THE GOLD STANDARD STRIKES BACK…PARTS 1 AND 2

Copyright © 2008
A. E. Fekete
All rights reserved

THE GOLD STANDARD STRIKES BACK…
…WITH A 36-YEAR LAG

(Part 1 of 2)

Antal E. Fekete
Gold Standard University Live

“Two legs bad, four legs good!”

There were two main direct assaults on the gold standard by the American government: the first on the watch of a Democratic president, Franklin D. Roosevelt, when the U.S. defaulted on its domestic gold obligations in 1933; the second on the watch of a Republican president, Richard Nixon, when the U.S. defaulted on its international gold obligations in 1971. In each case, the gold standard struck back. Uncannily, in each case there was a lag of 36 years, signifying the fact that it takes that long for a new generation to acquiesce in the slogan “two legs bad, four legs good!” as in George Orwell’s Animal Farm, a parody of the Soviet Union and the Bolshevik revolution. It will be recalled that the pigs have overthrown the farmer and took over the farm, trying to run it under this revolutionary slogan.

The run on the dollar in the wake of the 1933 default started in 1969, wiping out more than one half of the value of the currency in a few years, the worst episode of monetary destruction in history of the dollar up to that point. The second run on the dollar in the wake of the 1971 default started in 2007, when American banks faltered as bond insurance premiums they were paying on their assets skyrocketed. The second run still continues as foreign dollar account holders have not been heard from. Make no mistake about it: the present financial crisis is a gold crisis, even though this fact is vehemently denied by the Establishment.

Cause and effect

Causality may be camouflaged by lags, and the longer the lag, the more perfect the camouflage is. This is confirmed in the case of the government sabotaging the gold standard. From the point of view of the Establishment, the causality nexus must be covered up by hook or crook. The propaganda line is that gold has long since outlived its usefulness and it was necessary for the government to make some housekeeping changes in order to get rid of this useless and annoying appendage. Note that this is exactly what you would expect to hear from a banker defaulting on his gold obligations: he would badmouth gold and promote his own dishonored paper. But if gold is really so useless, and so entangled with superstition, then why not pay it out as honor demands, and avoid the stigma of national dishonor?

The 36-year long lag is explained, in part, by the servility of academia and media in parroting government propaganda ? betraying their sacred mission to inform without fear and favor. The general public, even if indignant at the time of the default, gets desensitized to the enormity of gold confiscation and the government’s declaring default fraudulently. As Hitler said, propaganda does work, provided that it is diligently repeated year after year. Nazi Germany just was not given 36 years for its propaganda to sink in. The Soviet Union was; that’s why the tenets of international socialism are still treated as holy writ, and those of national socialism as garbage, regardless of the close similarity.

“Four legs good, two legs better!”

Animal Farm could just as well be a parody of the regime of irredeemable currency. The pigs have overthrown the gold standard. They started to mimic its operation, prodded by the chief of pigs, Alan Greenspan. Their revolutionary slogan later gave way to a new one: “four legs good, two legs better!”, when the pigs tried to walk on their hind legs instead of all four, to the endless amusement of the other four-legged creatures on the farm. Unfortunately for them, their new manner of walking could not help the fact that they remained just as pig-headed and ham-handed as ever.

Kill the Constitution to make it a “living document”

The role of gold in the monetary system is anchored in the U.S. Constitution. The Founding Fathers were no fools. They knew exactly what they were talking about when they insisted on a blanket denial of power for the government to monetize its own debt, or any debt for that matter. They knew perfectly well that a metallic monetary standard is the only effective prophylactic that can deny that power. The fact that the U.S. government never considered proposing an amendment to the Constitution to legalize fiat money is a telltale. Policy-makers could not muster the necessary moral courage to face counter-arguments in an open debate. Irredeemable currency has no integrity: the issuer is given privileges with no countervailing responsibilities. He is granted unlimited power in a republic based on the principle of limited and enumerated powers. The principle of checks and balances is thrown to the winds. These features are all alien to the spirit of the Constitution, not just to its letter. Rather than facing a public debate, the government prefers to live with the odium that it is the destroyer of the Constitution.

The legislative branch usurped powers denied to it by the Constitution. The executive branch conspired with the legislative branch to pull it off. All presidents, starting with Franklin D. Roosevelt, have perjured themselves when they swore to uphold the U.S. Constitution, and then turned around and signed bills into law to keep raising the limit on government debt payable in irredeemable currency, i.e., monetized government debt. The judiciary branch of the government, rather than exposing the conspiracy, has joined it, on the basis of the spurious doctrine that the Constitution “is a living document” which does not say what it says, but what the judiciary say it says. In other words, you have to kill the Constitution to make it a “living” document.

Regulator of debt

To expect that the gold standard can be destroyed with impunity is a pipedream. The Establishment will never admit that the present monetary and financial crisis is a gold crisis, or that the day of reckoning has dawned. It will find any number of ad hoc explanations, such as too little regulation, too relaxed lending standards, naked short selling of financial stocks, etc., etc. The big picture is blackened out. For this reason, it is necessary to state the cause-effect nexus between ousting gold from the monetary system and the credit collapse that is now unfolding before our eyes, after a 36-year lag, in the clearest possible terms.

Gold has the same role to play in the monetary system as the fly-wheel regulator does in an engine, the brake does in a train, and circuit-breakers do in an electrical network. Gold is the regulator of the quantity of debt in the economy that can be safely created and carried. It is also safeguarding quality by rejecting toxic debt before it can start metastasis. Debt-based currency utterly lacks safeguards limiting quantity and vouching for quality of debt. Debt-based currency is an invitation to disaster, that of the toppling of the Tower of Babel. Its effects are far from being instantaneous. There is a threshold and there is a critical mass involved. We have long since crossed that threshold and passed that critical mass. By no rational calculus can the outstanding debt be expected to be repaid without inflationary or deflationary adventures, even if further increase were stopped dead in its track. The discussion of the present financial crisis by academia and media avoids all reference to this fact. Under the gold standard a fast-breeder of debt was unthinkable, and debt was retired in an orderly manner.

Destabilizing interest rates

The significance of gold in the monetary system is not that it can stabilize prices, which is neither possible nor desirable. It is the fact that gold can stabilize interest rates. No debt-based currency can do it, because the value of the unit of account is left undefined and is subject to political manipulation by the pressure groups. The discussion of the present financial crisis by academia and media avoids reference to this fact as well. Under the gold standard interest and foreign exchange rates were so stable that there was no bond speculation ? for lack of volatility would make it unprofitable. There was no Debt Tower of Babel to threaten with burying the economy underneath. Under the gold standard there were no credit-default swaps. There was no need for them.

Barbarous relic or accounting tool?

The gold standard has been called a “barbarous relic”. However, the unpleasant truth, one that government propagandists have ‘forgotten’ to consider, is that the gold standard is merely a tool for sound accounting and, yes, for sound moral principles. Book-keeping under the regime of irredeemable currency is an exercise in prestidigitation. The gold standard is the only conceivable early warning system to indicate erosion of capital. It was not the gold standard per se that politicians and adventurers wanted to overthrow. Above all, they wanted to get rid of certain accounting and moral principles, especially those applicable to banking, that had become a fetter upon their ambition for aggrandizement and perpetuation of power. Historically, sound accounting and moral principles had been singled out for discard before the gold standard was given the coup de grâce. Just how monetization of debt has led to unprecedented and previously unthinkable corruption of accounting and moral standards, this is a question that has never been addressed by impartial scholarship before.

In order to see the connection we must recall that any durable change of the rate of interest has a direct and immediate effect on the value of financial assets. Rising interest rates make the value of bonds fall, and falling interest rates make it rise. As a result of this inverse relationship the Wealth of Nations flows and ebbs together with the variation of the rate of interest.

Capital destruction

Indeed, rising interest rates destroy wealth as they render the productivity of capital submarginal. Establishment economists and financial journalists preach the false doctrine that, conversely, when the government and its central bank suppress interest rates, new wealth is being created. This is the gravest error of all! Falling interest rates destroy capital in a most devious way, as they increase the liquidation-value of debt contracted earlier at higher rates. All observers miss the point that as interest rates fall, the burden of servicing outstanding debt is increased. They blithely assume that all debt is automatically refinanced at the lower rate. This is definitely not the case. The issuer must continue to redeem the maturing coupons of fixed nominal value, regardless how far the rate of interest may have fallen after selling the bond. To that extent all issuers of bonds (along with other borrowers) are subject to impairment on capital account in a falling interest rate environment. If the impairment is ignored, the outcome is wholesale bankruptcies in due course.

Enterprises should make up for losses of capital due to falling interest rates whenever they occur. The trouble is that they don’t. As a result they report losses as profits. There is a negative feedback. Capital is eroded further. When the truth dawns upon them, it is already too late. I shall argue that this is the essence of the present banking crisis in America, and it was caused by the destabilization of the interest rate structure, the ultimate cause of which was the overthrow of the gold standard in 1971.

Interest rates have been falling for the past 28 years with the result that the liquidation-value of outstanding debt has reached the tipping point, where capital is plunged into negative territory. Capital dissipation stops as there is nothing more to dissipate. This is sudden death for the enterprise. Producing firms fold tent and look for greener pastures in Asia where wage rates are lower, while financial firms and banks start falling like dominoes.

No commentator is able to explain how American banks could run out of capital in spite of obscene profits they have been making. My explanation is simple. Capital destruction has been going on stealthily for 28 years but the banks were not paying attention. The magnitude of the decline in interest rates, if not its length, is historically unprecedented. The banks have been paying out phantom profits in dividends and in compensation, in the belief that their capital accounts were in good shape. They were not. They were insidiously eroded by the falling interest rate structure, as it inevitably increased the cost of servicing capital already deployed. The banks were unwilling or unable to raise new capital to cover the shortfall. Under these circumstances they should have reduced their own exposure to borrowing. Instead, they were vastly expanding it. By the time they woke up, capital was gone and they were in the grips of bankruptcy.

This puts the importance of the gold standard into high relief. Both rising and falling interest rates are extremely harmful to enterprises, banks not excepted. The plight of General Motors is no different from that of Morgan Stanley. The environment in which they can safely prosper is that of stable interest rates, that only a gold standard can provide.

Not all risks can be effectively insured against

Academia has failed to study and expose the untoward consequences of ousting gold from the monetary system. It dismissed the problem of fluctuating ? nay, gyrating ? interest rates by saying that insurance against those risks is available, just like insurance against the risk of fluctuating foreign exchange rates is, through the derivatives markets. If academia had done its job to research the problem properly, it would have discovered that there are risks against which no effective insurance is available. For example, there is no effective insurance against risks artificially created at the gaming tables in a gambling casino. Likewise, risks represented by fluctuating interest and foreign exchange rates have been artificially created by the government in ousting gold from the monetary system. Under the gold standard, there was no risk of fluctuating interest and foreign exchange rates. Bond values were stable.

Bond values are no longer stable, but there is no effective insurance against diminishing bond values. If you were to offer insurance against losses due to declining bond values or bond default, then you would have to look for second-round insurance to cover your assumed risk. Second-round insurers would need third-round insurance, and so on and so forth. This means an infinite chain of insurers, in effect, a Tower of Babel growing ever taller ever faster. Such a tower is not a figment of the imagination. It is real; it exists even though the earth is quaking under its foundations. This Tower of Babel is the derivatives market. At each level the instrument of insurance is a credit-default swap. The amazing thing is that there are far more credit-default swaps outstanding than there are bonds in existence that they are supposed to be insuring.

Observers make wild guesses in trying to explain this strange phenomenon. They suggest that most are “dry swaps”, that is, they have been created solely for speculative purposes. In this way speculators can gamble with almost no money down. This is the position, for example, of Floyd Norris of The New York Times (Reckless? You are in luck! September 19, 2008.)

I reject this explanation. In reality all credit-default swaps were created to insure actual risks directly or indirectly connected with bond-holdings in the balance sheets of financial institutions. First-round insurance is usually the purchase of a bond futures contract; second-round insurance is the purchase or sale of a put or a call options on bond futures. Third- and fourth-round insurance can also be negotiated in the form of a credit-default swap in the derivatives market. I submit that all the credit-default swaps were negotiated by actual insurers to cover risks they have actually assumed in writing insurance at a lower round. They were not negotiated for speculative purposes. However, at bottom, these risks are artificial, as they have been created by the government in overthrowing the gold standard. This is the true explanation of the exploding derivatives market that doubles in size every second year, and has already surpassed the one-half quadrillion dollar ($500,000,000,000,000) mark.

The derivatives market is the nemesis of government dishonesty and incompetence. The gold standard is striking back ? with a lag of 36 years.

Conclusion

The present credit crisis is the greatest ever in history. It burst upon the world in February, 2007, when insurance premiums on bonds in the banks’ portfolio shot up. However, the roots of the crisis go much farther back. They go back all the way to the ousting of gold from the monetary system 36 years earlier. Gold is an indispensable tool for the banks to manage risk. The Federal Reserve can print its notes ad nauseam, and Helicopter Ben can air-drop them to the banks and bond insurers. It will not address the risks of declining or evaporating bond values. To do that you need something more substantial than irredeemable promises to pay. In Part 2 of this article I shall look at the present crisis in greater detail from the distinctive perspective of the gold standard as an early warning system indicating capital erosion.

Gold Standard University is closing down

Gold Standard University Live had its mission cut out for it: to do the research that academia refused or was forbidden to do: find out the consequences of ousting gold from the monetary system by the U.S. government. Unfortunately our sponsor, Mr. Eric Sprott of Sprott Asset Management, Inc., has withdrawn his financial support saying that our “results do not justify the expenditure”. I am forced to terminate the sessions. The last one will be Session Five to be held in Canberra, Australia, November 11-14, 2008.

In view of the extraordinary events unfolding in world finance and the American banking scene, I shall put on extra meetings in Canberra where I can answer the questions of participants. I shall show that this is not a sub-prime crisis, not a real estate crisis, not even a dollar crisis. This is a gold crisis: the chickens of 1933 and 1971 are coming home to roost. I invite you to come and contribute to the success of Gold Standard University Live with your questions and comments. At any rate, the sessions will be taped and the DVD’s made available to the public, along with the conference proceedings.

September 25, 2008.

References

It is not a dollar crisis: it is a gold crisis

June 4, 2008

Is our accounting system flawed? ? It may be insensitive to capital destruction

May 23, 2008

Forgotten anniversary haunts the nation

March 25, 2008,

These and other articles of the author can be accessed at the website www.professorfekete.com

Calendar of events

New York City, October 16, 2008

Committee for Monetary Research and Education, Inc., Annual Fall Dinner.

Professor Fekete is an invited speaker. The title of his talk is:

The Mechanism of Capital Destruction.

Inquiries: cmre@bellsouth.net

Santa Clara, California, November 3, 2008

Santa Clara University, hosted by the Civil Society Institute

Professor Fekete is the invited speaker. The title of his talk is:

Monetary Reform: Gold and Bills of Exchange.

Inquiries: ffoldvary@scu.edu

San Francisco, California, November 4, 2008

Economic Club of San Francisco

Professor Fekete is the invited speaker. The title of his talk is:

The Revisionist Theory and History of the Great Depression ? Can It Happen Again?

Inquiries: ifkbischoff@yahoo.com

Canberra, Australia, November 11-14, 2008

Gold Standard University Live, Session Five. (This is the last session of GSUL since our sponsor, Mr. Eric Sprott of Sprott Asset Management, Inc., has withdrawn his support saying that in his opinion the results do not justify the expenditure. Come along and judge for yourself.) This 4-day seminar is a Primer on the Gold Basis ? Trading Tool for Gold Investors, Marketing Tool for Gold Miners, and Early Warning System for Everybody Else.

In view of the extraordinary events unfolding in world finance and the American banking scene right now, there will be extra meetings to answer questions from participants and to have a discussion, from our distinctive point of view, namely, that this is not a sub-prime crisis, not even a dollar crisis. This is a gold crisis: the chickens of 1933 and 1971 are coming home to roost.

Address inquiries to: feketeaustralia@yahoo.com.

A more detailed description of this seminar is found at the end of my article Cut Off Your Tail to Save My Face! September 1,

www.professorfekete.com


Copyright © 2008
A. E. Fekete
All rights reserved

THE GOLD STANDARD STRIKES BACK…
…WITH A 36-YEAR LAG

(Part 2 of 2)

The way to resolve the credit crisis:
Recapitalize the banks with gold

Antal E. Fekete
Gold Standard University Live

Privatizing profits, socializing losses

The 0.7 trillion dollar bailout plan of Treasury Secretary Paulson must be seen for what it is: a scheme to privatize profits while socializing losses. The scare tactics with which he was trying to railroad it through Congress has failed and the world is better for it. The malady has to be diagnosed properly. I summarize the popular diagnosis in five points.

1. The bursting of the housing bubble has led to a surge of defaults and foreclosures which has, in turn, led to a plunge in the value of mortgage-backed securities ― assets which are in effect capitalized mortgage payments.
2. These losses have left many banks short on capital account. Their problems were compounded by the fact that as their capital ratios were shrinking, rather than reducing their debt exposure they aggressively increased it.
3. “Leveraging” is the word to describe the deliberate shrinking of capital ratios, i.e., making smaller capital support a larger amount of risks. Aggressive leveraging was characteristic of the pre-crisis boom.
4. When they recovered after the dizzying ride, banks needed a microscope to read their capital ratios and they reacted in a predictable way. They were unwilling (unable?) to fulfill their mission to provide the credit that the national economy needs for its day-to-day operation.
5. As a defensive measure financial institutions have been belatedly trying to pay down their debt by selling assets, including mortgage-backed securities, but as they were doing it simultaneously, they drove down asset prices. This has damaged their balance sheets even more. A vicious circle is engaged that some call the “paradox of de-leveraging.”

Capital destruction

I should hasten to say that I disagree with this popular diagnosis which puts the cart before the horse. My diagnosis, described in the first part of this article, identifies the destruction of capital as the cause, and the credit crisis as the effect.

The problem goes back to the U.S. government foolish decision to destabilize the interest-rate structure (and, hence, bond prices) in 1971. As a consequence, long-term interest rates shot up to 16 percent per annum by the early 1980’s, from where they started their long descent that still continues.

Falling interest rates destroy capital as they raise the liquidation-value of debt contracted earlier at higher rates. By ‘liquidation value’ is meant the sum that will liquidate the debt, should it be necessary to pay it off before maturity. In a falling interest-rate environment it will take a larger sum to retire the same debt. Why? Because the scheduled stream of interest payments is now capitalized at a lower rate of interest and, therefore, it falls short in liquidating the debt.

This means that, paradoxically, falling interest rates do not alleviate but aggravate the burden of debt. All observers miss this point as they blithely assume that debt is automatically refinanced at the lower rate. It is not. Falling interest rates create a deficiency on capital account since it takes a bigger bite to service existing debt than originally provided for, and the deficit is made up at the expense of capital. Over-leveraging is not the cause; it is the effect. What it shows is that the banks do not pay heed; they persist in error. They simply ignore shrinking capital ratios. This ultimately causes wholesale bankruptcies, leading to the vicious downwards spiral.

The banks should have made provision to compensate for eroding capital as interest rates were falling. None of them did. None of them understood the insidious process of capital erosion in the wake of declining interest rates. They reported losses as profits. Then they were hit by the negative feedback: capital eroded further. When the truth dawned upon them, it was already too late.

Interest rates have been falling for the past 28 years. The liquidation value of outstanding debt has been increasing by leaps and bounds. It reached the tipping point in February, 2007 as indicated by the unprecedented jump in the price of credit-default swaps. It revealed that any further decline in the rate of interest would plunge bank capital into negative territory. At this point capital dissipation stops: there is nothing more left to dissipate. For the banks, this is sudden death.

No commentator could explain why banks have all run out of capital at the same time, while making obscene profits. My explanation is simple. There have been no profits, obscene or otherwise. The banks were paying out phantom profits in the belief that their capital accounts were in good shape. They weren’t. The banks were unaware that the falling interest rate structure has been making inroads on their capital. Since all banks have been working with microscopic capital ratios as a result of 28 years of capital erosion, the failure of one single bank would trigger the ‘domino-effect’ on the rest.

Why gold?

This puts the role of gold into high relief. Had gold been retained as a component of bank capital, credit-default swaps would have never been invented. Gold is unique among financial assets in that it has no corresponding liability in the balance sheet of others. Gold is the only financial asset that will survive any consolidation of bank balance sheets,in contrast with paper assets that are subject to annihilation (e.g., when the bank is consolidated with its counterparty holding the liability side of that asset). Suppose we consolidate the balance sheets of the global banking system. Then all assets will be wiped out with the sole exception of gold. But since the global banking system as it is presently constituted has no gold assets, under any consolidation the banks will be denuded of assets while note and deposit liabilities to the public remain. This is why the regime of irredeemable currency is susceptible to collapse that could be violent, taking place with lightening speed. It can also be seen that trying to save banks from collapsing through consolidation, mergers, takeovers, and shotgun marriages is pouring oil on the fire: it accelerates the meltdown of bank capital, rather than retarding it.

Implosion of the derivatives monster

My thesis also explains the explosive growth of the derivatives markets. First round insurance against decline in the value of bonds in the banks’ portfolio can be had by selling bond futures. Those writing first-round insurance need to cover their assumed risk in the form of second-round insurance, they do so by selling call or buying put options on bond futures. But those writing second-round insurance also need to cover their risk: they do it in the derivatives market by purchasing credit-default swaps. The point is that an infinite chain of credit-default swaps is being built on every bond in the banks’ portfolio, as shown by the derivatives monster’s more than doubling in size every other year, already having reached the size of one half quadrillion dollars and still counting.

Why is the derivative monster so dangerous? Because it is subject to implosion that could destroy an inordinate amount of bank assets. If the derivatives tower is consolidated, then its value collapses to zero as claims are wiped out by counter-claims. It is possible that this implosion has already started, but the banks (and their supervisory agencies) keep the lid on this information to avoid a world-wide panic. The earth quakes badly under the foundations of the Derivatives Tower of Babel. Its toppling may be imminent. If gold had been retained as a component of the bank capital structure, then there would have been no derivatives monster to fret about.

Those who explain the proliferation of derivatives by the popularity of “dry swaps”, that is to say, swaps created for the sole purpose of speculative profits they promise in view of their ultra-low price-to-reward ratio, are wrong. All those credit-default swaps were purchased by actual insurers insuring actual risks going with bond ownership, in trying to hedge their own risks.

Recapitalizing banks with gold

The credit crisis could be solved through the recapitalization of banks with gold. The Treasury should pledge to match subscriptions of new private capital, in gold, at the ratio of two to one. This means that two gold shares of capital stock subscribed by the private sector (individuals, firms, and institutions) shall invite one share of capital stock subscribed by the Treasury. Gold subscribed by the private sector should be constitutionally guaranteed against capital levy and confiscation.

There is no better use to which Treasury gold can be put which has been foolishly idled for the past 36 years. What is needed is the mobilization of gold hoarded by the Treasury, as well as of gold hoarded by the private sector. The trouble is that much of the privately owned gold is in hiding and won’t surface for reasons of lack of confidence in the monetary system. But as soon as there is a market for the shares of the recapitalized banks, private gold can be coaxed out of hiding and made to participate actively in the great task of rebuilding world credit.

Capital stock of the recapitalized banks would pay dividend, in gold, at the rate of one tenth of one percent per annum to stockholders, exempt of all taxes. This would make it possible, even for people of modest means, to acquire gold earning a safe return in gold. The maliciously false propaganda of the past decades that gold is a sterile asset in that it earns no interest is easy to refute. Gold has been lent and borrowed at interest (facetiously called the ‘lease rate’) without interruption, in spite of its so-called ‘demonetization’ by the government. In fact, the gold rate of interest is the benchmark on which all other interest rates are still based, after adding a risk-premium reflecting the risk that the monetary unit may lose its gold exchange value.

The tax-exempt feature of dividends has great merits to recommend it, especially if no other exemptions across the economic landscape are granted. You could look at it as society’s protection of widows and orphans, and other members of society who are unable to fend for themselves in a competitive environment, to live in dignity away from the hurly-burly of the investment world.

What is the use of recapitalizing banks with irredeemable promises to pay? It has been tried for the past 36 years; it doesn’t work.

No chain is stronger than its weakest link

The newly recapitalized banks must offer their old assets for sale to the public, in exchange for the gold shares of capital stock, through competitive auctions. In this way the true value of the old paper assets can be determined, and whatever can be salvaged will be salvaged. The market for bank assets, presently frozen, would be made liquid once more. If a bank wants to retain a part of its old assets in the balance sheet, it must bid for it in the same way as if it were buying from another bank through competitive auction. If an asset cannot be disposed of in this way, then it must be written off. Any delay in validating bank assets through the sieve of competitive auction will only prolong and deepen the crisis.

The ‘securitization’ of bank assets was an idiotic strategy motivated by the fraudulent idea that in lumping sub-prime assets together with valid assets would somehow impart value to the former, and the marketability of the product would be enhanced. This, of course, is just a ploy to cheat the buyer. It is like trying to make a chain containing a weak link stronger by adding any number of strong links. The weak link must be replaced with a strong one. No chain can be stronger than its weakest link.

The re-liquefying of bank assets is a first order of business in the present runaway global credit crisis. We are past the point that the wild-fire can be localized. Mobilization of gold is the only way.

Save the pension funds!

This crisis is a warning, possibly the last one, that the recapitalization of banks with gold cannot be further postponed without risking the total collapse of the financial system. If there was some hope that the Treasury might have a contingency plan to mobilize gold in case of a crisis such as this, the Paulson bailout plan has dispelled it. When the moment for the ‘break-the-glass’ rescue plan has arrived, what did we find behind the broken glass? More irredeemable promises to pay, to augment bank capital. All chaff, no grain.

Global credit collapse would bring enormous hardship in its train for ordinary people who have worked hard and saved hard through a lifetime only to see the fruits of their efforts going up in smoke. The result could be total social chaos and lawlessness. At risk are all the insurance companies, pension funds, money market funds. Also at risk is the taxing power of the government, as a prostrate economy won’t be able to bear the tax burden, but will spawn a grey economy that finds ways to evade taxes. The rejection by the U.S. House of Representatives of Paulson’s bailout plan can be viewed as a taxpayer revolt. Is it the first, with more to come?

Close of Keynes’ and Friedman’s system

Understandably, it will be hard for policy-makers, academia and media, and the accountants’ profession to admit that they have been wrong all along about gold and its essential role in the economic bloodstream and in accounting. They have fallen victim to the charm of John Maynard Keynes, the prankster who invented the idea that gold was a barbarous relic, and the gold standard was a ‘contractionist fetter’ upon the world economy. Now we have proof that the blame for the contraction should be assigned, not to the use but to the misuse of gold. The debt collapse is the burial ground for Keynesianism.

After Keynes was gone, policy-makers, academia and media, and the accountants’ profession fell under the spell of another visionary and adventurer talking with a forked tongue, Milton Friedman. He was fond of posing as a free-market man, but in promoting irredeemable currency he did more than anybody, save Keynes, to destroy the free market. Friedman promoted the spurious idea that gold is superfluous in the international monetary system as floating foreign exchanges rates can mimic the operation of the gold standard and will balance the trade accounts. But as the record shows, Friedmanite nostrums have ruined the dollar, as well as the once flourishing and peerless American productive apparatus.

Politicians, academia and media, and the accountants’ profession must swallow their pride and get the confession off their chests that their prognostication, policies, and advice about gold have been in error. If they fail to do this, and continue to block the way of gold to make a return to the economic bloodstream, then their responsibility for the suffering caused by the credit collapse in this country and in the world will be total. They will be shown as doctrinaire wreckers of human cooperation under the system of division of labor, who muzzled their critics and usurped unlimited power, while paving the way to a world disaster akin to that of the Bolshevik revolution.

After the close of Marx’ system, the close of Keynes’ and Friedman’s system is inevitable. But the wounds they have caused would take a long, long time to heal.

The mission of Gold Standard University Live is to do the research that academia refused or was forbidden to do: find out the consequences of ousting gold from the monetary system by the U.S. government, following its 1971 default on the Treasury’s gold obligations. Unfortunately our sponsor, Mr. Eric Sprott of Sprott Asset Management, Inc., has withdrawn his financial support saying that our “results do not justify the expenditure”. I am forced to terminate the sessions. Our last activity will be a panel discussion on the present credit crisis to be held in Canberra, Australia, on November 15, 2008, under the title: The chickens of 1933 and 1971 are coming home to roost and take out bank capital. I invite you to come and contribute to the success of Gold Standard University Live with your questions and comments. At any rate, the sessions will be taped and the DVD’s made available to the public, along with the conference proceedings.

Calendar of events

New York City, October 16, 2008
Committee for Monetary Research and Education, Inc., Annual Fall Dinner.
Professor Fekete is an invited speaker. The title of his talk is:
The Mechanism of Capital Destruction.
Inquiries: cmre@bellsouth.net

Santa Clara, California, November 3, 2008
Santa Clara University, hosted by the Civil Society Institute
Professor Fekete is the invited speaker. The title of his talk is:
Monetary Reform: Gold and Bills of Exchange.
Inquiries: ffoldvary@scu.edu

San Francisco, California, November 4, 2008
Economic Club of San Francisco
Professor Fekete is the invited speaker. The title of his talk is:
The Revisionist Theory and History of the Great Depression ― Can It Happen Again?
Inquiries: ifkbischoff@yahoo.com

Canberra, Australia, November 11-14, 2008
Gold Standard University Live, Session Five. (This is the last session of GSUL since our sponsor, Mr. Eric Sprott of Sprott Asset Management, Inc., has withdrawn his support saying that in his opinion the results do not justify the expenditure. Come along and judge for yourself.) This 4-day seminar is a Primer on the Gold Basis ― Trading Tool for Gold Investors, Marketing Tool for Gold Miners, and Early Warning System for Everybody Else.
Inquiries: feketeaustralia@yahoo.com

Canberra, Australia, November 15, 2008
Panel Discussions: The chickens of 1933 and 1971 are coming home to roost and take out bank capital.
Inquiries: feketeaustralia@yahoo.com