How far did Clinton sell us out? How about selling out the U.S. gold reserves...

In 1998, as he began www.LeMetropoleCafe.com , his Internet site of financial commentary, Bill Murphy noticed that the gold market wasn't trading as normal markets do. Eventually he sensed collusion among market participants to suppress the gold price and wrote about it repeatedly.

Following Murphy's commentary with great interest, a newspaper editor in Connecticut, Chris Powell, noted that collusion to control prices is against U.S. anti-trust law and suggested that gold partisans and gold market participants mobilize against it, and so GATA was formed and incorporated in early 1999. Murphy is chairman, and Powell is secretary/treasurer. GATA is recognized by the U.S. Internal Revenue Service as a tax-exempt charitable, educational, and civil rights organization. It has received contributions from mining industry sources as well as hundreds of individuals with an investment or philosophical interest in gold.

GATA has advocated litigation against collusion to suppress the gold price, and, indeed, has helped bring such litigation in U.S. District Court in Boston, with its consultant Reginald H. Howe. But GATA has discovered that the gold-price suppression scheme involves not only big bullion trading banks but also governments and particularly the U.S. government.

Indeed, GATA has discovered that the gold-price suppression scheme was actually put down on paper, in public, by Harvard Professor LAWRENCE SUMMERS, just before he went into the CLINTON TREASURY DEPARTMENT, eventually becoming treasury secretary. (He's now president of Harvard.)

Summers co-wrote an essay for an academic journal examining the inverse relationship between the gold price and interest rates, and more or less concluded that government could keep interest rates low by suppressing the gold price. While there is no electronic copy of Summers' essay, you can read about it here:

The mechanisms by which the gold price is being suppressed are, first, "leasing" of gold by central banks, wherein government gold reserves are sold into the market through intermediaries; and, second, the sale of gold futures, options, and other derivatives by bullion banks that, GATA believes, have assurance from governments that, if they ever have to produce actual gold to cover their positions, it will be made available to them cheaply from official sources.

Gold leasing is a matter of public record among the European central banks and some others. The United States, which reports the biggest gold reserves in the world, has always denied participating in gold leasing. But GATA have information that comes close to proving such involvement, undertaken through the secretive and unaccountable Exchange Stabilization Fund of the Treasury Department. Surreptitiously issuing claims against U.S. gold reserves, the ESF and the Federal Reserve Board have put those reserves at risk and their true ownership is now in question.

One big piece of evidence of the surreptitious use of U.S. gold reserves to suppress the gold price is a statement by the Federal Reserve's general counsel, Virgil Mattingly, recorded in the minutes of the Federal Open Market Committee meeting of January 31, 1995, which you can read about here:

Evidence of an auditing sort can be found in some essays by GATA James Turk, editor of the Freemarket Gold and Money Report, which you can read here:

For a broad perspective on the legal implications of all this, you can read the full complaint in the GATA-supported lawsuit, Howe vs. Bank for International Settlements, et al., here:

The lawsuit notes that the market in gold derivatives is tightly concentrated and overwhelmingly dominated by the J.P. Morgan/Chase investment bank. Of course the House of Morgan has a long and intimate relationship with the U.S. government. This concentration in the market for gold derivatives is in itself, GATA thinks, close to proof that the gold market is manipulated and not trading freely. This view is increasingly held by gold market observers.

1) To keep interest rates down by deceiving the bond markets about the rate of inflation, inflation historically being gauged in large part by the price of gold. You may remember the famous comments about the bond market that were attributed to President Clinton not long after he took office. He was frustrated with having to take the advice of his economic advisers that the approval of the bond market was crucial to his administration's political success. Clinton said he resented having to make his administration one of "Eisenhower Republicans." GATA thinks that the gold price suppression scheme -- the massive deception of the bond market -- was Clinton's revenge.

2) To strengthen the U.S. dollar in relation to other curencies; to suppress commodity prices generally, since commodity prices take their cues from the gold price; and, by extension, to raise living standards in the United States by expropriating the developing world, which makes its living largely from producing commodities.

3) To enrich through inside information about U.S. government policy the Wall Street investment houses that have helped implement the gold price suppression scheme and that long have staffed the Treasury Department and Federal Reserve.

But the results of the gold price suppression scheme have been far greater than all this. The results include the devastation of the economies of the developing world, and particularly sub-Sarahan Africa, and the vast misallocation of capital throughout the world in the last decade. That is, with the bond market deceived about inflation, the dollar, and the strength of the U.S. economy, most economic decisions around the world for the last decade have been based on horribly mistaken premises. The U.S. stock market bubble, now bursting, is evidence of this.

There's a lot more detail to be had here, but this is a start. All GATA's dispatches to its supporters, wherein GATA's evidence and commentary are laid out, are available here:

GATA believes that the most important work to be done now is to compel the U.S. government to admit and explain its intervention in the gold market -- its secret underwriting of the gold leasing done by central banks around the world and its putting U.S. gold reserves at risk. This is, after all, PUBLIC policy undertaken with PUBLIC resources, and there can be no justification for surreptitious government intervention in a supposedly capitalist economy in a democracy. Everyone should have equal access to information about such policy.

GATA believes that the gold price suppression policy will end when it is exposed, because it can't stand the light of day and because no investors will take the other side of any trade they come to realize is fixed.

CHRIS POWELL, Secretary/Treasurer Gold Anti-Trust Action Committee Inc. 7 Villa Louisa Road Manchester, CT 06043-7541 -- USA

Message 850 of 1850 | Previous | Next [ Up Thread ] Message Index Msg #

From: GATAComm@a...
Date: Sun Aug 12, 2001 4:27 pm
Subject: How Summers learned that as treasury secretary he'd need to rig gold

ADVERTISEMENT

By Reginald H. Howe
www.GoldenSextant.com
August 13, 2001

Due in no small measure to articles he wrote as a young
economist, especially his 1966 essay "Gold and Economic
Freedom" (reprinted in Ayn Rand, "Capitalism: The
nknown Ideal"), Fed Chairman Alan Greenspan is widely
recognized as quite an authority on gold. Far less
widely known are professional articles on gold by
another young economist who also went on to serve until
quite recently in some of the nation's top economic
policy positions.

Not long before joining the new Clinton administration
as undersecretary of the treasury for international
affairs, Harvard President and former Treasury
Secretary Lawrence H. Summers, then Nathaniel Ropes
professor of political economy at Harvard, co-authored
with Robert B. Barsky an article entitled "Gibson's
Paradox and the Gold Standard" published in the Journal
of Political Economy (vol. 96, June 1988, pp. 528-550).
The article, which appears to draw heavily on a 1985
working paper of the same title by the same authors, is
an excellent technical piece, revealing a high level of
expertise regarding gold, gold mining, and the
connections among gold prices, interest rates, and
inflation.

Indeed, for any administration concerned that the bond
vigilantes on Wall Street might thwart its economic
policies by pushing up long-term rates at inopportune
times, the article is must reading and qualifies its
authors as attractive candidates for government
service. Of even more interest, looking at the Clinton
administration retrospectively, the article provides
strong theoretical evidence that since 1995 gold prices
have not acted as would be expected in a genuine free
market, but instead have behaved as if subject to what
the authors describe as "government pegging
operations."

Lord Keynes gave the name "Gibson's paradox" to the
correlation between interest rates and the general
price level observed during the period of the classical
gold standard. It was, he said, "one of the most
completely established empirical facts in the whole
field of quantitative economics." (J.M. Keynes, "A
Treatise on Money" (Macmillan, 1930), vol. 2, p.198.)
And it was a paradox because contemporary monetary
theory, largely associated with Irving Fisher,
suggested that interest rates should move with the rate
of change in prices -- that is, the inflation rate or
expected inflation rate, rather than the price level
itself. Yet when Keynes wrote, data for the prior two
centuries showed that the yield on British consols
(government securities issued at a fixed rate of
interest but with no redemption date) had moved in
close correlation with wholesale prices but almost no
correlation to the inflation rate.

Economists have long tried to find a theoretical
explanation for Gibson's paradox. Professors Summers
and Barsky provide the following executive summary of
their contribution to this debate (at 528):

"A shock that raises the underlying real rate of return
in the economy reduces the equilibrium relative price
of gold and, with the nominal price of gold pegged by
the authorities, must raise the price level. The
mechanism involves the allocation of gold between
monetary and non-monetary uses. Our explanation helps
to resolve some important anomalies in previous work
and is supported by empirical evidence along a number
of dimensions."

They begin their article with an examination (at 530-
539) of the data supporting the existence of Gibson's
paradox, concluding that it was "primarily a gold
standard phenomenon" (at 530) that applies to real
rates of return. Regression analysis of the classical
gold standard period, 1821-1913, shows a close
correlation between long-term interest rates and the
general price level. The correlation is not as strong
for the pre-Napoleonic era, 1730-1796, when Britain
effectively adhered to the gold standard but many other
nations did not, and "completely breaks down during the
Napoleonic war period of 1797-1820, when the gold
standard was abandoned" (at 534).

Nor is the evidence of Gibson's paradox as strong for
the period of the interwar gold exchange standard,
1921-1938, which was marked by active central bank
management and restrictions on gold convertibility.
Following World War II, the correlation weakened
substantially under the Bretton Woods system, and
"[t]he complete disappearance of Gibson's paradox by
the early 1970s coincides with the final break with
gold at that time" (at 535).

With the nominal price of gold fixed, Barsky and
Summers note (at 529) that "the general price level is
the reciprocal of the price of gold in terms of goods.
Determination of the general price level then amounts
to the microeconomic problem of determining the
relative price of gold." For this, they develop a
simple model (at 539-543) that assumes full
convertibility between gold and dollars at a fixed
parity, fully flexible prices for goods and services,
and fixed exchange rates.

Next, they examine the response of the model to changes
in the available real rate of return. In this
connection, they observe (at 539): "Gold is a highly
durable asset, and thus ... it is the demand for the
existing stock, as opposed to the new flow, that must
be modeled. The willingness to hold the stock of gold
depends on the rate of return available on alternative
assets." With respect to the gold stock, the model
distinguishes between bank reserves (monetary gold
under the gold standard) and non-monetary gold,
principally jewelry.

Summarizing the mathematical formulas of the model,
Barsky and Summers make two key points. The first (at
540):

"The price level may rise or fall over time depending
on how the stock of gold, the dividend function
[formulaic abbreviation omitted], and the demand for
money [formulaic abbreviation omitted] evolve over
time. Secular increases in the demand for monetary and
non-monetary gold caused by rising income levels tend
to create an upward drift in the real price of gold
that is secular deflation. Tending to offset this
effect would be gold discoveries and technological
innovations in mining such as the cyanide process."

And the second (at 542):

"The economic mechanism is clear. Increases in real
interest rates raise the carrying cost of non-monetary
gold, reducing the demand for it. They also reduce the
demand for monetary gold as long as money demand is
interest elastic. The resulting reduction in the real
price of gold is equivalent to an increase in the
general price level."

Because the model is "essentially a theory of the
relative price of gold," Barsky and Summers postulate
(at 543) that "an important test of the model is to see
how well it accounts for movements in the relative
price of gold (and other metals) outside the context of
the gold standard." They continue (id.):

"The properties of the inverse relative prices of
metals today ought to be similar to the properties of
the general price level during the gold standard years.
We focus on the period from 1973 to the present, after
the gold market was sufficiently free from government
pegging operations and from limitations on private
trading for there to be a genuine 'market' price of
gold."

And they conclude (at 548):

"The price level under the gold standard behaved in a
fashion very similar to the way the reciprocal of the
relative price of gold evolves today. Data from recent
years indicate that changes in long-term real interest
rates are indeed associated with movements in the
relative price of gold in the opposite direction and
that this effect is a dominant feature of gold price
fluctuations."

In other words, the bottom line of their analysis is
that gold prices in a free market should move inversely
to real interest rates. Under the gold standard, higher
prices meant that an ounce of gold purchased fewer
goods -- that is, the relative price of gold fell.
Since under the Gibson paradox long-term interest rates
moved with the general price level, the relative price
of gold moved inversely to long-term rates. Assuming,
as Barsky and Summers assert, that the Gibson paradox
operates in a truly free gold market as it did under
the gold standard, gold prices will move inversely to
real long-term rates, falling when rates rise and
rising when they fall.

To test this proposition, particularly for the period
after 1984 not covered by Barsky and Summers in their
1988 article, Nick Laird has constructed the following
chart at my request. Nick is the proprietor of
www.sharelynx.net, which offers an excellent collection
of charts relating to gold and financial matters, and I
am most grateful for his assistance. The chart plots
average monthly gold prices on the inverted right scale
-- that is, higher prices at the bottom. Real long-term
rates are plotted on the left scale. They are defined
as the 30-year U.S. Treasury bond yield minus the
annualized increase in the Consumer Price Index
(calculated as the sum of the monthly CPI increases for
the preceding 12 months).

* * *

TO SEE CHART, GO TO
http://www.goldensextant.com/commentary18.html#anchor196905

* * *

As the chart shows, Gibson's paradox continued to
operate for another decade after the period covered by
Barsky and Summers. But some time around 1995, real
long-term interest rates and inverted gold prices began
a period of sharp and increasing divergence that has
continued to the present time. During this period, as
real rates have declined from the 4 percent level to
near 2 percent, gold prices have fallen from $400 per
ounce to around $270 rather than rising toward
the $500 level as Gibson's paradox and the model of it
constructed by Barsky and Summers indicates they should
have.

The historical evidence adduced by Barsky and Summers
leaves but one explanation for this breakdown in the
operation of Gibson's paradox: what they call
"government pegging operations" working on the price of
gold. What is more, this same evidence also
demonstrates that absent this governmental interference
in the free market for gold, falling real rates would
have led to rising gold prices, which, in today's world
of unlimited fiat money, would have been taken as a
warning of future inflation and likely triggered an
early reversal of the decline in real long-term rates.

Other analysts have noted the inverse relationship
between real rates and gold prices. An interesting and
informative recent article along these lines is Adam
Hamilton's "Real Rates and Gold," which makes reference
to a 1993 Federal Reserve study containing the
following statement: "The Fed's attempts to stimulate
the economy during the 1970s through what amounted to a
policy of extremely low real interest rates led to
steadily rising inflation that was finally checked at
great cost during the 1980s."

The low real long-term interest rates of the past few
years may have been engineered with far more
sophistication than those of a generation ago,
including the coordinated and heavy use of both gold
and interest rate derivatives. By demonstrating that
falling real long-term rates will lead to rising gold
prices absent government interference in the gold
market, Barsky and Summers underscore the futility of
trying to control the former without also controlling
the latter. But they do not provide a model for
successful long-term suppression of gold prices in the
face of continued low real rates.

What they do indicate (at 548), however, is that their
model of Gibson's paradox accords only a "minimal role"
to "new gold discoveries" and fails to account fully
for shifts between monetary and non-monetary gold. As
they note (at 546-548), the fraction of the total gold
stock held in non-monetary form during the gold
standard era was substantial, perhaps exceeding one-
half, and the fraction varied over time. Also (at 548),
"the post-1896 rise in prices, after more than two
decades of deflation, is usually attributed to gold
discoveries in combination with the development of the
cyanide process for extraction."

Accordingly, they conclude (at 548-549) that their
"proposed resolution of the Gibson paradox cannot be
the whole answer" and that determination of "the
quantitative importance of the mechanism in this paper
would require better methods for proxying movements in
the stocks of monetary and non-monetary gold, and this
might be an appropriate topic for further research."

The unusual and sharp divergence of real long-term
interest rates from inverted gold prices that began in
1995 suggests that Mr. Summers found an opportunity to
do some further applied research on these matters
during his tenure at the Treasury.

Both the heavy use of forward selling by mining
companies and the World Gold Council's obsession with
promoting gold as jewelry to the near exclusion of its
historic monetary role appear designed to exploit the
conceded points of vulnerability in the operation of
the model.

Viewed in this light, these two novel and
distinguishing features of the post-1995 gold market
appear less accidental and more as the handmaidens of
the government price-fixing operations that the model
reveals.

At the time of his appointment, Professor Summers was
the youngest tenured professor in Harvard's modern
history. On Friday, October 12, 2001, in outdoor
ceremonies in Tercentenary Theatre, he will be formally
installed as its 27th president, entrusted with the job
of leading into the new millennium the nation's oldest
university, where "Veritas" is the motto.

Three days earlier, in Courtroom No. 11 of the new U.S.
Courthouse on Boston Harbor, the search for the truth
about his interim service in the highest positions at
the U.S. Treasury will resume.

Judge Lindsay has scheduled for Tuesday, October 9, at
3:30 p.m, a hearing on the defendants' motion to
dismiss in Howe vs. Bank for International Settlements
et al. The underlying issue in that proceeding is
whether the Constitution and laws of the United States
may be enforced in a federal court action challenging
the authority of Mr. Summers and other American
officials, working at least in part through the Bank
for International Settlements, to conduct the
surreptitious and illegal gold price-fixing operations
exposed even by his own academic research.

-END-

John,

I’ve written probably the equivalent of a (short, disorganized :) book here, and elsewhere, over the past year or so on the current state of the American economy, and my own personal view of the economic future of our republic. I won’t repeat much of it here. Just a few simplistic, disjointed ‘parting thoughts’ (gonna be away from the forum for a while, embarking on a research grant joint venture with a friend that will take up most of my free time (and then some :) for the near-term future. But will be back once that assignment is wrapped up – hoping by then to not be wiping hindsight egg off my face as a result of the opinions that follow :) ....

The Bretton Woods Agreement in 1944 as good as defined the US dollar as being the equivalent of gold …. and it made perfect sense at the time. There was a literal mountain of gold backing the dollar, and gold/dollar transactions were commonplace.

Since the dollar became the world’s currency (and was literally considered as good as gold), using the dollar to settle balances of payment became much more convenient than transferring large amounts of gold bullion or coins between governments. Trouble is, over the past sixty years, this reliance on the dollar has caused governments throughout the world to believe that they no longer have to store sufficient gold in order to back their own currencies.

This dangerous philosophy worked fine as long as the US had gold stockpiles plentiful enough to back its dollar, and as long as America enjoyed a surplus balance of payments -- which means that Bretton Woods, and the resulting change in global monetary/trade policy, worked just fine for all of about ten to fifteen years.

Enter the new -- faulty, and fiscally deadly -- American belief that paper money has its own intrinsic value, and that a healthy balance of payments surplus is nothing more than an economic luxury.

In the fifties and sixties, when other nations (European especially, and France in particular) began to comprehend that the dollar’s integrity was no longer as stable as it once was, they began trading in their surplus of dollars (the result of our growing trade imbalance with them) for gold, and the gold stockpile that America originally boasted in order to back its own currency began to shrink dramatically.

In the early seventies, Nixon, realizing that America’s gold reserves were fast depleting, cut the tie between gold and the dollar – essentially abandoning the foundations of Bretton Woods for good. By severing the dollar from its gold backing, Nixon effectively announced to the world that the reliability of the dollar from that day forth rested solely on the integrity, and willingness to honor its commitments, of the American government (how’s that for an oxymoronic concept?)

[Note: Just last week, thirty-year US Treasury bonds were redeemed five years early in order to reduce the cost of federal debt, stiffing those private investors who put their faith in the abovementioned integrity of the US government.]

Fast forward thirty years from Nixon’s fateful decision, and reflect back on the last sixty, post-Bretton Woods ….

A few seemingly disjointed connect-the-dots comments and questions. I connect the dots in my own way. Others come up with an entirely different resulting pattern. So I’ll just throw out a few (what I believe are) immutable facts – surprising in their simplicity -- and leave them sitting there, for whatever they may be worth in drawing conclusions (or not).

Facts/comments:

At the time of Bretton Woods, the US economy was roughly fifty percent of world GNP. Now it is barely twenty.

US debt is now approximately three hundred percent of GDP (its highest level ever). Even more frightening is that the rate of growth of our debt is significantly larger than the rate of growth of our GDP.

For the first time in history, foreigners are doing most of the financing of US debt. Related question: How much longer will they be willing to accept the US dollar? More frightening question: What happens when they stop doing so? China is feverishly buying US dollars and US paper. When it no longer profits her to do so, will she continue to do so out of respect/admiration for, or a sense of moral indebtedness to, the US (please contain your laughter)? If not, what happens to the US economy?

For now, China has to play along with our currency war and hold the value of her currency down by buying dollar assets. She is reaping factories and jobs. Once she abandons the pro-dollar policy, we will simply be left with massive debts and an almost worthless dollar for a currency.

The Fed is forever creating money based on assets it does not have, and charging interest on those non-existent assets. Said differently: It is stealing the wealth of this nation. But the Fed’s Ponzi scheme will collapse under its own weight when it can find no more (especially international) investors to assume its debt.

For the first time since Bretton Woods, the dollar has, in the Euro, a semi-legitimate competitor for currency of the world status.

Currency debasement can help a nation’s balance of payments in the short term, but history is replete with examples of permanent damage caused by governments who deliberately devalue their currency. Historically, monetary debasement has been the precursor to a civilization’s loss of political/economic power.

The future of credit as payment for anything is precarious at best, because there is simply too much credit (personal, business, and government) that is created out of thin air, with little or no tangible asset collateral. Economics based on illusion is not economics at all, but deadly, escapist wishful thinking.

If the global credit system implodes, the world will turn to tangibles. After all, paper is only worth what one believes its future portends. A check from a rich man and a check from a homeless person can have the same amount printed on it, but who would value both of them equally? However, if the homeless man offers you gold (or another tangible commodity), how would your view of your two debtors change?

A couple of pertinent, timeless quotes:

The real menace of our republic is the invisible government, which, like a giant octopus, sprawls its slimy length over our city, state and nation. At the head is a small group of banking houses generally referred to as international bankers. This little coterie of powerful international bankers virtually runs our government for their own selfish ends. …. NYC Mayor John F. Hylan,1922.

If the American people ever allow private banks to control the issue of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered …. Thomas Jefferson.

Over the years, in conversations with people on the local level, and in conversations with others from other parts of the state and country, I believe I have planted seeds in a few minds. But I have also noted definite tendencies in some of those who choose not to believe that which I believe. Government defenders often refer to a skeptic as an extremist or reactionary, and they urge the embracing of more reasonable explanations of unreasonable events.

I have never felt more pessimistic about the economic (and therefore political/security) future of our republic. The fact that behind-the-scenes bankers, monetary policymakers, and power brokers have surreptitiously called the shots for decades used to keep me awake at night. It no longer does. It is an unfortunate fact of life that I, personally, now accept as such. But that doesn’t mean that we shouldn’t continue to try to do what is within our power to change that state of affairs – even if what is within our power finds itself daily more limited by those same powers that be.

Adieu (for now) ....

~ joanie

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