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The Gold Symposium Keynote Presentation 14 & 15 November 2011 Luna Park

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  • 1.Banks and GovernmentDr David EvansNovember 2011

2. 1. Manufacturing Money 3. Where Does Our Money Come From? Ever noticed that here is a lot moremoney around than there was, say,20 years ago? So someone is manufacturing it(literally making money). 4. Taboo Topic:Money Manufacture Public conversation is at kindergarten level,because hardly anyone knows how moneyis manufactured. Vaguely referred to byeuphemisms in public(economy is overheating) 5. Money Manufacture Dominatesthe Economic Landscape Interest rates Bubbles Debt crisis Money manufactureis power:determines whichelites get to runsociety 6. What if You Could Manufacture Money? No work producing goods or servicesthat others want. Freedom! Material wealth! Buy almostanyone to do almost anything! 7. Good News Legally manufacture of money is limited tobanks and governments. Manufacture by commercial banks: (nothing)$-$ Only governments (central banks) cangrossly exploit the manufacturing power: (nothing) $ 8. Bad News Some paper shufflers capturemuch of value from moneymanufacture. Wealthy, without working hard. Historically, fiat currencies leadto corruption and unfairness. Fiat currencies usually die after25 50 years. Its now 40 yearssince 1971 9. The Origins of Banking Goldsmiths took golddeposits, issued receipts. The receipts circulated asmoney, more convenientthan the metal. Goldsmiths learned theycould issue more receiptsthan they had gold. 10. More Receipts than Gold Lent out these extra receipts and chargedinterest on them (to cover risk of nonrepayment, and profit). Typically safe to lend out 10 times asmany receipts as gold deposits.DepositerGoldsmith Borrowers 11. Classical Gold Standard Base money = gold Bank money = receipts (cash, bank notes) Bank money is created out of nothing, yetcan buy stuff the same as gold. Amplifies the base money by 10. 90% of money is created by banks, bylending. Depositors money is NOT lent out; theyhave access to their money at all times. 12. Modern Base Money Transitioned from gold 1913 1971. Two forms:1. Physical cash Manufactured by a printing press or coin press.2. Money in an account at the central bank Manufactured by increasing the account balance on a computer (monetization). Manufacture unconstrained. Moderated in practice only by desire not toraise inflationary expectations. 13. Modern Bank Money (1) One form:1. Money in an account at a private bank Manufactured by increasing the account balance, on a computer. Manufacture is constrained by BaselAccord, since 1988, a formula based on Equity capital of bank Size and riskiness of existing loans Depositors funds. 90 95% of all money is bank money. Most purchases move it between accounts. 14. Modern Bank Money (2) A loan is made: (nothing) Bank money $ -$ Matching liability And repaid:(nothing) Bank debt = Bank money. Nearly all modern money is debt. 15. Todays Money System The current system is a fiat base amplifiedby a fractional reserve system. Both parts create something-for-nothing:1. Base money, created by the central bank.2. Bank money, created by private banks. Each part is somewhatunstable historically. What could possibly gowrong? Cute but irrelevant 16. 2. Our Debt Crisis 17. Monetary Experiment Starts 1982 Novel money system started in 1971, withthe switch to fiat base money. Only constrained by the sensible behaviorof banks and governments. 1970s stagflation dealt with the inflationaryconsequences of the 1960s. Reset in 1980 by 20% interest rates. 18. How Governments and BanksBlew It Central banks keptinterest rates as low aspossible (keep CPI low) Changed banking rules tomake moneymanufacture ever easier. Responded to everycrisis by bailing everyoneout with new money.No one took away the punchbowl . 19. The Debt-To-GDP Ratio Amount of money = (total) debt Size of economy = GDP Size of bubble = debt-To-GDP ratio This is the financial story of our times 20. Gold peaks at 850 USD/oz Volcker 20% interest ratesGFC Tech Crash ->Housing Bubble1987Crash235%, 1929 crash235%, 1987 crash Change to Fiat Base Money (Nixon) ClintonStrategy Starts Bubble Starts The longer view: 1870 Q3 2009 21. The Bubble Began To End in 2008 World is running low on borrowing capacity:1. Not enough income to service more debt Debt = 400% of GDP Interest rate = 4% So interest repayments are 16% of GDP2. World running low on unencumbered collateral. Money manufacture in the private sectorstalled in 2008 Global Financial Crisis. 22. Governments Prolonged the Bubble Governments took up slack of moneymanufacture in 2008: Borrowing A little printing (monetization) Lowered interest rates. Late 2011: Many governments running out ofcapacity to borrow more. Now realizing private sector is debt-saturated,no return to pre-2007 normal. Only option left for manufacturing money isgovernment printing. 23. What Now? Last years debt has to be repaid withinterest, so every year the stock of moneymust increase or there will be widespreadbusiness and bank failures (a la 1930). World at a fork: orPrint andWidespread failures inflate and deflation 24. The Dismal Arithmetic 1994 2007: Extra debt added 1 2 % toGDP, each year. 15 - 25% of growth was borrowed from thefuture. To return the debt-to-GDP ratio to normal,must pay back that borrowed GDP growth 15 25% fall in GDP Double depression!! 25. Philosophical View : Essence Money is a promise of similar purchasingpower anytime in the future. Work is motivated by those promises. Too much money = Too many promises. Promises cannot all be kept: not all debtscan be repaid in dollars near current value. So there are going to be many losers. The political system, not usual economicrules, will determine who the losers will be. 26. Politicians Will Choose Inflation Basic democratic calculus: Lenders: Few Borrowers: Many (vote, might riot). Powerful business interests: Dont want to fail. Keynesian fog will be used to excuse thischoice, to reduce the peoples debt burden. 27. Inflation is coming The political system wontallow failures of big banksand corporations. TBTF. Bernanke vows he wontallow deflation, like 1930s. Establishment economistsalready suggesting runningmild inflation (6%) for a fewyears. (Rogoff, Mankiw) Government spending morethan tax receipts. 28. Winners Borrowers, the profligate. People without savings. Banks that would be bust if their assetswere marked to market (most big banks). Businesses that would be bust if they hadto pay back loans at original value. Owners of real assets not tied to wages especially commodities, but not houses. Gold and silver. 29. Losers Lenders. Savers. People on fixed incomes. Retirees, pensioners. Most industrial companies. The Economy (suboptimal allocation ofcapital, friction costs of inflation). Everyone in the economy. 30. Even the MSM Are NoticingIt was probably always going to turn out like this. That is,with both the United States and Europe monetising theirdebt and sending the worlds owners of capital scurryinginto gold effectively producing a de facto return to thegold standard.There was no way the debt-funded golden decadesfollowing the end of Bretton Woods in 1972 could bepaid back via global deflation and depression. It wasalways going to be done through inflation. Alan Kohler, 7 Nov 2011 31. 3. Gold(and Silver) 32. Gold: Enforces honesty. An anti-cheating device. A reliable store of purchasing power. Gold is the foremost non-governmentcurrency, evolved in the marketplace over5,000 years. Fiat currencies come and go. Might return to the monetary system. They cant print it. And who hates gold? 33. A Bet On Gold is a Bet AgainstGovernment and BankingThe monetary elite and governments: Prefer dishonest money Enjoy first use of the new money Profit by funneling new money to favoredsectors when it suits Print to cover debts Bash gold Will not give up their power easily. 34. A Bet on Gold is a Bet on Political Interference Without political interference,the current debt bubblewould collapse in a massivedeflation. A bet on gold is a bet thatcentral banks will interfere tomanufacture more money, Bob Prechterand deliberately increase (Analyst)inflation. 35. Gold in a Bubble? Long-term value of currency is determinedby its relative growth rates: Aboveground gold: 1% pa growth Fiat Currencies: 10%+ for last three decades10+%1% p.a. p.a.Amount Huge catch-up ahead for gold. Gold will basically go up forever againstfiat. $1m /oz is only a matter of time. 36. Gold Bubble? No end in sight! Reasons for gold are currently intensifying. 1970s : Took 20% interest rates to end thegold bubble (and inflation). No one can afford 20% interest ratestoday.Wikipedia: Volckers Fed elicited the strongest political attacks andmost widespread protests in the history of the Federal Reserve 37. Gold Bubble? By historical standards, gold price is low. Imagine it is 1850 I might do it for $20,000 /oz. Gold mining today is mechanized yet marginal. 38. Gold as an investment?? Gold is a currency. Most of the time, gold is a lousy investment. Gold becomes a good investment onlywhen the other currencies are failing,inflating, profligate, corrupt, . This is one of those times.Timing is everything 39. 4. The Next 17Years 40. The Economy High but tolerable inflation, a more intenseversion of the 1970s, goes on longer. Debt strangles the world economy.Moribund industries and zombie banks. Governments keep interest rates low, tokeep interest payments down. People save in gold, but pay taxes anddaily commerce in national currencies. Adual currency system will develop. 41. Precedents? Not really. The inevitable reversion to the mean debtlevel of 150% is a double-depression. Depression debt started at 235%, up to 15years to revert to 150% via deflation. 1970s, 6 years of 10% inflation, mild. 42. How Long? Shrinking total debt levels from 375% ofGDP to 150% is a reduction of 60%. How much inflation is required? Three years to get started 2014. 12% inflation high but tolerable, like 1970s. 14 years of 12