Rob Arnott: QE, Fed, inflation, Weimar Germany, investor confidence & more

One Million Mark notes, used as notepaper

Many of us in the mad-eyed gold bug community subscribe to King World News, to seek out affirmation for our crazy lopsided view of the world, in which we believe that virtually all of the world’s major governments – and related supranational bodies – are directing the global paper fiat system into a total paper money collapse.

However, occasionally, Eric King also interviews those whose net worth is concerned with much more than the price of gold or silver. One of those regular interviewees is Rob Arnott, who sub advises the Pimco All Asset Fund, and who manages around $80 billion dollars of other people’s money.

If you’d like to listen to some of the interesting things Mr Arnott had to say, today, to Eric King, click below:


Ben Davies: Gold, silver, miners, riots, QE3, EU, default, bank crisis & more

As hardcore Kingworld News listeners will already know, the prescient Ben Davies gave Eric King a remarkable interview a few days ago, which encompassed virtually every topic of recent interest to Cobden Centre readers. I was enthralled by this interview, and only wished it could go on longer, but, alas, after nineteen minutes, the brilliant Mr Davies had other souvlaki to fry.

If you’d like to listen to the interview too, just click on the link below:


James Turk: The edge of chaos

For all of you King World News fans out there, there’s an interesting interview just out between Eric King and James Turk:

The interview discusses the accelerating fall of the dollar and its possible waterfall decline if it breaks down through the range of 71.20-74.20 on the dollar index.

Admittedly, the dollar index only measures the dollar up against other collapsing fiat currencies; however, Turk believes that if the dollar index punches down through 71.20, its previous low, then it could mark the beginning of a free-fall decline.

[And this is despite 58% per cent of the dollar index being set against the euro, that bastion of current monetary stability, with the Greek government currently paying credit card rates on its debt and the Greek populace becoming increasingly restive.]

Turk believes that all fiat currencies are declining because there is a global:

  • Loss of confidence in paper currency
  • Lack of confidence in Bernanke that he will truly fight U.S. inflation when even he can no longer ignore it and people are attempting to eat iPads
  • Lack of confidence in politicians that they can stop themselves spending money they don’t have, except via a printing press, despite all the fine words, postures, and media-faced positions

In addition, for all of the crazy Daily-Bell-reading gold bugs out there (and you know who you are), Turk is completely unsurprised by gold’s steamrollering through $1500 dollars, and is still expecting $1850 by the end of the year as a possibility, and $1650 as a probability, as the dollar heads towards its ultimate confetti status, whereas gold just sits there, disproving Keynesian monetary socialism, on a second-by-second basis.

Here is the related KWN blog piece.


Sprott and Faber on KWN

With paper currencies plummeting downwards at the moment, as silver and gold hold their positions at higher and higher paper money prices, we may be living through pivotal times.

Eric Sprott and Marc Faber discuss this, on King World News, in a sort of Yin and Yang way. Sprott (the contrarian) is expecting further large paper money price gains in both major precious metals, particularly in silver; whereas, Faber (the contrarian’s contrarian) is expecting a serious correction, particularly in silver.

Well, you wouldn’t want them both agreeing now, would you?

Listen out, in particular, for an interesting description of Ben Bernanke, by Doctor Faber:


Kingworld News Roundup

In the KWN weekly metals wrap, we’re looking at $1,440 as the new ceiling and perhaps $1,420 as the new floor for gold (yes, the dreaded ‘G’ word). Although last week was indeed a consolidation week, if we break through $1,440, then we’re up through $1,450 and a new ceiling at $1,460. With gold going through these $20 window breakpoints, silver appears to be going through the same logical process, but with $2 dollar breakpoints, as people abandon paper currency, particularly the paper dollar (which other paper money printers still treat as their reserve currency, even though the dollar has been backed by nothing since 1971). The new silver ceiling target is $38 dollars. Once we’re through that, then we’ll probably be up to $40 as the new immediate target:

James Turk, the proprietor of GoldMoney, is more bullish than the metals wrap commentators (as you might expect, of course). The major difference between silver and gold at the moment, is that silver is in backwardation (the future delivery prices are lower than the on-the-spot prices), which indicates that people prefer physical silver in the hand, to two birds bearing paper promises of silver in the bush. Mr Turk predicts that if gold goes into backwardation too (a highly unusual and usually extremely fleeting occurrence), then it’s all over for the dollar. Backwardation in both silver and gold will indicate a major flight of wealth into private metal (solidity) and away from government paper (junk). Turk still says he believes in $1,800 dollar gold this year, and $50 dollar silver:

[For financial markets newcomers, future delivery contracts for hard valuable commodities are usually more expensive than on-the-spot delivery contracts. This is called 'Contango', which is a sort of cod-latin for 'I touch against'. The idea is this; I have two routes to holding a thousand ounces of silver, in one month from now. I can either buy hard physical silver today in the on-the-spot markets, and hold it for a month, or I can buy a promise from someone else to deliver me a thousand ounces of silver in a month. The problem with buying it today, however, and holding it for a month, is that you need to borrow money today to pay for it, then you need to store it in an expensive vault, and you also need to insure it from theft. These three costs of finance, storage, and insurance, are usually added on to the on-the-spot price to make it equal to the future delivery price. If this relationship is broken, then arbitrage theory might come into play. If the future delivery contract price is lower than the on-the-spot physical price, then you can sell all the silver you hold and save a month's finance, storage, and insurance charges. To keep your silver portfolio filled, you simply buy a future delivery contract from a reputable firm, and take their delivery of silver in a month to refill your portfolio. Therefore, you'll make a lot of money. For example, if physical silver is $36 dollars, and the total finance, storage, and insurance costs are $2 dollars, per month, per ounce, the futures contract for a thousand ounces should cost $38 dollars per ounce; this is sometimes known as the 'fair value' of the futures contract. However, if because of supply and demand the silver futures price for delivery in one month's time is $35 dollars (i.e. it is in 'backwardation') and you hold one contract's worth of silver, then you sell your thousand ounces of silver at $36 per ounce and buy a future for delivery of 1,000 ounces of silver, at a promise-to-pay of $35 per ounce; you then bank the $36,000 dollars you have just made, and start collecting interest on it. In one month's time, you take $35,000 dollars out of your bank account, and pay that to the reputable firm to take delivery of your silver, at a 'profit' of $1,000 dollars (plus one month's bank interest on the full $36,000). You also saved yourself $2 dollars per ounce in holding costs. So on a one month future contract, that's $3,000 dollars of gain, plus interest. On a thousand contracts, that's over $3 million dollars! When a market in a hard commodity like silver goes into backwardation, it indicates that there is a massive 'convenience yield' in holding physical silver right now, rather than waiting a month for someone else's promise to deliver it to you. What this might indicate in these markets, is that people believe silver's price rise is relentless, in terms of dollars and other unbacked paper monies, and that in a month's time silver is going to be priced significantly higher and rising, therefore wiping out any 'paper money' gains in arbitrage, because you have lost your real silver, and are left holding nothing more than a paper promise to deliver it back from someone else, who might have gone bust in the meantime, or who has resorted to hiding behind complex smallprint in the original future delivery contract because they cannot cover themselves and cannot find the silver in the market that they promised to deliver to you, at the cut-price rate you promised to pay, and cannot afford to fund the difference. If they are speculators rather than silver miners, they will have only sold you the futures contract in the first place, because they believed or hoped the price of silver would fall, and this rise has really caught them short. For instance, if the demand price for physical silver has gone to $50 dollars an ounce, and they sold you a thousand fair value contracts to deliver at $38 dollars an ounce, a month earlier, they are down $12 million dollars. You therefore want to keep holding all the silver supply you have now. You do not want to let a single ounce go. And you want more silver, real silver, in the hand, at your convenience. Right now. You do not trust even reputable exchange organisations to be able to deliver real silver to you in a month's time, without monkeying about with obfuscated exchange rules on paper money compensation in lieu of real physical delivery. You don't want $50 miserable paper dollars delivered late by a recalcitrant, possibly even, bailed-out exchange; you want your ounces of silver right now, which could be rising by a dollar a day, at this point. For instance, you might believe you will receive $50 miserable paper dollars in contracted compensation for not receiving a promised and undelivered ounce of silver, but that silver itself might be over $55 dollars an ounce, and rising, by the time you are so compensated (with the finagling firm or even silver miner that sold you the futures contract keeping hold of your silver, that they should have delivered to you). Your faith in paper money is, as they say, crumbling. (You might wonder therefore who is selling silver futures at $35 dollars an ounce? Well, there's lot of talk about that on the Internet, particularly if you stray anywhere near Max Keiser's web site, but if we're being generous, we'll say it's silver mining companies who are digging it out of the ground for $5 dollars an ounce, and who will be happy with a guaranteed $30 dollar profit on that in a month's time. They just want a predictable market for their effort, and are prepared to forego any speculative profit to get that guaranteed money, plus, as silver miners, they should be able to honour their obligations in physical metal.) Therefore, if gold does go into backwardation for any sustainable period, then Mr Turk is probably right. If you could believe in futures markets and paper money, then buying gold futures in backwardation would make lots of sense, thereby pushing the price up of these futures contracts. It only makes sense for gold to go into backwardation if a large mass of gold buyers, including central banks, have given up on paper money. It probably really is all over for the dollar if gold goes into backwardation for any sustained kind of period. The Federal Reserve will therefore have done its assigned job in less than a century, since 1913, when it was formed. It will have completely destroyed the dollar and the wealth of every dollar holder in the world, and passed this wealth on to the U.S. government to waste on itself in a century of imperial ambition. Well done, Alan and Ben. Your mission will have been accomplished. A truly magnificent effort in the face of so much economic logic from the Austrian School, of which Alan Greenspan, in particular, was intimately aware. As for Ben, he's really a confused cardboard cut-out character on sabbatical from 'Hector's House', and so is to be pitied more than defiled.]

Ben Davies speaks about George Reisman’s book, Capitalism (freely available for PDF download), and government price controls. Davies predicts that no matter how stupid price controls are, in an economic sense, western governments are heading towards more price controls to miserably fail to smother the paper money inflation they are creating with their printing presses.

He also talks about how the silver price has been artificially controlled, which has led to a shortage in physical silver, and therefore the current price explosion in silver as those controls fall apart (as price controls always do). Davies predicts a consolidating top for silver, at $45 dollars an ounce. He believes once silver reaches that point, then gold will be where the action is, with a breakthrough ceiling of $1,440 dollars an ounce, and then nothing to stop it rising another $400 dollars on the upside, if it breaks through that price-controlled ceiling, to match Mr Turk’s $1,800 dollars by Christmas. Interesting:

Rob Arnott speaks about the general inflationary cycle, moral hazard, and the policy blunders of central banks; he is alarmed. He also predicts that if the U.S. government keeps going with its money-printing policies, then it is heading for a Greek-style collapse. Listen out for the line about the iPad:

The heroic honey-voiced Robin Griffiths strays a teensy-weensy bit into Bastiat broken window territory, but we’ll forgive him for this possible faux pas because of the kicking he then gives Helicopter Ben. He believes it is reasonable to expect gold to hit $3,000 dollars an ounce, at some point, without a specific timeframe, though even $8,000 dollars is a not unreasonable target, if Helicopter Ben really keeps going with his prodigious money printing programme. On silver, he thinks a reasonable resting position is somewhere between $40-45 dollars, but that it should double from there within some kind of short-term horizon:


Gold bug heaven on King World News

With the price of gold crashing through record highs most days of the week at the moment, I should imagine most gold bugs are having trouble keeping smiles off their faces.

To keep all these fine people in a continuing happy mood — after a few months of nervousness that Ben Bernanke was somehow, despite all logic, going to get away with his quantitative easing money printing programme — I thought I would do a round-up of the latest MP3 shows on King World News, where a certain ‘dominant theme’ is evident, based upon the dreaded ‘G’ word:

The big date is going to be the 30th of June.  If Mr Bernanke keeps going with his quantitative easing after this point — which in my own view is a no-brainer — then all bets are off on the upside potential of gold and silver in terms of dollars.  We shall have to see if our own central planning money board at the Bank of England tries to accompany Ben down on his race to the bottom, to keep him company, but I would imagine they will, though hopefully not at the same prodigious rate, particularly given this news from Zero Hedge.


John Hathaway: The end game for paper currency

John Hathaway is a senior managing director and portfolio manager at Tocqueville Asset Management, specialising in the Tocqueville Gold Fund. Mr Hathaway recently wrote an excellent piece called The Committee to Save the World, which starts with an examination of a Time Magazine article cover, from ten years ago, upon which Alan Greenspan, Robert Rubin, and Lawrence Summers strut with the magnificence of gilded peacocks.

Back then, government men like these apparently knew how to direct the world’s finances, and such colossi used emerald wands to gain secret access to privileged information that remained unknowable to anyone else. All the rest of us had to do was to trust in these government-appointed financial wizards, behind their rippling green silk curtains, and if we did so, whispering “I believe” behind our hands, then all would be well for the future of humanity.

Fortunately these days, such hubris has rapidly evaporated, in a world in which Mervyn King and Ben Bernanke are both publicly panicking, like boiling frogs, with their recent pronouncements that they are clueless about what is going on, that they have failed with quantitative counterfeiting, and that they have little idea what to do next except to pray for a miracle and to roll the printing presses ever harder.

Eric King interviews John Hathaway about his article, below:

A synopsis of the interview follows:

Hathaway believes the government-appointed economic dream teams of 1999-2007 have lost virtually all of their credibility and will not get it back. However, there is still a large political dimension to governmental monetary policy over the next few years and there is much more to it than simply working out whether we will have inflation or deflation.

The current political landscape is predisposed to maintain a status quo of big government and large transfer payments from private industry to the public sector.  With so many western democracy citizens dependent upon government jobs and transfer payments, and with so many of these people able to vote for more of the same, this political landscape will be difficult to unwind, especially in the short-term.

Hathaway predicts, at least for the US, that high government spending levels will continue, funded via deficits and government currency printing. Consequently, it is essential that if Americans possess any liquid assets, then at least some of these assets must be invested in gold.

Eric King then asked Hathaway about his thoughts on the latest pronouncements from the Bank for International Settlements (BIS), the central bankers’ bank, on the current state of the world’s finances.

Hathaway regards these comments as sobering and without histrionics. However, given the sobriety of the BIS, their recent comments can by interpreted as displaying alarm and concern within the central banking community.  For example:

The window of opportunity to put in place fully fledged macroprudential frameworks should not be missed. Meeting this challenge calls for a finely balanced blend of boldness and realism.

Claudio Borio, Head of the Research and Policy Analysis, Monetary and Economic Department, Bank for International Settlements, 22nd July, 2010

King then asked Hathaway about the recent correction in the gold market, which Pierre Lassonde thinks will reverse sometime from September onwards.

Hathaway thinks there was a crescendo in the gold price in late spring, when the Euro got trashed, and gold benefited with its ‘safe haven’ status. However, every long-term bull market has pauses, pullbacks, and corrections, and this gold bull run will be no exception.

Although Hathaway thinks that sudden quantitative easing moves by the Federal Reserve make everything difficult to predict in a volatile environment, the markets will wait until November to see what the US electorate wishes for in the US mid-term elections. Assuming that these elections retain the status quo of big-spending stimulus-based politicians, and that there is no sea-change in thinking, then gold will begin its next leg up against the falling Dollar at that point.

The psychology of the market is healthy for gold, because with lots of cashed-in former gold bulls wanting the gold price to go down to prove themselves right, there is little bubble-popping euphoria in the gold market. Although the price has come down from its high, it hasn’t collapsed, and is still hovering under the record high and holding station.

With the uncharted waters of a stagnating US economy, high unemployment, unprecedented paper money stimulus, and college students unable to get jobs, Hathaway predicts that the political atmosphere is highly volatile, which is highly positive for gold, and that we could even be in the end game for paper currency.

We live in a non-linear world, says Hathaway, and everything is difficult to predict precisely. However, it is now rational to talk about the possibility of hyperinflation, whereas a decade ago, when the original Time Magazine article came out, talk of future hyperinflation would have seemed bizarre and outlandish.

The world is now different, says Hathaway.

To change for the better, governments have to cut their involvement in the economy and for this to happen electorates have to demand fiscal responsibility from their politicians. However, this scenario is not on any horizon Hathaway can see from where he sits in America. Also, the government-appointed ‘Committees to Save the World’ within central banks want to save their jobs and their reputations, and Hathaway sees no limit as to what they will risk to achieve this.

The recipe is therefore baked into the cake.

When we compare the infinite modern paper scrip to the finite ancient gold relic, the Dollar price for gold has only one direction.



Jim Rickards: What’s So Wrong With Deflation?

Jim Rickards is the Senior Managing Director for Market Intelligence at Omnis, Incorporated, and was interviewed recently by Eric King to discuss the US quantitative easing push proposed by Dr James Bullard, the President of the Federal Reserve Bank of St. Louis.

In this refreshing 18 minute interview, Mr Rickards produced some forthright views of what this new plan may mean in the Politburo machinations at the Federal Reserve, plus he provides an excellent technical analysis of the Bullard plan to both raise interest rates and fire the bazooka of quantitative easing at the same time, to stimulate the US economy. Does this sound like a monetary description of a painting by Escher?

If you are as intrigued as I was, then the radio interview is available below:

According to Rickards, the following is how the Keynesian puppet controllers at the Federal Reserve think they can deceive the US population into obeying their strictures on spending more:

[Austrian readers of a nervous disposition may feel the need to grab hold of something firm before continuing, because we have to enter a Keynesian/Monetarist mental mindset to reach the other side of this chain of ideas, without otherwise turning into gibbering slavering lunatics.  At no point are you allowed to ask 'Why is this true?', or 'How did you work that out?', or 'Why don't we just get rid of the Fed?']

  • Interest rates at 0% have failed, therefore something new needs to be tried
  • There is a danger of the US flipping into a Japanese-style deflation
  • General investors want to receive inflation, as measured by the CPI, plus at least 50 basis points, to compensate them for tying their money up for any period of time
  • The Fed targets 2.3% inflation as being optimal for a successful economy
  • Therefore interest rates should be 2.8% to create an optimal economy
  • Unfortunately, with interest rates at 0%, the expectation is that inflation is negative, at minus 0.5%, and in deflation territory
  • Therefore behaviour patterns have set in which expect deflation and which have stopped spending and investment
  • To combat this, the Fed must raise interest rates to increase expectations of ‘good inflation’ at 2.3%
  • So interest rates must go to 2.8%
  • This will stop deflationary fears and get people investing again to prevent a Japanese style denouement for the US economy
  • Unfortunately, these higher interest rates will dry up credit for many US businesses
  • Therefore we need to flood the US with a second round of quantitative easing, and put the pedal to the printing press metal, and do whatever it takes to provide this credit
  • Hence, behavioural expectations about inflation will be optimal and credit levels will be optimal
  • All will then be sweetness and light

You can let go now.

[I don't know about you, but if you thought reading that was bad, you ought to have tried writing it. For the brave at heart, you can download Dr Bullard's paper yourself, 'The Seven Faces of Peril', at Scribd. For a discussion on deflation, try the recent piece by Dr Frank Shostak. For a tangential piece on how all of this may be an attempt to push us towards a global paper currency, try the recent article by Lew Rockwell.]

Getting back to Jim Rickards, he was as unimpressed by Dr Bullard’s comments as Peter Schiff was, in his recent response.

Here’s a synopsis of the radio interview above:

Bullard and Bernanke may disagree on the tools that the Fed should use, but they do agree that deflation must be combatted with inflation. ‘But what is so wrong with deflation?’ asks Rickards.

The greatest period in US economic history was perhaps 1870 to 1900, an entirely deflationary period, in which the US shifted from being a Jeffersonian agrarian power to becoming a world-girdling industrial giant, even displacing Great Britain, which itself was going through its own enormous boom in industrial output, within its own deflationary monetary system.

Rickards contends that if prices go down, standards of living go up, because the same amount of money goes further, as it has with personal computers over the last three decades. However, the US Treasury hates this, because they have no way of taxing a rise in the standard of living caused by the price level going down.

[Which is why they perhaps solved this 'terrible problem' by instituting inflation in the first place, from 1913 onwards, with the creation of the Federal Reserve, a.k.a., The Creature from Jekyll Island.]

Deflation also increases the real value of debt, and although at first this may seem good for the banks, who hold debts on their books as assets, in the medium term it is bad for banks because the level of defaults rises as people walk away from debts they should never have taken on in the first place, and never would have taken on in a constant deflationary environment [and as the assets they have collateralised against these debts go down in monetary value].

When Bernanke et al therefore try to stop deflation, what they are actually doing is helping the banks collect every penny on their loans and punishing the people by keeping them nailed under increasing tax and debt burdens.

In short, Rickards thinks the Fed are fronting for the US Treasury and the banks in their monetary exploitation of the American people.

[I know. You're staggered and amazed.]

Rickards then moves away from the broader canvas and steps down a gear into more technical detail. He challenges Bullard on how the St. Louis Fed President thinks inflation can so easily be fine-tuned and dialled up and down as the Politburo controllers at the Federal Reserve dictate. ‘Who says this dynamically unstable process can be so easily controlled?’ asks Rickards.

In the Weimar Republic in 1920, the Reichsbank increased the money supply significantly, though nothing dramatically life-threatening happened for two years.  However, in 1922, the German economy moved from serious inflation, in June, to hyperinflation, in the matter of a month [with the price level rising 16 times between June and December of 1922].

Weimar Republic Hyperinflation

Rickards contends that the velocity of money is the crucial thing and that the volatility of velocity is consistently underestimated by the Keynesian/Monetarist school.

Although nothing is ever certain in a volatile Black Swan world, Rickards thinks the Bullard money printing plan could tip an inflationary situation into one of hyperinflation, and that if this should occur, then it will be a relatively overnight event.

He goes on to predict that if this monetary collapse does ensue in the US, then each consumer business will run an electronic billboard for its customers, at their tills, which will provide a second-by-second update on the Dollar price against a gold weight unit.

[Please let this gold weight unit be called The Rothbard, with one Rothbard equal to one Troy ounce of gold. For those who have yet to read it, there is also a gem of a novel about this potential paper money breakdown scenario by J. Neil Schulman, entitled Alongside Night, which may still be freely available at Google Books]

Getting back on topic, however, businesses will set all prices using this gold numéraire as an exchange price, but will still take dollars in payment [because it will probably be illegal for them to refuse].  However, businesses will use the gold numéraire to set a constant pricing standard on all the goods labels in the store, with the dollars constantly ticking up in red diode terminator-style numbers beside the unitary gold weight denomination at the till.

Nicknaming Bullard ‘Son of Helicopter’, after the famous Bernanke Helicopter Speech, in which the future Chairman of the Federal Reserve Board quoted an earlier Milton Friedman analogy about the dumping of money from helicopters to solve the Keynesian/Monetarist liquidity trap problem, Rickards does state that he finds the Bullard plan more elegant, technical, and refined, than Bernanke’s usual level of output, but no more persuasive for all that.

Eric King breaks into the interview at this point and asks Mr Rickards what he thinks will happen next at the Federal Reserve?

Rickards thinks the FOMC (Federal Open Market Committee) currently has two camps, both of which want to scare people into spending more money:

  • Group One: Keep interest rates at zero percent for a ‘sustained’ period (i.e. indefinitely)
  • Group Two: Use intellectual stalking horses to later raise interest rates sometime in the middle of next year

Unfortunately for the Fed, most people are de-leveraging themselves, while they still can, from high debt levels, plus cutting down their spending on everything else as the continuing spectre of rising unemployment levels eats into the American psyche [see Up In The Air, with George Clooney]. The Fed’s Inner Party response is to threaten the Proles with massive inflation, to get them to do what the Fed wants.

Rickards thinks it is arrogant for the Federal Reserve to treat American citizens like this, as laboratory mice in an experiment imposed upon them by self-declared geniuses. These are the same geniuses, he says, who missed the Dotcom bubble, who missed the housing bubble, and who have devalued the Dollar by over 95% since their federal reserve system was created in 1913.

They have messed up everything they have ever attempted in their entire existence, which includes the super-extended 1930s depression, so why should anyone think their new plan will work now? The Bullard plan, if implemented, will add lighter fuel to a charcoal barbecue. Nothing may happen for a while, but then one day it will all go boom and the US will switch from a low inflation environment to a hyperinflative one, almost overnight.

To summarise, the Rickards’ position is thus:

  • Deflation can be a good thing
  • The more quantitative easing is engaged in, the more likely a hyperinflative shock will occur at some unpredictable Black Swan moment in the future

To keep up with Jim Rickards, you can keep track of his Twitter page, here: