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The World Declares Monetary Independence from the U.S. Dollar and Hannibal's Worst Nightmare Begins

October 2, 1999

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 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 uptrend threatened. This has now ended.


With the monetary system facing the greatest defaults since the 1930s, 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 under way. While the problem may appear to have begun in Asia, in fact its origin is a monetary system that allows the United States to have "deficits without tears." Every nation in the world has suffered as they have been forced to import our inflation (that is, to 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 global monetary system is dysfunctional. The Asian currency epidemic was the first act in a play destined to take down the U.S. dollar. Starting with Mexico in 1995, Asia in 1997, and 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 22) 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 Jan. 1, 1999, Prime Minister Obuchi proposed the establishment of a monetary system composed of three key currencies -- the yen, the dollar, and the euro. Japan signaled its intention to internationalize the yen turning it into the key currency of Asia.

On Sept. 20 this year, despite warnings, the Bank of Japan refused to ease monetary policy to curb a rapid rise in the yen against the dollar. A week later the European central banks befriended gold.

The Russian default in 1998 launched us into a new phase of this meltdown, which directly affected 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?

It proves the mutual dependency and just how cozy the alliance is between Wall Street and Washington. LTCM was bailed out because government 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 1998 the yen fell from 147 to 112. Then, on Oct. 15, 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 a policy 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 this state of affairs. The U.S. financial markets have become a fool's paradise, and the affairs of LTCM down to the current scandals involving Martin Armstrong and others have not been lost on the global banking community.

As a young man Alan Greenspan wrote an essay titled "Gold and Economic Freedom," detailed the cause of the 1929 crash. It appears to me as though he repeats the mistakes he accused the Fed of committing in 1927-28.

That is, Greenspan has created a bubble (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 of gold. This is not the issue. The critical determinant in the price of gold ultimately is the supply of DOLLARS. As the United States is the world's largest debtor nation, 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 but rather their excessive position of dollars, which has entered a major secular downtrend.


The European central banks' new gold policy must be viewed as an aggressive escalation in their policy to establish monetary independence. The world has crossed the threshold into a monetary system that 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 its American friends, has turned its 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 to equal the gold reserves backing the dollar and the euro. 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' bids for gold are likely to far exceed the sale limits just established by the Europeans. The historic actions by the European central banks and Japan over recent days are extremely bearish for the dollar and U.S. financial markets. So far the markets have failed to understand this.

Vice Chairman and Treasurer
Gold Anti-Trust Action Committee Inc.

The first use of gold as money occurred around 700 B.C., when Lydian merchants (western Turkey) produced the first coins
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