The world declares monetary independence from the US dollar

By *John D. Meyer

No. 137, 11 - 17 October 1999

THE U. S. DOLLAR AND HANNIBAL'S WORST NIGHTMARE BEGINS

Pinch me quick and tell me I'm not dreaming. How can this be? Fourteen European central banks plus even the English "Poodle", announce that they will restrict gold sales and lending for the next five years. In one dramatic sweeping step the "reign of terror" besieging the gold bullion market has been broken. But the question remains why would the European central banks wish to reassure the gold markets?

For the past many years the gold world has been throttled by perceptions and short selling. Central banks gold sales were in fact never the problem, but the gold lending and the well orchestrated propaganda directed by the United States was. Since early 1996, the threat of central bank gold sales and a raising volume of gold lending strategically timed and presented by the mainstream financial press attacked gold whenever an up-trend threatened. This has now ended.

THE TWILIGHT OF THE DOLLAR

With the monetary system facing the greatest defaults since the 1930's, the manipulation of gold, the ultimate preserver of wealth serves precisely to conceal the bankruptcy of our current monetary system. Single events often appear distant and unrelated, yet with a more critical eye they can be seen to be part of a pattern. It is my position that the European central bank announcement is a defining moment in monetary history. The propaganda windmills, mostly English speaking, would have you believe that "money" is a creation of government. As Martin Armstrong liked to say gold has been demonetized. We hold a different view. Namely, that money is determined by a market process. The European central bank decision is a major part of this market process, which has two consequences. First, it partially restores gold's monetary role. Second, and more importantly, it is a determined attempt to turn away from the dollar as a reserve currency.

The reality is that the greatest crisis in credit since the 1930s is underway. While the problem may appear to have begun in Asia, in fact its origin is a monetary system which allows the United States "Deficits without Tears". Every nation in the world has suffered as they have been forced to import our inflation (i.e., buy dollars and U.S. debt) because it is the reserve currency of the world's financial system. The dollar as the reserve currency forces other countries to accept our paper as payment for their goods and services. Jacques Rueff named this dirty little secret The Monetary Sin of the West.

Our present global monetary system is dysfunctional. The Asian currency epidemic was the first act in a play ultimately destined to take down the U.S. dollar. Starting with Mexico in 1995, Asia in 1997, Russia and Brazil in 1998 we have experienced an escalation in each crisis as larger and larger countries are ravaged. The monetary mischief of competitive currency devaluations claimed its first victim in North America with the collapse last fall of Long Term Capital Management.

As 1998 was ending the Japanese authorities (December 22nd) blind-sided the financial markets, saying that they would cut back their purchases of Japanese government bonds. Japanese long term bond prices were pummeled and the U. S. dollar crumbled. Then on January 1, 1999 Prime Minister Obuchi proposed the establishment of a monetary system composed of three key currencies  the yen, the U.S. dollar and the euro. Japan signaled its intention to internationalize the yen turning it into the key currency of Asia.

On Monday (September 20, 1999 ), despite warnings, the Bank of Japan refused to ease monetary policy to curb a rapid rise in the yen against the dollar. Now a week later the European central banks befriends gold. The Russian default in 1998 launched us into a new phase of this meltdown, which directly impacted the derivative arena. Default has been staved off for decades through credit expansion (i.e., bailouts). New debt piled on the old. Finally, when the excesses are too great and the economies too anemic, default becomes the final solution. Default immediately exposes systemic weaknesses. Since derivatives are leveraged contracts dependent upon an underlying "asset", default of the underlying asset immediately wipes out that derivative. The Wizards' computer model programs are not programmed for events that might cause a non-standard deviation movement.

For the Federal Reserve to admit that a single hedge fund, with a mere $4 billion in equity, jeopardized the entire financial system is an admission of a profound failure in the Federal Reserve policy. What can be the justification for bailing out a den of gamblers? Frankly, it proves the mutual dependency and just how cozy the alliance is between Wall St. and Washington. LTCM was bailed out because officials realized other hedge funds and Wall Street trading desks had similar leveraged positions. This crisis is still largely unknown to the public. It is the story of the "carry trade". The naked borrowing of yen and gold to finance these extraordinarily leveraged positions of the financial community. Between August and October of 1998 the yen fell from 147 to 112. Then on October 15th, facing a breakdown in the interbank payment system, the Fed initiated the first of three rate cuts. As 1999 commenced the U.S. financial system had been brought back from the brink by another massive ballooning of credit.

These fixes have merely exacerbated the underlying systemic risks. After decades of "too big to fail" the Fed's unwillingness to address underlying structural problems of debt has led to putting the entire system at risk. The Bank of Japan and the European central banks are declaring an end to the present state of affairs. The United States financial markets have become a fools paradise and the affairs of LTCM down to the current scandals involving Martin Armstrong and others has not been lost on the global banking community. As a younger man Alan Greenspan wrote an essay entitled "Gold and Economic Freedom", which correctly detailed and identified the cause of the 1929 crash. It appears to this writer as though he repeats the same mistakes that he accused The Fed of committing in 1927-28. Greenspan has created a bubble (i.e., hyperinflation) in our financial markets. Wall Street has become a casino. The greatest fear for the central bankers of the world is the U.S. dollar which comprises the bulk of their monetary reserves.

For years now the mainstream gold analysis has been fixated on the supply side of gold. This is not the issue. The critical determinant in the price of gold ultimately is the supply side of dollars. As the worlds largest debtor, with endlessly mounting trade deficits, negative savings and inflated security markets it is not hard to image the fear motivating recent developments by the Japanese and the Europeans. Enough is enough. Gold reserves are not the problem for central banks of the world but rather their bloated and excessive position of dollars, which has entered a major secular down trend.

THE COMING DOLLAR BACKLASH

The European central banks gold policy must be viewed as an aggressive escalation in their policy to establish monetary independence. There is no doubt that the monetary world has crossed the threshold into a monetary system which will be comprised of three reserve currencies. Gold is no longer to be held hostage to American monetary policy. On this point it is quite interesting to see that the English "Poodle", in an obvious break with their American friends, has turned her leash over to the Europeans.

It will be interesting to see what response the Bank of Japan will make to the European central banks. An Asian yen backed currency has a long way to go in order to equal the gold reserves backing the dollar and the euro. Up until now the currency world has been engaged in a competitive race to the cellar. It could be that the race for competitive legitimacy has begun. Central banks bid for gold is likely to far exceed the sale limits just established by the Europeans. The historic actions by the European central banks and Japan over this past week are extremely bearish for the dollar and U.S. financial markets. So far the markets have failed to understand this threat.

A FINAL WORD

The heroic effort and foresight of Bill Murphy is only now beginning to be understood. Bill and his Le Metropole Cafe have absolutely nailed the events that are now unfolding. If the Bank of England sale didn't convince the world that the gold market was being manipulated, maybe a $60 explosion in the gold price might. The extreme price action in gold should clearly indicate that the market has been artificially suppressed. One wonders how much it will take to generate an acknowledgment of Bill's incredible performance.

*John D. Meyer GATA Vice Chairman, Treasurer September 28, 1999

The New Australian

-- flierdude (nospam@spam.spam), October 11, 1999

Answers

There seems to be a rash of such articles on the net today. I was reading theories on everything from a plot on those gold mining companies who were shorting, a take over by one entity of the worlds' gold, to several nations acting together to destroy the USA.

One thought came to my mind. I wonder if it did others? That possibly nations are starting the Y2K islands no differently then the power plants that contemplate islanding from the grids. Only in this arena it is on currency and everyone is scrambling for safety?

-- Paula (chowbabe@pacbell.net), October 11, 1999.

What do we manufacture that is of so great significance to any country? What do we have to offer other than weapons of destruction? Technology? Ha! We educate and train foreigners to go back to their country to train and educate their people. What really is there here in America to invest in? We lost our manufacturing, and the only thing left to export are brains, and that's all!

-- we are doomed (we are doomed@wearedoomeddd.xcom), October 11, 1999.

Paula,

very astute analysis!

"islanding" by any other name is nothing more than hunkering down, isolationism, withdrawing to the cave, et al...

[when someone in the room is coughing and wheezing all over everyone else, they tend to move backward out of the way of the flying stuff...]

you've called it pretty close!

Perry

-- Perry Arnett (pjarnett@pdqnet.net), October 11, 1999.

I understand what I am reading and I am familiar with the multi trillion dollar derivitive markets.

In my spooked state, I cannot see the smart path for local business investment. I know the reccomendation is buy silver, but I am asking what is a good product or service to offer locally and make locally.

It really is the end of the world as we know it. And it wasnt even y2k!

-- bburke (bburke@rocketmail.com), October 11, 1999.

John Meyer,

The only part I dont understand about your post is the cheer for Bill Murphy. Is it because the collapse of the American house of cards is better now than later? I guess that would have to be it because the collapse is going to be just ugly and there is little to be pleased about this disaster. The hopes and dreams of millions and millions are tied to the american purchaseing of products that come from around the world that cause the people there to be lifted up out of poverty.

It completely fries my mind to realize that y2k is not the only disasterous bug in our system. The amount of financial derivitives loosely tied to the gold and silver and yen manipulation is in the many trillions. It will take us down completely.

You see any way for that to not happen? Once the markets digest this, they will run for the exits (or the window!).

-- billburke (bburke@rocketmail.com), October 11, 1999.

"The dollar is unsound at any price"

-George Soros.

The damnation of money is at hand, let all be thrown into the fiery furnace, the dross to consume and your gold refine.

Physical Gold, cheap, (even at $350/oz for US Eagle coins) Porfolio insurance par excellance!

Gold stocks, for those with stomachs of steel (gold plated to resist the acid indigestion) and money to burn (it probably will)

10 oz silver bars at $68/ea, make nice christmas gifts (if you can still bear to part with them by december...) Make nice paperweights.

http://www.davidhall.com

http://www.ajpm.com/htbin/silver.cgi

-- quasimodo (Hunchback@belltwor.com), October 12, 1999.

For starters, the heading "The world declares monetary independence from the US dollar", using the present tense, is fraudulent. Perhaps it will happen someday, but to state it as if it is now happening is lying. No ifs, ands or buts about it.

There are many and large financial problems, including currency problems, in the world today, as people who frequent this forum, among others, may well be aware. However, in terms of relative effects, the gold bullion market is small fry compared, for example, to currency markets, by several orders of magnitude. Some goldbugs seem to work overtime at ignoring the fact that since gold is no longer used as actual money in real life, day to day, practice, by real people in ordinary everyday transactions, it is not as financially important as is was many years ago.

In recent weeks the gold bullion markets have gone bananas, and may be expected to continue to do so for some time to come. Some people will get seriously burned, and some people will make bundles. But, is there any currency in the world that is directly pegged to gold? Certainly not the yen, the US dollar, or the euro.

What will happen in the gold bullion markets in the next few months may be very interesting, but it would probably be good to try to view it with some sense of proportion. The hype of some goldbugs just might be presenting an exaggerated view of gold's contemporary role in the global economy. :-)

To put it briefly, gold is important, but not as important as some goldbugs would have you believe.

Jerry

-- Jerry B (skeptic76@erols.com), October 12, 1999.

Jerry,

You don't know what your talking about. I'm not going into it with you. I don't have the time. I predict that you will be bankrupt by July 1 2000 if you don't buy gold. Investigate before you speak about it.

How did Hitler finance his war? Do you think he paid in Marks? Well he didn't. He paid in the only recognizable money excepted by all the people of the world. GOLD! When the USD burns very soon, do you think that Germany, France, Italy etc. is going to except dollars for their products? Do you think Saudi Arabia is going to except dollars for their oil? OPEC quit excepting dollars many moon ago. Don't believe it? Investigate and find out for yourself. Until then keep your mouth shut about gold until you know what your talking about.

-- Jerry is an idiot. (Reply@idiot.slug), October 12, 1999.

idiot,

Your post indicates that some goldbugs are more hyper than others, which is to be expected, but ranting does not magically turn exaggerations into realities.

Jerry

-- Jerry B (skeptic76@erols.com), October 12, 1999.

Jerry

I think there is something significant happening all right. But rather than the "world" ditching the US, it would appear that the British have turned heel. Something about this seems historic. The British financial system Kotoing to the Gnomes. I would be suprised if any gold is sold next year. The Swiss as I understand it have to have a majority of the public to sell gold. If it increases in value and there is financial turmoil well it is not going to happen IMHO.

Is this a step for Briton to convert to the Euro? Did Briton bluff themselves into the position they are in? Sell gold and move into paper like the states oooorrrr twist an arm or two in Europe. Or did the Gnomes bust the British's balls?

What I realllllyyyy think is happening is the USofA will get some competition from the Euro and that will be a good thing. It will get some disipline into the systems and clear out the risk factor not being the only game in town. Gold will only be one factor. Next would be a military force.

Recent events in Europe will have given incentive no doubt to be able to protect their backyard. Russia for one could be a real wild card in the future. And they are going to have to come together and deal with it.

Oh and then there is Y2K (how could I forget).

-- Brian (imager@home.com), October 12, 1999.

There is a substantial difference in weighting and spin between US-based reporting/analysis and that by people outside the US. In words appropriate and well-known to this forum, the "self-reporting" by US-based financial people is as suspect as "self-reported" y2k completion numbers. They are derived and described with self interest.

Make no mistake about this and understand the following points clearly:

1. Other nations feel that their own economies and people have been damaged by the flow of investments into the American markets. They are screaming loudly that the investments have denied their people the use of the money shipped off to America. The money, as dollars, doesn't get repatriated and should the US market suffer a severe shock... they will lose it... to America.

2. American trade policies have been disengenuously applied in the past few years for the sake of local American politics. Unfair, predatory and/or vendetta-like trade policies have a lasting emotional impact on less industrialized nations. Emotions are a bad thing in international affairs.

3. Is there an quasi-conspiracy to take the American economy down a notch? I don't know for sure, but it's plausible. Many nations (India, Japan, Malaysia, Thailand, Korea, China) may feel as if it's time to take back some of the "wealth" of America and return it to the their people.

4. Is the decline of the USD hurting the world economy? There is a substantial amout of ink (and electrons) saying that it really isn't hurting the global economy. In fact, it may be it a good thing.

-- PNG (png@gol.com), October 12, 1999.

Gold my nicely bronzed buttocks. Think chocolate, bullets, cigarettes,whiskey. Each can be divided and each can be purchased right now at your neighborhood merchant.

-- 8 (8@8.com), October 12, 1999.

2. American trade policies have been disengenuously applied in the past few years for the sake of local American politics. Unfair, predatory and/or vendetta-like trade policies have a lasting emotional impact on less industrialized nations. Emotions are a bad thing in international affairs. PNG

Mr. PNG,

Surely you are confusing the United States with a certain group of nations in another part of the world. Lets make on thing very, very clear. The United States's market is the most open market in the world. This is not just an opinion, it is based on the behavior of several nations that have become used to the open tap of money coming out of the United States to purchase their products. applied for the sake of local politics well . . . yes, but a discussion of trade policy must be based on comparisons, not only on absolutes. The news should not be just whether United States' trade policy is disengenious, but also whether the United States is reactiong to disingenuity on the part of others. It is only fair to use the same standards to judge all nations' trade policies. The United States's trade policy is not "unfair" unless yoiu are a person thinks the United States has some sort of moral obligation to keep its market completely open regardless of how the United States is treated by other nations. It is also important to use specific numbers, in contrast to a general opinion.

Let's consider just what proportion of the United States' exports are subsidized by the U.S, government:

According to the Export-Import bank, in 1995 2% of all the United States' exports were subsidized by the US Government. And other nations? Let's take a look:

PERCENTAGE OF EXPORTS SUBSIDIZED BY GOVERNMENT IN 1995:

United States

-- Rick (rick7@postmark.net), October 12, 1999.

Sorry for the break in thought. I accidently clicked the wrong thing a little early.

According to the Export-Import bank, in 1995 2% of all the United States' exports were subsidized by the US Government. And other nations? Let's take a look:

PERCENTAGE OF EXPORTS SUBSIDIZED BY GOVERNMENT IN 1995:

United States 2%

Great Britain 3%

Italy 4%

Germany 5%

Canada 7%

France 18%

Japan . . . well, Mr. PNG, perhaps we could take another little break here. Would you care to take a guess at what percentage of Japan's exports are subsidized with government money? or China's? I don't expect a correct answer, just a rough ballpark figure. Come on, give it a try. If you make a good guess I will congratulate you wholeheartedly.

Oh yeah, maybe you could also explain to us exactly what you meant by Unfair, predatory and/or vendetta-like trade policies . We certainly wouldn't want anything like that to take place.

Have a good day Mr. PNG

-- Rick (rick7@postmark.net), October 12, 1999.

Jerry says: "However, in terms of relative effects, the gold bullion market is small fry compared, for example, to currency markets, by several orders of magnitude"

It is obvious you aren't paying attention to or are not aware of the volume at the London Bullion Market Association which, by the way, is STAGGERING, to the tune of NINE BILLION SIX HUNDRED MILLION DOLLARS PER DAY (30 ml troy oz. valued at $320 current price) and this is CONSERVATIVE. "Mr. Jeffrey Rhodes, of Standard Bank, London, said the 30m ounces should be "multiplied by three, and possibly five, to give the full scope of the global market."

http://www.gold-eagle.com/gold_digest/baron907.html

Yes, currency trading markets are larger, but you give a false impression by claiming that this trading market is "small fry" in comparison to the ramifications of this trading volume.

Now take into consideration that "not only can the owner of gold earn a return in gold on his holdings even under the regime of irredeemable currency, but gold is the only form of tangible wealth that can be lent out at interest and that is in constant demand as such". (www.usagold.com)

Read that a couple of times to let it sink in. Now, I will remind you that this market is soon going to implode, not because of gold sales but gold leasing, because there are entities out there who CAN'T AND DON'T WANT TO SELL THEIR GOLD.

You have bought into the western block manipulation on what is real money. The IMF, World Bank, the US and England have strong armed the concept of paper money onto other countries with the intention of total economic control of those countries. However, there are many countries out there that do not buy into worthless debt backed paper as the real thing. Ever heard of the gold dinar? It is being used for 'money' in the middle east because they value real money over paper notes.

OPEC countries (and that is including Venezuela, a co-founder of same) are not fooled by US hegemony. Why do you think oil has doubled in the last few months? Why do you think Clinton is now considering opening up our oil strategic reserves? Watch what happens to the price of imported OPEC oil then.

My suggestion is that the game being played is 3 dimensional and you are looking at it 2 dimensionally.

-- OR (orwelliator@biosys.net), October 12, 1999.

Folks, get real!

An AMERICA FIRST! trade policy would have the rest of the world on the ropes. If Y2K gets bad, expect QUOTAS and PROTECTIVE TARIFFS to return. The United Nations??

Have you ever seen 105mm Howitizers level a building??

-- K. Stevens (Kstevens@ It's ALL going away in January.com), October 12, 1999.

OR,

You may consider $9.6 billion per day staggering; I consider it small fry compared to the $1.x trillion per day on currency markets. You can multiply the $9.6 billion by the suggested three, or possibly five, and then compare it to just an even $1 trillion, and it's still a small fraction.

I got a big laugh from the portion of your post that reads:

"Now take into consideration that "not only can the owner of gold earn a return in gold on his holdings even under the regime of irredeemable currency, but gold is the only form of tangible wealth that can be lent out at interest and that is in constant demand as such". (www.usagold.com)"

followed by:

"Read that a couple of times to let it sink in."

I suggest that before allowing nonsense to sink in, it would be prudent to analyze it first, and filter out the nonsense. The part about: "... but gold is the only form of tangible wealth that can be lent out at interest and that is in constant demand as such" had me ROTFL. Perhaps the author of that statement never studied even rudimentary economics, but, to mention just one of many possible examples, when the owner of a house lends it to a tenant, a major portion of the rent payments constitutes interest.

A subsequent part of your post attempts a mind reading act in the words: "You have bought into the western block manipulation on what is real money." As is so often the case, mind reading usually does not work very well. My understanding of "real money" is based on a careful study of Ludwig Mises' treatise: The Theory of Money and Credit. It's not light reading; it doesn't have lots of juicy rumors from unnamed sources about who is manipulating what; and it makes a case for using gold as money; but it also makes it clear that "real money" is whatever people are willing to use as money, even when their choice is imprudent and/or disliked by others, including people who prefer gold.

As for: "The IMF, World Bank, the US and England have strong armed the concept of paper money onto other countries with the intention of total economic control of those countries.", let me simply point out that paper money has been used since before the IMF, the World Bank, and even the US of A existed.

Continuing: "However, there are many countries out there that do not buy into worthless debt backed paper as the real thing. Ever heard of the gold dinar? It is being used for 'money' in the middle east because they value real money over paper notes." I had heard of the dinar, but not lately, and not as gold. If it is indeed gold used as money, it offers another opportunity to get a sense of proportion. If you take gold dinars, plus any and all other gold currencies that may currently be used, and estimate that sum of the purchases and sales of goods and services exchanged for those curencies over some period, say one year, and convert the total to some common currency. Then estimate the total of goods and services exchanged for non gold, paper based, currencies, and convert to the same common currency. If you divide the former by the latter, I would guess that you may come up with a number somewhere in the vicinity of Plank's constant ( :-) ) i.e. a very, very, very small fraction.

Continuing: "OPEC countries (and that is including Venezuela, a co-founder of same) are not fooled by US hegemony. Why do you think oil has doubled in the last few months? Why do you think Clinton is now considering opening up our oil strategic reserves? Watch what happens to the price of imported OPEC oil then."

I will leave it as an exercise to the student to graph oil prices and gold prices for the past year. :-) Extra points for imaginative ways to try to come up with an appearance of correlations. A couple of hints: the reccent climb in crude oil prices preceded the recent climb in gold prices by several months. Then in recent weeks, while gold prices climbed sharply, crude oil prices almost slept through the party.

Continuing: "My suggestion is that the game being played is 3 dimensional and you are looking at it 2 dimensionally." Almost cute, and certainly more polite than some other comments that some goldbugs have sent my way recently. But I must reject the analogy; to describe markets in dimensional terms, we would need to use more than three per player, not to mention for the whole game.

As I mentioned earlier in this thread with respect to activities in the gold market, some people will get seriously burned, and some people will make bundles. I hope that those who choose to invest in the gold market in any of the various ways available, keep in mind that much of what is happening there is due to a "short squeeze".

Short squeezes are not new and are not unique to gold markets. They routinely cause prices in the affected market to rise by some unpredictable amount, and they are routinely followed by prices dropping, also by some unpredictable amount. Whether one makes a net gain or a net loss is very dependent on when one gets in, and when one gets out. If one is using options, strike prices also affect whether one gains or loses.

In such situations, among the most dangerous factors are unrealistic expectations. Unfortunately, which expectations are realistic, and which are unrealistic, can only be guessed in advance, but not known with anything approaching certainty until the dust settles. In this context, an exaggerated perception of the role of gold in the world economy may encourage unrealistic expectations. I would be very happy to see people here make bundles. However, I am concious that they could get burned if they base their decisions on unrealistic expectations.

Jerry

-- Jerry B (skeptic76@erols.com), October 12, 1999.

Jerry,

When it comes to gold and financial markets you are dumber then a box of rocks. Enough said.

-- Jerry Is a kook (Jery@jerry.jerry), October 12, 1999.

kook,

Your post does seem to save the effort and verbiage of jumping to a conclusion by simply starting at a conclusion. That approach at least has the benefit of saving a few bits of bandwidth. :-)

Jerry

-- Jerry B (skeptic76@erols.com), October 12, 1999.

Jerry, your responding post only served to solidfy your 2 dimensional perspective. So be it.

Us 3 dimensional viewers will be hangin' on to our shorts when the blast comes. You will be doing something else.

-- OR (orwelliator@biosys.net), October 13, 1999.

OR,

I will leave you to your invalid analogies. :-) Good luck.

Jerry

-- Jerry B (skeptic76@erols.com), October 13, 1999.