Friday, October 12, 2012

Weekend Chillout - Gold is in the Eye of the beholder

This week the longs and shorts battled it out in the Golden commodities pits between $1750 and $1800, it seems even more than usual views on Gold are very much in the eye of the beholder.

Cashin Remembers Germany's Hyperinflation Birthday

Art Cashin
Via Art Cashin of UBS,

Originally, on this day in 1922, the German Central Bank and the German Treasury took an inevitable step in a process which had begun with their previous effort to "jump start" a stagnant economy. Many months earlier they had decided that what was needed was easier money. Their initial efforts brought little response. So, using the governmental "more is better" theory they simply created more and more money. But economic stagnation continued and so did the money growth. They kept making money more available. No reaction. Then, suddenly prices began to explode unbelievably (but, perversely, not business activity).

So, on this day government officials decided to bring figures in line with market realities. They devalued the mark. The new value would be 2 billion marks to a dollar. At the start of World War I the exchange rate had been a mere 4.2 marks to the dollar.In simple terms you needed 4.2 marks in order to get one dollar. Now it was 2 billion marks to get one dollar. And thirteen months from this date (late November 1923) you would need 4.2 trillion marks to get one dollar. In ten years the amount of money had increased a trillion fold.

Numbers like billions and trillions tend to numb the mind. They are too large to grasp in any “real” sense. Thirty years ago an older member of the NYSE (there were some then) gave me a graphic and memorable (at least for me) example. “Young man,” he said, “would you like a million dollars?” “I sure would, sir!”, I replied anxiously. “Then just put aside $500 every week for the next 40 years.” I have never forgotten that a million dollars is enough to pay you $500 per week for 40 years (and that’s without benefit of interest). To get a billion dollars you would have to set aside $500,000 dollars per week for 40 years. And a…..trillion that would require $500 million every week for 40 years. Even with these examples, the enormity is difficult to grasp.

Let’s take a different tack. To understand the incomprehensible scope of the German inflation maybe it’s best to start with something basic….like a loaf of bread. (To keep things simple we’ll substitute dollars and cents in place of marks and pfennigs. You’ll get the picture.) In the middle of 1914, just before the war, a one pound loaf of bread cost 13 cents. Two years later it was 19 cents. Two years more and it sold for 22 cents. By 1919 it was 26 cents. Now the fun begins.

In 1920, a loaf of bread soared to $1.20, and then in 1921 it hit $1.35. By the middle of 1922 it was $3.50. At the start of 1923 it rocketed to $700 a loaf. Five months later a loaf went for $1200. By September it was $2 million. A month later it was $670 million (wide spread rioting broke out). The next month it hit $3 billion. By mid month it was $100 billion. Then it all collapsed. Let’s go back to “marks”. In 1913, the total currency of Germany was a grand total of 6 billion marks. In November of 1923 that loaf of bread we just talked about cost 428 billion marks. A kilo of fresh butter cost 6000 billion marks (as you will note that kilo of butter cost 1000 times more than the entire money supply of the nation just 10 years earlier).

How Could This All Happen?

In 1913 Germany had a solid, prosperous, advanced culture and population. Like much of Europe it was a monarchy (under the Kaiser). Then, following the assassination of the Archduke Franz Ferdinand in Sarajevo in 1914, the world moved toward war. Each side was convinced the other would not dare go to war. So, in a global game of chicken they stumbled into the Great War.

The German General Staff thought the war would be short and sweet and that they could finance the costs with the post war reparations that they, as victors, would exact. The war was long. The flower of their manhood was killed or injured. They lost and, thus, it was they who had to pay reparations rather than receive them.

Things did not go badly instantly. Yes, the deficit soared but much of it was borne by foreign and domestic bond buyers. As had been noted by scholars…..“The foreign and domestic public willingly purchased new debt issues when it believed that the government could run future surpluses to offset contemporaneous deficits.” In layman’s English that means foreign bond buyers said – “Hey this is a great nation and this is probably just a speed bump in the economy.” (Can you imagine such a thing happening again?)

When things began to disintegrate, no one dared to take away the punchbowl. They feared shutting off the monetary heroin would lead to riots, civil war, and, worst of all communism. So, realizing that what they were doing was destructive, they kept doing it out of fear that stopping would be even more destructive.

Currencies, Culture And Chaos

If it is difficult to grasp the enormity of the numbers in this tale of hyper-inflation, it is far more difficult to grasp how it destroyed a culture, a nation and, almost, the world.

People’s savings were suddenly worthless. Pensions were meaningless. If you had a 400 mark monthly pension, you went from comfortable to penniless in a matter of months. People demanded to be paid daily so they would not have their wages devalued by a few days passing. Ultimately, they demanded their pay twice daily just to cover changes in trolley fare. People heated their homes by burning money instead of coal. (It was more plentiful and cheaper to get.) The middle class was destroyed. It was an age of renters, not of home ownership, so thousands became homeless. But the cultural collapse may have had other more pernicious effects.

Some sociologists note that it was still an era of arranged marriages. Families scrimped and saved for years to build a dowry so that their daughter might marry well. Suddenly, the dowry was worthless – wiped out. And with it was gone all hope of marriage. Girls who had stayed prim and proper awaiting some future Prince Charming now had no hope at all. Social morality began to collapse. The roar of the roaring twenties began to rumble. All hope and belief in systems, governmental or otherwise, collapsed. With its culture and its economy disintegrating, Germany saw a guy named Hitler begin a ten year effort to come to power by trading on the chaos and street rioting. And then came World War II.

We think it’s best to close this review with a statement from a man whom many consider (probably incorrectly) the father of modern inflation with his endorsement of deficit spending. Here’s what John Maynard Keynes said on the topic:

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some…..Those to whom the system brings windfalls….become profiteers.

To convert the business man into a profiteer is to strike a blow at capitalism, because it destroys the psychological equilibrium which permits the perpetuance of unequal rewards.

Lenin was certainly right. There is no subtler, no surer means of over-turning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose….By combining a popular hatred of the class of entrepreneurs with the blow already given to social security by the violent and arbitrary disturbance of contract….governments are fast rendering impossible a continuance of the social and economic order of the nineteenth century.

To celebrate have a jagermeister or two at the Pre Fuhrer Lounge and try to explain that for over half a century America's trauma has been depression-era unemployment while Germany's trauma has been runaway inflation. But drink fast, prices change radically after happy hour. And, tell Fed. Chairman Bernanke that it was the “German Experience” that caused many folks to raise an eyebrow when he alluded to the power of the “printing press” a few years ago.

It is why so many, including some of the FOMC, express concern about unintended consequences of each new wave of quantitative easing. (And, if you think no government would ever sponsor wild inflation to liquidate its debt, take a look at Zimbabwe.)

Mike Rivero and Sean on the Madness of the Ruling Elite

Oct 11, 2012 by SGTbull07

In-depth interview with radio show host Mike Rivero, founder of As a 20-year veteran of the truth movement, Mike gives us his expert perspective on the Madness of the ruling "Elite" and the death of the Petrodollar.

Breaking The Set - Pro-life Hypocrite, TSA Scanner Scam, Greg Palast on Billionaire Bandits

Oct 11, 2012 by breakingtheset

Czech National Bank Vice Governor Hampl on the Czech economy and the Eurozone

Oct 11, 2012 by GoldMoneyNews

GoldMoney's Alasdair Macleod interviews Vice-Governor Hampl of the Czech National Bank. They discuss the nature of the Czech economy, which is savings-driven, the Republic being a nation of small savers. This gives it an economy that has more in common with Germany than the rest of Europe. The economy enjoys a low-inflation environment, with a free-market approach. Since 1989, the economy has been driven by economic agents wishing to rebuild their wealth, and this has helped the Republic develop its economy more rapidly than its neighbours.

Paolo Raffone - UK will not survive EU economic collapse

Oct 11, 2012 by PressTVGlobalNews

Amid austerity cuts to essential social services, British Prime Minister Cameron has said that the goal for his government was to spread not to defend privilege.

Interview with Paolo Raffone, Secretary General of the CIPI foundation from Brussels.

Ron Paul on US Politics and Gold

Oct 11, 2012 by RonPaulFriends

Is Silver the New Gold?

From Michael MacDonald, author of The Silver Bomb:

Twitter Pic of the Week

Snow covered tree near Ben Lomond in Northern NSW, Oct 12, 2012. Source

World Richest Man buys a Gold Mine


Original source

Billionaire Carlos Slim’s Minera Frisco SAB agreed to acquire mining assets in Mexico fromAuRico Gold Inc. (AUQ) for $750 million in what would be the largest gold deal involving a Mexican company.

AuRico will sell properties including the Ocampo mine and Venus and Los Jarros projects in northern Chihuahua state and a 50 percent stake in the Orion project in Nayarit state, the companies said yesterday in separate statements.

Slim, the world’s richest person according to the Bloomberg Billionaires Index, is betting precious metals will show resilience as the global economy struggles to grow. The price of gold, which is poised to rise for the 12th straight year, hasn’t dropped below $1,500 an ounce in more than a year.

Read more

Stephen Leeb on King World News

A double shot of my favourite resources analyst, Stephen Leeb. In this interview he discusses EU and UK economic situations, Gold and Silver - including his thoughts on $100 - $150/oz silver. Listen here

Capital Account Stephen Leeb on the Missing Presidential Debate on Trickle Up Economics & the Energy War

Oct 11, 2012 by CapitalAccount

Gold Market Manipulation Explained

Oct 10, 2012 by

Increasingly the suspicion is raised that the gold price is kept artificially in check. But who can have an interest in a manipulated price of gold? Central banks? Lars Schall conducted an exclusive interview related to this topic with the technical analyst and book author Dimitri Speck.

Keiser Report: Parasites Fat on Fraud

Oct 11, 2012 by

In this episode, Max Keiser and Stacy Herbert discuss the very civil lawsuits that are oh so amiable, benevolent, benign, clubby, cordial, courteous and cozy but available only for financial crooks. They also discuss the mysterious algorithm with an unknown motive that accounted for 4% of all quotes on the US stock markets last week. In the second half of the show, Max Keiser talks to Jon Najarian of about options trading, high frequency trading and naked short selling.

Marc Faber CNBC Fast Money

Capital Account with Nigel Farage

Oct 10, 2012 by