Was Willing To 'Rip Off' Everyone Else... But Was Pissed About Android Copying iPhone? (TechDirt)

5. Michael Pettis Talks China (Infectious Greed)

6. €1.5bn Dexia loans used to buy shares in...Dexia (FT)

7. Generation X Doesn’t Want to Hear It (Emptypage)

Video: Keynes on Britain's Departure from the Gold Standard

SNB Gift-Wraps $2,000/oz. Gold

Perhaps not since World Bank President Robert Zoellick publicly advocated a return to the gold standard last year has the barbarous relic received such a sure-fire price boost.

Today the Swiss National Bank declared that it will print an "unlimited" number of Swiss francs (because fiat central banks can do that) to prevent further appreciation of the franc.

The Swiss franc had been considered perhaps the ultimate safe haven currency, alongside perhaps to a lesser extent the Japanese yen. Both have been appreciating steadily over the past year+ in the face of periodic interventions by their respective central banks. Both countries have trade surpluses, which creates a built-in demand for their currencies as domestic firms repatriate funds. The Japanese and Swiss banking systems are also considered relatively strong. However with the SNB's decision to crank up the printing press and peg the franc to the euro at 1.20 francs will undoubtedly increase pressure on the Bank of Japan to do something similar.

Strangely, the price of gold dropped dramatically on the SNB news before rationality returned and pushed gold back up to an all-time record high of $1,923/oz. (although it did finish the day below $1,900).

Bottom line: today's news is very bullish for gold, and my prediction, made just under a month ago when gold reached $1,700/oz., that the yellow metal would push forward to $2,000/oz. should now materialize sooner than anticipated.

Gold Price: Full Steam Ahead to $2,000/oz.

Over a year ago, on May 6, 2010, this blog launched with a first post on the attractiveness of gold as an investment. On that day the price of gold was just under $1200/oz, and as it became clear that the Federal Reserve was about to embark on another large round of money printing, which later came to be known as QE2, I felt compelled to grab the keyboard and start typing (see articles tagged 'Gold' both here and on SeekingAlpha for further reference).

During this time it has been amusing to watch the professional punditry drone on about a  "gold bubble" and observe various blogger bets about how gold's run couldn't last. The biggest amusement of all, however, has been the disparaging remarks from those such as Berkshire Hathaway's Charlie Munger, who belongs to a group I've taken to calling the 'gold haters'.

Suggestions from credible policymakers, such as the World Bank's Robert Zoellick advocating a return to the gold standard, have lit a fire under the barbarous relic's price this past year. Today, with gold pressing above $1700, or nearly 50% higher in just over a year, I can't help but comment on how we've heard nary a peep of late from the anti-gold crowd.

Where to from here? As long as three key fundamental forces persist then the rise in the price of gold will continue unabated. Those forces are:

1. Low interest rates, a hallmark of the current program of financial repression, which is only just getting started and should extend for many years to come.
2. Continued central bank purchases of gold by countries such as South Korea, Thailand, Russia, etc.
3. More money printing, which we've seen in spades of late with Italian and Spanish bond buying, Bank of Japan and Swiss National Bank currency intervention, and the Fed's rumored QE3.

Continue reading the full article at SeekingAlpha here.

Video: Barry Eichengreen on Why Economics Needs History

Berkeley Professor Barry Eichengreen discusses the importance of history to the study of economics and other topics in the below video.

A summary of Professor Eichengreen's recent book, Exorbitant Privilege, can be found here; a video lecture he gave on this book can be viewed here. 

So far Germany's current generation of leaders seem to be as committed to supporting the current Eurozone project as Professor Eichengreen has suggested they would . However, it's less than clear to me whether Germany has the appetite or capacity to support countries such as Spain and Italy should a full blown debt crisis ignite in these two large countries. Perhaps Germany would prefer a smaller Eurozone, comprised primarily of more economically homogeneous northern European countries instead of the current version which includes slow growing Club Med countries?

Video: Jim Grant - 'We Traded the Gold Standard for the PhD Standard'

Interview with Jim Grant on Bernanke's press conference today, the coming of QE3, and why the Federal Reserve should "be run by someone with a degree in unintended consequences" after the break.

In Greece, Locals Rule

Harvard Professor Dani Rodrik clearly spells out the bottom line on Greece:

History suggests...when the demands of financial markets and foreign creditors clash with those of domestic workers, pensioners, and the middle class, it is usually the locals who have the last say.

Rodrik's full post here, and video you won't see on most main stream media below.

Timeline of International Currencies

(click to enlarge)

Time for the U.S. to Sell Fort Knox Gold?

Some members of Congress and economists are saying it's time to cash-in on the appreciation of the U.S.'s vast gold holdings, which were recently valued at $370 billion.

From the Washington Post:

Although the country does not use the gold for anything, Treasury officials believe that selling it could create the impression of desperation, and thereby rattle the markets. Inert though it may be, the mountain of hidden gold may serve an indefinable psychological function.

Selling it during a budget crunch would seem a sure bet to incite derision. The satirical newspaper The Onion recently ran a story in which President Obama vowed to balance the budget through spending cuts, tax increases and a daring midnight heist of Fort Knox. (“I’ve got the blueprints and I think I found a way out through a drainage pipe.”) 

Of course, Gordon Brown's U.K. government had a similar idea about selling England's gold, and we've seen how well that worked out.

Greenspan's Opinion on the Gold Standard and Where's Gold Heading Now?

Some choice comments on gold from the former Federal Reserve Chairman previously made on Fox Business News:

"We have at this particular stage a fiat money which is essentially money printed by a government and it's usually a central bank which is authorized to do so. Some mechanism has got to be in place that restricts the amount of money which is produced, either a gold standard or a currency board, because unless you do that all of history suggest that inflation will take hold with very deleterious effects on economic activity. There are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard." 

During the interview Greenspan also wondered aloud whether we really need a central bank.

Contrary to what the occasionally conspiratorial and always hyperbolic 'Tyler Durden(s)' of ZeroHedge would have you believe, these quotes (while perhaps deserving of a muted 'wow' from those hearing them for the first time) aren't nearly as big of a surprise as World Bank President Bob Zoellick's recent call for a return to the Gold Standard.

Throughout his career Greenspan hasn't exactly been shy about making his feelings about Au known. Further, Greenspan is a highly paid private consultant right now without any official government responsibilities or gag orders. He (and his clients) are no doubt aware that his words still carry significant weight in the marketplace, and he can say whatever he likes and even talk his own book.

Having said that, as a close student of Greenspan's philosophy and personality I can say with a high degree of certainty that he very much cares about his place in history, particularly at this stage in his career.

In other words, the likelihood that the former Chairman is going on television and talking up gold the past few years just to earn a few bucks from hedge funds is low, in my opinion. And with outgoing Fed Governor Thomas Hoenig also recently weighing in on the yellow metal's merits one can't help notice the growing chorus for a reconsideration of the gold standard.

Continue reading the full article published on SeekingAlpha here.

Video: The Dark Side of the Gold Boom (from Bloomberg TV)

Gold's Strange Bedfellows

Today Floyd Norris ponders the rise in the price of gold in a NY Times piece, which perhaps more accurately could be titled "Let's Hope the Price of Gold Crashes".

I encourage you to read it in full, but if you don't have time it can be simply summarized as yet another gold hit job by a major media organization. Wall Street Journal opinion makers had previously been leading the anti-gold media charge; in particular investing 'guru' Jason Zweig and Matt Phillips of the MarketBeat blog have both bad mouthed the barbarous relic. Perhaps the NY Times is now aiming to give the WSJ a run for its anti-yellow metal money?

What Zweig, Phillips and now Norris have perhaps all failed to realize is that in barbarous monetary times, relics do well.

However, the above journalists' dislike of gold doesn't compares with the vitriol from Warren Buffet's longtime partner at Berkshire Hathaway, Charlie Munger. In what is a clear case of hating on both the game and the playa, Munger calls all gold owners "jerks".

If the fiercely competitive and politically opposite WSJ and NY Times seem like strange anti-gold bedfellows, consider the following bizarre 'gold lovers': followers of media shock jock Glen Beck and the hedge fund investor he refers to as a "economic war criminal", George Soros, both own loads of gold; countries as culturally and economically diverse as Russia, Mauritius, India, Saudi Arabia, Sri Lanka, Iran, Bangladesh and China have all been increasing their gold reserves; citizens have been acquiring Au in both economically underperforming America and booming Germany, where Frankfurt university professor Wilhelm Hankel recently remarked:

"You cannot find a bank safe deposit box in Germany because every single one has already been taken and stuffed with gold and silver. It is like an underground Switzerland within our borders"

Returning to Norris' article, he speculates that part of the appeal of gold is that it serves as a proxy ballot box for the general dissatisfaction people feel towards the inability of their political leaders to tackle economic problems.

In other words, the rising price of gold reflects an investor vote of no confidence in the world's economic leadership. But besides Munger, can anyone really blame investors for feeling this way?

Quote of the Day

In reference to World Bank President Robert Zoellick's recent gold standard op-ed in the Financial Times, the quote of the day comes from the WSJ:

"mentioning the word "gold" in the orthodox Keynesian company of the Financial Times is like mentioning the name "Palin" in the Princeton faculty lounge"

In related news, gold has throttled well past $1400, as predicted.

World Bank President Zoellick Gift Wraps Gold $1400+

'Tis soon to be the season of giving, and the monetary gifts to gold owners are getting off to an early start.

Not to be outdone by Federal Reserve Chairman Ben Bernanke's recent 'QE2' goody bag, World Bank President Robert Zoellick has penned an editorial in the Financial Times calling for a global monetary debate on returning to a gold standard of sorts.

Zoellick's proposal is for a basket of the world's leading currencies - the dollar, euro, yen, pound, and renminbi - to be paired with gold (which he describes as "an international reference point of market expectations") in a new Bretton Woods styled monetary order.

Gold really didn't need much of a reason to finally poke its head above $1400/oz, but Zoellick's op-ed and the gold chatter that's sure to follow will almost certainly provide the nudge.

Meantime gold owners can sit back, grab a bag of popcorn, and enjoy what's about to happen to the price of your Au.

Why Do Governments Still Own So Much Gold?

With the gold standard long gone ever wondered why so many countries (and a couple multinational institutions) still own so much gold?

Some foreign leaders have wondered the same thing themselves.

Gordon Brown

Ex-UK Prime Minister Gordon Brown didn't see much point in guarding British gold. While he was Chancellor of the Exchequer he sold almost 400 tons (or nearly half) of England's hundreds of years old gold reserves.

Brown's market timing won't aid any dreams of a lucrative hedge fund consulting career: his sales between 1999 and 2002 at $256 to $296 an ounce were at the 30+ year low. Since Brown's golden folly the value of Au has nearly quintupled. Ouch.

More recently the IMF has been selling its gold in a series of "off-market" auctions "directly to central banks and other official sector holders". Translation: the IMF is keeping the gold in the family, so to speak, selling its gold only to other countries like India. So far the IMF has sold approximately 220 metric tons of gold.

But Brown and the IMF are more the exception than the rule. With prices at an all-time high and growing talk of a gold bubble, no major country (to my knowledge) has made any material sales. Why not?

Fort Knox

Any gold sold could be put to productive use (e.g., pay down debt and decrease interest expense). There are plenty of cash strapped nations right now that could use a few extra bucks. Greece occupies the world's 30th largest gold reserve position, with over 100 tons. Selling some gold could help Greece try to avoid default.

And with the world's reserve currency, what possible purpose does holding all that gold at Fort Knox serve the U.S. (the world's #1 owner of gold)?

Attempts to answer these questions definitively would be speculative, but gold investors would do well to keep an eye on any moves by the big gold owners - countries and multinationals.

The Largest Holders of Gold

CNBC put together a slideshow with the world's 15 largest holders of gold. There are a few surprises. For example, I would have expected that the U.K. would make the list.

Running for the Hills

"What you're faced with is you simply do not know which countries are solvent, which countries are insolvent. You do not know who the counterparties are for these insolvent countries, so you run for the hills."                                   

We've wound up in quite a complicated, difficult mess. And selfishly speaking, I'm young enough that I can expect to feel the full pain of it for many decades to come. So I've decided to give blogging a try. Here goes:

Governments Can Also Go Bust

The topic du jour is the sovereign debt crisis. At the current epicenter we see Greeks in the streets, rioting among other things about raising the retirement age from 53 to 67. Sadly, a few Greeks have died. Germans, who would be the principal Greek financial rescuers, don't seem all that thrilled about loaning Greece money when they (Germans) tend to work later into life than Greeks.

So where is all of this heading? Esteemed Princeton Professor and Nobel laureate Paul Krugman recently changed his public opinion and now says Greece may very well a) default on its debt (aka "restructure", "refinance", "rebalance" -- the list of euphemisms beginning with "re-" for a debt default is long) and b) drop the Euro as its currency. 

Further, there could be some "bank holidays" in Greece to prevent capital flight, along with other unpleasantries that are typical of this kind of crisis which I'll discuss in more detail later. In terms of the timing, the Greek tragedy could all play out over months, perhaps years, or maybe as soon as the next few weeks or even days.

(I don't have any data at hand to support the following hypothesis, but I believe that the ever accelerating speed at which data and information travels has lead to a general compression in the amount of time it takes today's events to unfold when compared with comparable historical events. I would therefore predict that the full Greek debt end game will play out sooner rather than later.)

But Greece is only approximately a tiny 2% of the Eurozone GDP. The real threat is "contagion", meaning a financial wildfire that spreads from one country to the next. The fire would probably next land on Portugal's doorstep. Portugal's situation is not quite as dire as Greece's. Spain, Ireland, and Italy are all potentially at risk too. For Europe there seems a significant possibility that the number of countries using the Euro as the currency could shrink. And there is a real possibility that Germany may even abandon the Euro, which may effectively equal € R.I.P.

After Europe perhaps next up is Japan. Or maybe not. Japan is different because nearly all of its debt is owned domestically. The same is not true for Greece, where some 80+% of the public debt is owed to foreigners. Greece needs outside investors from other countries to pay its government bills, whereas Japan does not. Like Greece, a large portion U.S. public debt (approximately 40%) is owed to foreigners.

Many people are understandably perplexed and asking what does relatively tiny Greece and its debt have to do with the United States, the U.S. stock market, and the U.S.'s public debt? There are long, somewhat complex answers  to this question. And there are simple, even entertaining answers. I'm going to shoot for somewhere in the middle.

I.O.U.S.A

First, if you are unfamiliar with the U.S. public debt situation, and/or you have a weakness for edutainment like me, then I recommend watching the movie I.O.U.S.A. It's a great primer on this topic and features interviews with Warren Buffet, Paul Volcker, and several former U.S. Treasury Secretaries. The film is available on Netflix and parts if not all of it can be viewed by searching for it on the web.

If you're already familiar with the U.S. debt situation then you're aware of the big challenge we have financing our Big 3 federal entitlement programs: Medicare, Medicaid and Social Security.

Now, you might be thinking "Sure, I'm aware that financing our entitlements will become a problem down the road. But that's years if not decades away and there's lots of time for the economy to get back on track."

Well, the Social Security fund just went negative well ahead of schedule.

Also, baby boomers are beginning to retire. This unprecedented demographic shift will lead to even larger demands on our Big 3 entitlements. For example, approximately 60% of all current healthcare dollars are spent on people aged 65 and over.

The bottom line is:

1. the day of reckoning may be closing in faster than previously imagined 
2. we cannot pay off our public debt without some major change

The Magical Money Printing Press

One way -- and arguably the only realistic way -- for the U.S. to get out from under its unsustainable debt burden is to 'print' more money.

(When I say 'print' more money I mean figuratively, not literally. When the Federal Reserve significantly expands the supply of money it rarely prints any physical paper currency. Instead, simply put, it punches some numbers into a computer and presto, now there's more money! The subject of what exactly is money, the banking and Federal Reserve system, fractional banking, and how the supply of money expands and contracts are complex subjects. If another actual "run" on a bank happens like the ones that happened to Northern Rock and Bear Stearns, then the money supply could be a good topic for another blog post.)

Instead of printing more money, can't the U.S. just spend less? That would, and will probably be, part of the ultimate solution. But it is also a far more difficult solution to implement than printing money. Politically speaking it has been shown to be nearly impossible to cut our Big 3 entitlement programs. In fact, forming a congressional group to simply discuss the cost of our entitlement programs is difficult. The politicians that try to reform our Big 3 entitlements are often voted out of office and replaced with politicians that further perpetuate the unsustainable.

The other possible way out is to increase tax revenue via either higher taxes (assuming you can extract more tax from citizens, which is not a given) or a larger tax base (i.e., more Googles, Bill Gates, larger population to tax at today's rates).

Higher taxes are perhaps even less popular than entitlement cuts. But an economic expansion leading to a larger tax base, like we witnessed in the 1990s, could theoeretically happen. Also, the U.S. population is still expanding and this larger tax base can help pay off the previous generation's debt. However, the U.S. is facing far more competition in the 21st century than the 20th. Thomas L. Friedman's The World is Flat is probably the best known book on this topic.

Print, Baby, Print!

Of the three major options that could solve the U.S.'s debt problem (cut, grow, print), printing money is probably the path of least resistance and hence the most likely scenario.

The additional money the U.S. prints can be used to pay off those that loaned us money (U.S. creditors). The way this can be done is for the Federal Reserve to purchase and hold U.S. Treasury debt. At present Japan, China, and Middle Eastern oil rich countries are the largest foreign holders of U.S. Treasury debt.

Coming back to Greece for a moment, unlike the Americans the Greeks no longer have their very own currency. Greece exchanged the drachma for the euro, which it shares with other European countries. Because Greece does not have complete control of the euro printing press, Greece cannot unilaterally printing more money. Only the European Central Bank, which is governed by all Eurozone member countries -- including the very ironically un-Gutenberg like but powerful Germans -- can collectively decide to print more money. I bid you good luck, Greece, on convincing the wheelbarrow full of money pushing descendants of the Weimar Republic to significantly crank up the Euro printing press.

What happens when money is printed? The value of money decreases relative to what it can purchase. In other words, instead of your McDonald's Happy Meal costing $5, then...if we were to use the Germany Weimar Republic inflation rate in 1923 where prices doubled every two days well...you better buy that Happy Meal fast!

Return of the Gold Standard?

So where will all this printing of money lead? Ultimately, I believe that it will culminate in a change in the current fiat monetary system, and gold will be included in the discussion of a new monetary system.

('Fiat' is a term used to describe a currency, like the U.S. dollar, that is not backed by anything other than belief. In other words, what makes the U.S. dollar ultimately worth something is simply the confidence placed in it. It was not always the case that the U.S. Dollar had no intrinsic value. Up until the Nixon administration U.S. dollars could actually be converted into a fixed amount of gold by other nations. This is what was known as the Gold Standard, and it served to underpin the value of the U.S. dollar. There are other factors supporting the value of a currency beyond confidence, such as government requiring that taxes be paid in that currency. Therefore we must exchange our labor, goods and services for currency so that we can meet our tax obligations. The ability of the government to effectively collect taxes is important to the perceived value and stability of the currency. The U.S. dollar also benefits from being the world's de facto reserve currency. This provides the U.S. with some advantages vis-a-vis other currencies.)

Unlike paper fiat currencies, gold cannot be printed. There is a finite supply of gold, but an infinite number of ones and zeroes for the Federal Reserve to type into its money creation computer. Gold has several other attractive properties which have made it the world's oldest store of value. 

Perhaps the biggest argument for making gold a part of any new monetary order is that it will help hold governments accountable. Many, many governments have consistently demonstrated an inability to manage public finances. Reinstating gold as a component of the new currency would provide a proven check and balance on this temptation. The gold standard carries tradeoffs. But basic human nature has ensured that the old "barbaric relic", as Keynes called it, cannot be kicked into economic posterity just yet.

(For a excellent read on the history of Gold I strongly recommend a book by the late Peter L. Bernstein titled The Power of Gold: The History of an Obsession)

Now the Good News

When we're faced with an apocalyptic issue, a natural response is to bury your head in the sand. We do this because talk of major change can be confusing, frightening, and depressing. This is especially true when we don't feel there is much we can actually do to affect or control the situation, let alone help ourselves.

Unfortunately I'm not optimistic about the U.S.'s ability to solve the debt problem before a crisis hits. But thankfully there are things we can individually do now to help ourselves.

The age-old way to protect oneself from governments that borrow too much and create too much currency is to own gold. If it weren't for the recent and yet-to-fully deflate real estate bubble, land would be (and probably still is all things considered) a decent protective option too. Commodities and real assets in general will rise in value as the U.S. dollar is printed. It's possible that other currencies and some stocks will rise as this event unfolds.

Many both inside government and outside will fight hard against ever allowing gold to return to its former role in the monetary system. For its inclusion would hinder their ability to engage in the behavior to which they're accustomed.

How best to own gold? There are a number of gold exchange traded funds (ETFs, which can be purchased in a manner similar to stocks) which hold actual physical gold. There are gold focussed mutual funds. There are gold mining company stocks. There are both domestic and international options for all of the above. And of course there are advantages and disadvantages to each respective investment approach. But please note that: 1. gold has shown significant short-term volatility and 2. gold has experienced substantial appreciation over the past decade.

What About Owning Physical Gold?

Is it worth owning actual physical gold, such as gold coins or jewelry?

The sovereign debt crisis has moved to a stage now where owning a Gold mutual fund may not be enough for some. Why not?

If the U.S. dollar were to go into a free fall, the U.S. government may pull out the following oldie but goodie signed into law on April 5, 1933 and called Executive Order 6102.

Owning physical gold is not without its own challenges. Gold is valuable and someone may want to steal yours. So rather than show off your gold to your neighbors in the front window of your home you may prefer to keep it in a safety deposit box, have it insured, stored off shore, etc.

Final Thoughts

The stability and continued existence of the U.S. government rests to a large degree on belief in the U.S. dollar as a store of value. To prevent a currency collapse governments can and will do the unimaginable. Police may bash people's skulls. U.S. President's could reissue something like Executive Order 6102.

History doesn't always repeat. But if the dollar takes a nose dive, and because Executive Order 6102 'worked', it would seem like more than just a minor possibility. (I doubt the people who saw the value of their savings nearly cut in half by Executive Order 6102 would say it worked perfectly.)

But instead of just running for the hills, think about whether 'thar may be gold in them hills.