Fed ... accepted a new one: guardian of the American economy's paper wealth.
Alex, thanks for the article in your post, but looks like it was too big
to handle at a single reading for those on this thread so I reduced it.
Eventhought it was a day prior to the just recently announced GATA News
that I just posted, I see it as adding good creditability to the work of
Bill Murphy Chairman of Gold Anti Trust Action (GATA) gata.org
who is working hard using he own time and money to help us citizens of all
the world in the fight for a free market in gold so that those who do evil
in their quest for money and power can be identified and punished.
So that there is no confusion to new readers,
the other Bill Murphy site is not GATA,
Le Patron, Le Metropole Cafe lemetropolecafe.com
but is a pay for view web site that includes in its scope much more than
the GATA references, and is NOT recommended by me eventhought it has a
wealth of world economic leaders and statesmens and noted experts telling
what really is happening so that one can use it to accomplish stuff.
But back to this article you posted Alex, I hope its now not too big or
I guess too complicated for those on this thread to absorb, but I bet so. Thanks, Doug
goldensextant.com
December 3, 1999. A Time for Courage: Buy Gold
As a general rule, this site does not.....
Today, in an article entitled "Time to Tame Exchange Rates,"
The Wall Street Journal, Dec. 3, 1999, p. A14, David Malpass,
chief international economist for Bear Stearns, argues that Europe
(and by implication Japan) should evaluate its currency in absolute terms,
not in reference to the dollar. He writes:
Europe may want to create a benchmark other than the dollar for
evaluating the euro. Otherwise, it will trap itself into viewing the
world through American asset valuations.....
Mr. Malpass does not address the mechanics of implementing his advice.....
Overall, it is an excellent article.....
... is to sell dollars, of which the ECB has an abundance, for gold,
of which it can never have too much and with which it can someday,
if conditions warrant, purchase excess Euros.
... point is that Mr. Malpass did not go quite far enough. If the ECB
uses gold as the benchmark for the Euro, it logically must also use gold
as the benchmark for its foreign exchange holdings. Indeed, it should
hold very modest amounts of foreign exchange except in so far as it may
deem certain foreign currencies a good value against gold.
Of course, if the ECB declares gold as its principal benchmark of value
-- not only for the Euro but also for all other currencies that EMU
current account surpluses may bring it -- it will also be declaring
complete monetary independence from the dollar. But if it doesn't, the
Euro will continue to play second fiddle to the dollar. Worse, the ECB
at some point could find itself forced to buy Euros with dollars despite
reasonably tight monetary conditions within the EMU.
The real question, then, in both Euroland and Japan is whether either is
now prepared to assert true monetary independence from the United States
by declaring for gold, or whether, despite all the brave talk, both will
continue to measure their money at the end of the day against the dollar.
December 1, 1999. Fed Options: The Plot Thickens
My commentary of September 20, 1999, suggested the possibility that the
Bank of England's gold sales were triggered by a plea from Washington
aimed at rescuing the Fed from potential big losses on the writing of
gold call options. Nothing that has happened since is inconsistent with
this suggestion, and what new evidence there is supports it.....
Testifying in July 1998 before the House Banking Committee looking into
the regulation of over-the-counter derivatives, Fed Chairman Alan
Greenspan distinguished financial derivatives from agricultural
derivatives, saying that it would be impossible to corner a market in
financial futures where the underlying asset (e.g., a paper currency) is
of unlimited supply. The same point, he continued, also applied to
certain commodity derivatives where the supply was also very large,
such as oil.
Greenspan further volunteered: "Nor can private counterparties restrict
supplies of gold, another commodity whose derivatives are often traded
over-the-counter, where central banks stand ready to lease gold in
increasing quantities should the price rise." In other words, the Fed
Chairman opposed any action by Congress aimed at greater regulation of
over-the-counter derivatives, specifically including gold derivatives.
One reason -- left unstated -- for this opposition may well have been
concern that any new legislation might interfere with the Fed's own
activities in the derivatives markets, particularly in the gold area.
Why might the Fed have engaged in writing call options on gold?
Their immediate purpose and effect would be to facilitate gold leasing
by enabling the bullion banks to hedge more easily short positions
resulting from the sale of leased gold. Indeed, as the so-called gold
carry trade grew, demand for this sort of hedging by bullion banks
likely strengthened since here, unlike in mining finance, their
customers were not themselves producers of gold. More generally, by thus
exercising control over the amount of leasing and resulting short sales,
the Fed could have achieved considerable influence over the gold price.
Indeed, perhaps it was just this kind of activity that led a former Fed
governor to claim on CNN's Moneyline in October 1998: "The Fed has
precise control over the price of gold and.....
Beyond these direct consequences, some believe that the Fed responded to
the October gold banking crisis and presumed problems of the bullion
banks by adding liquidity to the banking system, thus providing much of
the fuel for the November stock market rally. In this connection, it is
worth noting that the bullion banks with apparently the greatest
exposure to Ashanti's problems are among those most often associated
with suspected Fed activities in the gold market. So too, the question
of whether and to what extent short gold positions may have played a
role in last year's LTCM affair remains shrouded in mystery. What does
appear, however, is that the Fed is very reluctant to allow the U.S.
stock market to progress from a correction into a true bear market,
adding credence to the growing belief that the stock market, however
overvalued, is too big and too important to be allowed to fail.
There is a certain irony in the fact that since Alan Greenspan assured
Congress in July 1998 that over-the-counter financial and gold
derivatives required no further regulation, these very same derivatives
have twice presented the Fed with an opportunity to allow a stock market
correction to turn into a bear market for which it could escape much of
the blame. In each case the Fed may properly have been concerned that
the decline might cascade into a disorderly rout. But by intervening to
head off these stock market declines, the Fed may also have undercut the
credibility of its own interest rate weapon. Searching for a way to
freeze the bubble or at least to let the air out slowly, and unwilling
to let market forces have their way, the Fed has steered the whole
American economy into uncharted waters.
The Fed was founded to stabilize the gold value of the dollar on the
theory that central banking could achieve this goal better than free
banking. Having utterly botched that mission, it has accepted a new one:
guardian of the American economy's paper wealth.
..... these steps would almost certainly lead to increased use of
gold as an international reserve asset. As Asian and other central banks
with relatively low gold reserves recognize this trend, their demand for
gold could provide an outlet for a significant chunk of official
European reserves at much higher gold prices than currently prevail.
Indeed, the effective functioning of any new international monetary
order elevating gold to a central role will virtually require a more
equitable distribution of the world's monetary gold reserves among
central banks. From the European perspective, gold sales at higher
prices to other central banks are far preferable to market sales at
bargain prices. What is more.....
After almost a century of internecine squabbles, a new Europe -- led by
the EA countries with France and Germany at each other's side rather
than at each other's throat -- seems poised to reassert its historic
role as a major player in the great game of politics among nations.
For America, this development means some painful adjustments;
for the British, it will bring some painful choices. The continuing
Anglo-American efforts to denigrate gold, including the third tranche of
the Bank of England's gold sales next Monday, are signs that neither
country has yet faced up to the reality of the Euro and the new Europe. |
