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The Federal Reserve, or the Fed as it is lovingly called, may be one of the most mysterious entities in modern American government. It was created during Wilson's presidency to protect the economy in times of financial turmoil, its real business remains to be discovered. During the Wilson presidency, the U.S. government sanctions the creation of the Federal Reserve. Thought by many to be a government organization maintained to provide financial accountability in the event of a domestic depression, the actual business of the Fed is shrouded in secrecy.
Many Americans will be shocked to discover that the principle business of the Fed is to print money from nothing, lend it to the U.S. government and charge interest on these loans. Who keeps the interest? Good question. Find out as the connective tissue between this and other top-secret international organizations is explored and exposed.
Texas (Kitco News) -- U.S. Rep. Ron Paul , R-Tex., plans to introduce a new bill next year that will allow for an audit of US gold reserves, he told Kitco News in an exclusive interview.
Paul dropped the news in the interview, indicating that the bill still does not have an official name yet but will be unveiled at the start of the new U.S. Congress.
“If there was no question, you'd think they would be very anxious to prove to us that the gold is there,” he said.
This is not the first time the congressman has made his pitch. “In the early 1980s when I was on the gold commission, I asked them to recommend to the Congress that they audit the gold reserves – we had 17 members of the commission and 15 voted not to the audit,” said Paul. “I think there was only one decent audit done 50 years ago,” he said.
Though Paul did not say whether there is any truth to claims that there is no gold in Fort Knox or the New York Federal Reserve, he said, “I think it is a possibility.”
“If we ever get around to deciding we should use gold in relationship to our currency we ought to know how much is there,” said Paul. “Our Federal Reserve admits to nothing and they should prove all the gold is there. There is a reason to be suspicious and even if you are not suspicious why wouldn’t you have an audit?” he said.
The gold audit follows his crusade last year looking to audit the Federal Reserve, which he says is the chief culprit behind the economic crisis.
“I don’t think the Federal Reserve should exist – it would be best for congress to exert their responsibilities and that is find out what they are doing”' said Paul. "It is an ominous amount of power they have to create money out of thin air and being the reserve currency of the world and be able to finance runaway spending whether it is for welfare or warfare; it seems so strange that we have been so complacent not to even look at the books. If we knew exactly what they were doing, who they were taking care of, there would be a growing momentum to reassess the whole system,” he told Kitco News.
Before the creation of the Federal Reserve however, the US saw 16 recessions from 1850 to 1910; they averaged 22 months long. During this time, the U.S. was in recession 60 out of 91 months. Many would argue that the severity of these recessions led to the creation of the Federal Reserve System.
“I think they would be exaggerating what happened before 1913,” Paul responds. “We had some panics …they were usually short and there were no long depressions,” he said. “The Fed creates the bubbles and they are much worse since 1913, if you think of the size of the government and the valuation of the dollar, we are down to about a 2 cent dollar from the 1913 dollar.”
Paul said everyone accuses him of wanting the gold standard but he said he doesn't accept that. “I accept the idea of a gold coin standard and I think we can do much better than what we had," he said. "There was a lot that they did pre-Fed that was not exactly right but we never had a disastrous loss of purchasing power long-term, we didn’t have a great depression, we didn’t have the 1970s with stagflation and we wouldn’t have what we have right now.”
Since the Fed’s creation in 1913 the dollar has lost more than 96% of its value, and by inflating the money supply the Fed continues to distort interest rates and intentionally erodes the value of the dollar said Paul.
Paul’s solution is to not replace the Fed with anything. “It would make the dollar strong… who wants money to be devalued? I want a strong dollar and if it were equivalent to gold it would remain strong.”
Paul also said he wants to legalize the freedom for people to choose. “My proposal for now is to legalize the constitution to use gold and silver as legal tender in a parallel standard and have it compete with paper money. If people get tired of using the paper standard they can deal in gold or silver,” he said.
On the topic of gold price manipulation, Paul said, “I think it is probably true.”
“I am not the one to lay out proof of this, others have done a lot of investigation. One of the reasons I don’t dwell on that is they are not going to listen to us" he said. "But I think it is very important somebody talks about it and emphasizes it just as a warning to be careful; you don’t have to only anticipate what the markets are doing, but you have to anticipate what the government is doing.”
The best example of manipulating the ratio of gold to paper would have been from the late 1950s to 1971, said Paul. “We printed money like currency, we printed too many dollars against the gold, so they said, ‘we will take your gold.’ …if they are capable of that they are capable of doing this as well, because they don’t want their cover blown, ” said Paul. If the markets are saying not to trust paper money, they have to do everything they can to “destroy gold,” said Paul.
Recounting a visit with Paul Volcker, former Chairman of the Fed Reserve, Rep. Paul said the Chairman walked straight into the room, went immediately to his staffer and asked what the price of gold was. “They know gold is important. I think they are quite willing to manipulate it. That is the only way they can maintain this false illusion about gold.”
“If they are involved isn’t it pretty amazing what has happened in past year? What will happen if they throw in the towel?” said Paul.
The current economic situation is very healthy for gold, said Paul. “You see people rushing just to put their money in any place …they don’t even care about making money.”
New Regulations When asked what regulations the Congressman is currently worried about, he said, “All of them.” However, Paul specifically points to the 1099 provision, a portion of the health-care act, passed earlier in the year. “For every transaction of over $600, gold dealers have to fill out a form, it is a lot of paperwork,” said the congressman. Entities must file a Form 1099 with the Internal Revenue Service whenever they make transactions paying out $600 a year to another party.
US economy
It is going to continue to go downhill said Paul on the US economy. “I don’t believe in a double dip, I believe we have single-dip and it has been continuous.”
“The only reason it doesn’t look so bad is if you spend $2 trillion dollars and you have a $5 hundred billion increase in some GDP figures, you didn’t get much for your trillion dollars but it might improve your statistics, so it was a fake recovery.”
As for another presidency run, Paul says it is too early to tell.
Asian central bankers see a ghost from the past in the U.S. Federal Reserve’s plan to pump $600 billion into the banking system. To them it's like the rolling mid-1990s again, except that they know how this party is going to end.
Here's the scenario: This tsunami of cheap dollars would flood Asia's stock, property, commodities and other asset markets, pushing up prices, then forming bubbles that would eventually burst and result in another ruinous recession like the 1997 Asian financial crisis.
Even scarier now than 13 years ago is that options to manage this cash onslaught have come down to a hard dilemma for central bankers in Asia: If they raise interest rates to absorb excess capital, which would almost definitely be higher than the rates in the U.S. and Europe, it would only attract more of that cheap money. If they leave the markets alone, the risk of a severe shock multiplies. Hot money comes in fast, and flees just as easily.
Compounding the situation is that these economies have only just come off their own stimulus in 2008-2009. So the Fed's move is like a double stimulus for them, piling on top of the money still sloshing around.
“The launch of QE2 [this second round of quantitative easing] will definitely add pressure to the asset markets in the emerging market economies such as Hong Kong’s. As far as Hong Kong is concerned, we will take measures that are specific to the housing market,” said Norman Chan, chief executive of the Hong Kong Monetary Authority, the city’s de facto central bank.
Property prices in Hong Kong have risen to their highest since 1997, the peak of the last bubble. The Hang Seng index this week reached a two-year high in anticipation of the Fed's loose money. With a highly liquid market and no capital controls (unlike mainland China), Hong Kong is a natural proxy for investors seeking a China exposure. In the first 10 months of the year, HK$345.9 billion ($44.6 billion) was raised in Hong Kong from initial public offerings. That shows just how much money has been circulating. Hong Kong hardly needs more.
Property speculation is a major concern too in China, Malaysia and Singapore — all three already curbing mortgages. In South Korea, stocks reached their highest level in nearly three years this week. Bailed out by the International Monetary Fund in 1997 — South Korea came out with a combative tone against effect of the stimulus, signaling it will “actively” seek measures to control the flow of capital, which could include taxing foreign investments in government bonds. Thailand — another poster country of the 1997 crisis — already did that last month.
Surely, Asian authorities want to see the U.S. economy pick up – after all they sell a lot of their exports to America? However, the Fed’s intervention, although anticipated, still conjures U.S. unilateralism, an attempt by America to save itself regardless of how it would affect others.
“The main issue here is that the United States conducts monetary policy that has consequences not only on the United States. The U.S. dollar, for better or for worse, is the only serious international reserve currency,” said Uwe Parpart, chief Asia economist and strategist of Cantor Fitzgerald in Hong Kong.
The Fed’s stimulus was a de facto weakening of the dollar. Conversely, it means the Fed has just engineered for the value of Asian currencies to go up.
So how is that different from the Bank of Japan intervening in the foreign exchange market to weaken the yen? Or from China managing its exchange rate?
Whatever happened to global coordination of policies to prevent a currency war? Did the Fed just precipitate that? Only a few weeks ago, Treasury Secretary Tim Geithner said there was “no risk” of a currency war.
This only gives Beijing ammunition to counter the expected clamor at the G20 next week for the yuan’s appreciation and it allows central banks in Asia to justify future foreign exchange interventions.
Already, the currencies of big exporting economies such as Japan, South Korea and Thailand have risen to multi-year highs. This makes their products more expensive abroad and they are unsurprisingly, not happy with that (although a strong currency also makes imported components cheaper.) More foreign capital flows further raise the values of their currencies as foreign investors buy local currencies.
The Japanese yen hovers around a 15-year high against the dollar despite a massive purchase of dollars by the Japanese central bank in September to weaken the yen.
There are indications that Asian central banks may take concerted actions to control the flow of capital into their economies. Capital controls work well when done together, but a robust common policy may be hard to come by because some Asian economy stand differently today, than say, in 2008, when all agreed on stimulus measures.
Japan, for instance, has mirrored the sluggish economic recovery of the United States and may even implement its own quantitative easing (expected Friday).
China, too, attracts foreign capital, perhaps more than others, because of its expected 10-percent growth rate this year. But because the yuan is heavily managed by the central bank and because of existing capital controls and foreign investment restrictions, it has some built-in safeguard against capital inflows.
All told, Asian monetary authorities are probably reaching for their antacids now. Yes, they want the U.S. economy to grow to stabilize the global economy. But they don’t want the imported inflation and the instability risks. They didn’t survive two severe financial crises in less than 15 years to be sitting ducks for another one.
The question now is, how far would Asian leaders assert themselves at the G20 talks in Seoul next week (Nov. 11-12) against the United States and the weak dollar?
The U.S. Federal Reserve’s bond purchase plan will further drive the rally for global stocks and push commodity prices “higher and higher,” said Templeton Asset Management Ltd.’s Mark Mobius.
“We could have an optimistic scenario for quite some time,” Mobius, who oversees about $34 billion, said in a telephone interview from Beijing yesterday. “Commodities are the big area for us. We are great believers in higher commodity prices and therefore are investing in commodity companies.”
The MSCI World Index yesterday surged to a two-year high, gold jumped to a record and crude oil advanced to a seven-month high after the Fed announced Nov. 3 plans for $600 billion in bond purchases through next June. Asian stocks rose today, pushing a benchmark gauge to its best weekly advance this year, on speculation the Fed will succeed in stoking growth in the world’s biggest economy.
The liquidity flooding the global economy from the Fed’s quantitative easing will extend record gains for commodities and dollar depreciation cannot be avoided, said Mobius, 74, who is also the chairman of Templeton’s emerging markets group.
The U.S. economy is growing and that will have a positive effect on Europe and spread to other countries, Mobius said. The “bright spot” is the emerging markets where demand continues to grow, he said. Rising incomes in developing nations are especially good for consumer stocks, he said.
Mobius joins Goldman Sachs Asset Management’s Jim O’Neill in saying the Fed’s measures to boost the U.S. economy will spur further gains for global equities. O’Neill, creator of the BRICs acronym to describe the large emerging markets of Brazil, Russia, India and China, said this week that while a new “bull market” in global equities probably started in the past 15 months, current valuations are far from a “bubble.”
China Bull
The MSCI Emerging Markets Index has jumped 17 percent this year, compared with an 8.4 percent advance for a measure of developed markets.
Mobius said he’s “very bullish” on China as the country has “no big problems.” Even though stock valuations are not as attractive as last year they are “not out of sight” and Templeton funds are buying companies that are expanding in the nation’s less developed regions, particularly consumer companies.
“It’s not as easy as it was but we’re still buying and finding opportunities,” he said.
The Shanghai Composite Index has rebounded 32 percent since reaching this year’s low on July 5 on expectations central banks around the world will inject more cash into their economies to boost growth. It remains down 4.5 percent this year after the government raised bank reserve requirements and curbed lending growth to cool the economy.
‘Wouldn’t Touch’
Demand is so strong in China that Mobius is now looking at airline stocks, an industry that he said he normally “wouldn’t touch” because of low profit margins.
Emerging markets may faces inflationary pressure from the capital inflows spurred by the Fed’s measures, he said.
Inflows into emerging-market stock funds have surpassed $60 billion and exceeded $46 billion in bond funds, both poised for their best year since Cambridge, Massachusetts-based EPFR Global started tracking them in 1995.
Central banks in emerging markets will buy dollars to prevent their currencies from rising too fast and as their foreign exchange reserves increase in size so they will appear increasingly safe to investors looking for markets with higher economic growth and yields, Mobius said.
“It’s a vicious cycle,” he said. “The consequences could be not too good going forward. It’s something we have to watch carefully.”
China Concern
The Fed needs to explain this week’s decision to purchase bonds to pump money into the world’s biggest economy or risk undermining the global recovery, Cui Tiankai, China’s Vice Foreign Minister, said at a press briefing in Beijing today.
Cui’s remarks echo concerns raised across Asia as countries brace themselves for stronger currencies and possible asset- price inflation. German Finance Minister Wolfgang Schaeuble yesterday said the U.S. was creating problems for the world and the subject would be raised during next week’s Group of 20 leaders’ summit in Seoul.
For now, capital inflows in emerging markets are being counterbalanced by “hundreds of billions” of funds being raised by new stock sales and secondary fund raisings, Mobius said.
If funds keep pouring in and companies that have raised cash begin using it to buy assets, prices will be pushed up in a “snowball effect,” he said.
The worst-case outcome is a bubble that bursts after prices rise too fast, with “people getting hurt” because they were too optimistic, Mobius said.
If the U.S. government’s quantitative easing plan fails and fiscal tightening follows, Western economies may be back into recession, Albert Edwards, Societe General SA’s London-based strategist, wrote in a report yesterday. That will trigger a 60 percent drop in equity prices, he said.
Mobius said none of these outcomes is likely in the short term and his funds are fully invested. “I’m pretty optimistic,” he said. “I don’t see any risks any time soon. These things can last for years and years.”
Pimco bond meister Bill Gross is out with his monthly investment outlook calling QE2 a Ponzi scheme and saying it’s arrival will mark the end of the rally for U.S. Treasurys.
He writes:
It seems that the Fed has taken Charles Ponzi one step further. Instead of simply paying for maturing debt with receipts from financial sector creditors – banks, insurance companies, surplus reserve nations and investment managers, to name the most significant – the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers. One and one-half trillion in checks were written in 2009, and trillions more lie ahead. The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not. This one is so unique that it requires a new name. I call it a Sammy scheme, in honor of Uncle Sam and the politicians (as well as its citizens) who have brought us to this critical moment in time. It is not a Bernanke scheme, because this is his only alternative and he shares no responsibility for its origin. It is a Sammy scheme – you and I, and the politicians that we elect every two years – deserve all the blame.
Still, as I’ve indicated, a Sammy scheme is temporarily, but not ultimately, a bondholder’s friend. It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead-end where those prices can no longer go up. Having arrived at its destination, the market then offers near 0% returns and a picking of the creditor’s pocket via inflation and negative real interest rates. A similar fate, by the way, awaits stockholders, although their ability to adjust somewhat to rising inflation prevents such a startling conclusion.
