Taylor On US Economy & Gold
Jay Taylor
Financial Markets
Which Was It, Jay? A Strong Dollar Policy Or a Weak Dollar Policy?
One very famous American investment icon, who reads my weekly missives at least some of the time, happened to read what I wrote last week about the Clinton "weak dollar policy." In response to my remarks about that issue, he sent me the following e-mail message: "For 2 years I have read you state the US government had been conspiring to keep gold prices down "to support its strong dollar policy." Today I suddenly see you stating they were conspiring to keep gold prices down "to support its weak dollar policy."" Clearly, I did a terrible job of clearly communicating my views. If this very astute investor was confused, I can only imagine that most of you were also confused. What I meant to say was the following:
- Core U.S. monetary policy was a weak dollar policy from 1995 through 2000. U.S. monetary policy was anything but strong. In fact, at about the same time the Clinton administration began to talk about a strong dollar policy, the Greenspan Fed began what can only be described as weak dollar policy, evidenced by a massive growth in the U.S. money supply. From 1995 thorough the end of 2000, U.S. money supply grew by 10.8% per year, and real interest rates declined markedly. By comparison, from 1987-when Greenspan took over as Fed Chairman-until 1995, the average annual growth of M-3 was only 2.9%. So in fact, at the very moment the Clinton Treasury started talking about a strong dollar policy, exactly the opposite policy was being implemented.
- The Clinton "strong dollar policy" was in fact a grand deception. The dollar rose in value, not because its intrinsic value had increased, but rather because of declining real interest rates and a massive increase in its supply-because the Summers/Rubin Treasury did exactly what Lawrence Summers knew had to be done to cause the dollar to rise in light of declining real interest rates. He and his boss set out to manipulate the price of gold downward by setting the table for a massive dishording of gold from various central banks.
In other words, an intrinsically weak dollar policy was made to appear to be a strong dollar policy, which in turn provided short-term political benefits to the Clinton Administration by causing bubble-like economic conditions. Such conditions were revealed in a hugely overvalued stock market and various economic bubbles that began to burst at the very end of the Clinton Administration, but mostly during the new Administration's watch.
Massive Growth in Money Supply on Clinton's Watch - Not a Strong Dollar Policy
The Clinton Administration talked about implementing a strong dollar policy from about 1995 through the end of the second term. But in fact, U.S. monetary policy was everything but strong from 1995 onward. What would have constituted a strong dollar policy would have been a contraction of the money supply or at the least, a slow
rate of growth in the money supply. But in fact, the U.S. money supply grew on average by 10.8% per year from 1995 through the end of 2003. That compared with an average rate of growth of just 2.9% per year from the time Mr. Greenspan took over as Fed Chairman in 1987 until 1995. Ironically, or perhaps because of the explosive growth in money starting around 1995, the Clinton folks felt a need to deceive through spin and
sleight of hand and to distract market participants from what was in fact a weak dollar policy. Evidence that the Clinton monetary policy was a weak monetary policy can be seen from the following chart of M-3
Massive Increase in Money Resulted in Declining Real Interest Rates, but Gold Kept Rising!
With the supply of dollars increasing rapidly, the price of "renting" dollars-namely, real interest rates-declined sharply from 1995 onward. As the blue line in the chart below illustrates, the real rate of interest declined from about 4% in 1995 to near 2%. This decline in real interest rates should have resulted in a weaker dollar relative to gold and other currencies. Strangely, rather than gold rising vis-à-vis the dollar, as it has
throughout history (except when the price of gold was capped), it continued to decline, as shown in the chart below, in a long-standing relationship that economist Lord Keynes named "Gibson's Paradox."
How Did the Clinton Treasury Make the Dollar Appear Strong when It was Becoming Fundamentally Weaker?
That is the $64 billion question, to which there is an answer for people who have the ability to think outside of the box the establishment is trying to imprison them in. The viable answer to that question has been supplied by the Gold Anti Trust Action Committee (GATA) and Blanchard & Company. In an academic paper he coauthored in 1988, Clinton Treasury secretary Lawrence Summers demonstrated that the only way to make the dollar appear strong in light of falling real interest rates would have been to "cap" or rig the gold price. The Clinton Administration never explained to anyone how it was implementing its strong dollar policy, but it now appears as though it managed to con the world into viewing the dollar as "strong" by manipulating the gold price downward.
Gold Manipulation Couldn't Happen in America!
Most other mainstream folks have objected to the notion that the gold price could have been manipulated, for some very logical reasons. One of the arguments that Summers and others have proposed is that to rig the gold market would require the cooperation of scores of people, at least one of whom would most certainly have leaked the news to the press.
I see two problems with that argument. First, as GATA can tell you, no matter how much evidence has been exposed, the major press will simply not pick up on it. Why? I can only presume that those who determine content for major media view it much as Jim Rogers has, namely, that it is simply too incredible to be true. Moreover, I suppose that the enormity of this revelation could shake confidence to such an extent and roil the
markets so severely that establishment figures who have staked their entire existence on the stock market find the notion of a rigged gold market to be too threatening for them to accept, much as any significant trauma is blocked out from the conscious mind of human beings.
In addition to the public's failing to examine evidence put forward by GATA and now the Blanchard trial, there is another problem with the argument that knowledge of a rigging could not be secretly contained. The supposition is that for a conspiracy to take place, there would need to be too many people involved to keep it a secret. Someone would have surely gone to the press by now, James Rogers argued in my 2003 interview with him last year.
According to my understanding of how the gold manipulation scam was carried out, only a handful of people at the highest levels of our government would have needed to be aware of this scheme. Moreover, the apathy, if not outright hatred, of gold has been so thoroughly ingrained in the American psyche over the past several decades by way of the Keynesians' and monetarists' indoctrination processes in our universities, that even our
so-called economic thinkers do not understand the relationship between gold and fiat money. When the value of gold declines, most folks find that to be a positive outcome, so why not leave your good fortunes be! In other words, a decline in the gold price is a "who cares?" event. As one colleague at ING Barrings used to argue, "Jay, even if the gold market is being manipulated so that it results in a booming stock market, how could that
be bad?" My friend lacked the insight into how market intervention causes longer term problems by way of increasing market imbalances such as the enormous indebtedness America now faces to itself and to the world.
Lacking this insight, Americans clearly, want to believe the stock market fairy tale of the 1990s remains alive and well. So, they simply won't approach the gold manipulation scheme with an open mind. Neither will the media approach the topic because people will turn their TV sets off.
But the assumption that a whole army of people would be required to bring about the gold manipulation is simply false. Really only two people in the whole world would have to have gotten together to conspire to manipulate the gold price, namely the President and the Secretary of the Treasury. That is true because under a dictatorial law established during the days of President Roosevelt, the Exchange Stabilization Fund was set up
for the purpose of secretly intervening in the gold and currency markets. Moreover, the President and Treasury Secretary are obligated to tell no one else about any such intervention. Not your senator. Not your representative. Not staff members. No one except the President and the Treasury Secretary is entitled to know about gold and currency manipulation. Only the President and Treasury Secretary need know about the gold manipulation. That is not to say staff members or others in the government are precluded from knowing. But only those two people are required to know. We expect that another person, namely Lawrence Summers, who was Undersecretary of the Treasury when Robert Rubin was the Treasury Secretary, was aware of the gold manipulation. We suspect he may have been the instigator behind the scam, given his understanding of the
relationship between the real rate of interest and gold. Indeed, Mr. Summers wrote an academic paper in the late 1980s that demonstrated that the only way to implement a strong dollar policy in the midst of declining real
rates of interest was through government intervention to "cap" the gold price. The point is, it did not require an army of people in the know to pull off the great gold manipulation/Clinton strong dollar policy of the late 1990s. All that needed to happen was for the Treasury Secretary to set the table for the gold bullion dealers to profit, much as you would dangle a chicken in front of a hungry alligator. And so the table was set for Goldman Sachs, J.P. Morgan, Chase, Citicorp, Deutsche Bank, and others, with a luscious spread of low funding via very, very low priced gold loans.
Beyond the President, Treasury Secretary, and Lawrence Summers who advised Robert Rubin, I don't believe anyone else would need to have been formally involved in the plot to manipulate the gold price, although it seems likely that Alan Greenspan was in the know. In 1998, Mr. Greenspan said before Congress, not once but twice, that, "central banks stand ready to lease increasing amounts of gold should the price rise." With this
statement he most certainly implicated himself as being in the know, and his words most certainly paved the way for the bullion banks as well as gold mining firms to continue to increase their gold borrowings. Beyond those three or four people, I imagine there were likely others with a sense that gold dishording was underlying the strong dollar policy. But they would not have needed to be included in any meeting in which a gold
conspiracy plan was hatched. The head trader at J.P. Morgan Chase or Goldman Sachs must have had a sense of what was going on, as so many tonnes of gold were being made available from various central banks. But they would no doubt never be included in any formal sense in a meeting that would tie them to any such plan, because any such conspiracy could be very dangerous. Besides, all that needed to be done was to set up a
situation where the bullion banks could profit from easy and cheap access to very cheap gold.
GOLD
The anti-gold battle is continuing. There is definitely a group within Germany that is on sides with our central bank manipulators. Remember that Deutsche Bank was one of the defendants in the Reginald Howe lawsuit, despite the fact that many Germans understand that fiat money is an immoral theft and that it leads to major economic problems in time. But as the memory of the great germ hyper-inflation fades, and as more and more
of the German youth are brought up with the same Keynesian and monetarist nonsense that our university students are given, the Germans are following the indoctrination process just like our talking heads on CNBC have. One of the real concerns I have is the ability of the Anglo/American banking alliance to infiltrate globally into the banking systems and cultures of other countries. Indeed the big push for a one-world government is coming from the same intellectual think tanks as those who have the power to create money from thin air.
And so last week we were treated to the announcement that Chancellor Gerhard Schroeder has spoken in favor of using the proceeds from selling off some of the Federal Bank's gold reserves in order to invest in research projects in Germany. In an interview with the newspaper "Die Zeit," Schroeder suggested that the money from the sale of gold reserves-which is planned anyway-could be put into a foundation for the benefit of research and development. He added, however, that the final decision rested with the Federal Bank itself. The Federal Bank intends to sell 600 of its 3500 metric tonnes of gold reserves over the next few years. Bank President Ernest Welteke has already come out in favor of such a development fund.
The interesting thing however is that the Germans may in fact not even have 3500 tonnes in the bank. As James Turk pointed out in his most recent newsletter, the Germans more than likely have already leased those ounces out on to the market. What they may really be up to in talking about selling gold is to try to talk the price of gold down a bit so they can allow the borrowers of gold from the central bank to repay them in currency before
an audit reveals the gold is gone. According to Mr. Turk, a similar move had been made in England. James Turk has found some very interesting revelations about governments and how they account for gold and one such revelation strongly hinted at the possibility that gold held in the U.S. at West Point had been swapped to the Germans and that the Germans might then have sold their own gold out into the market.
Whether James is right in his assertion that the German gold is already gone and that this latest rhetoric is simply a cover to keep politicians and central bankers from political embarrassment, I don't know. James is a very reputable and straight-shooting friend of mine. I hold him in the highest esteem for his honesty and integrity. But even if he isn't right and the Germans are simply playing the same old game of trying to pretend
their paper money is worth more than it really is, what is true is that the relentless printing of money, as has taken place since 1971, is setting up the global economy for a debt collapse that will ultimately bring down the foundations of our existing monetary system. One of the major problems with this endless printing of money is the continued and rapidly growing imbalance we see in the global markets with the U.S. balance of payments, Federal deficit, and overall U.S. indebtedness. The Japanese are now letting us know they are becoming increasingly uneasy about the amount of dollars they are holding. So last week they made a statement that they may seek to replace some of their dollar holdings with gold to meet their central bank reserve needs. Their remarks last week about the possibility of exchanging some dollars for gold shows that the laws of nature have a way of ultimately countering the nonsense coming from Germans in this instance, that a liability money like paper is equal as a monetary reserve as an asset money like gold. Of course that is at the heart of Keynesian and monetarist ideology which has corrupted the halls of learning over most of the past 100 years.
Is the Gold Correction Over?
Is the correction in the gold and gold share markets that has taken many of our gold shares into negative territory so far this year over or nearly over? We can't say for sure, but the powerful move off of the bottom to close at its high for the day and comfortably above all the moving averages is very encouraging indeed. Lets put it his way. I would not want to be short gold and gold shares at this time.
February 9, 2004
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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