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History: A Wise Economic Teacher

History: A Wise Economic Teacher

Dear Reader,

The Gold price has risen £142.54 (16.35%) over the last 3 months and £107.68 (11.89%) of that move being over the last month. 
 
The Silver price has risen twice that percentage over the last month - 24.10% - (£2.93 per ounce)  and a whopping 33.50% over the last 3 months (£3.79 per ounce).
 
These figures persuade even an entrenched opponent of the intrinsic value of Gold.  A known skeptic, Willem Buiter, went on record this week to admit a turn-around from his previous position that; "he "would hold gold" due to the global tidal wave of negative interest rates. So gold, in times of uncertainty and especially in days of uncertainty laced with negative rates looks pretty good." 
 
But the words that struck me the most, from this economist at Citigroup bank, were these; "It competes with other fiat currencies, the dollar, the yen, the euro. And if these currencies now yield negative interest rates or are at risk of negative yields in the U.K. and the United States, then the currency that at least has a zero interest rate, looks better.” 
 
First of all, we avoided an interest rate cut last week. And the Governor of the Bank of England has specifically "warned central banks that adopting negative interest rates would be the wrong response to the current global slowdown, indicating currency depreciation was "no free lunch". Amid the recent economic turmoil which has seen economic growth come to a standstill in a number of regions, the Bank of Japan and the European Central Bank (ECB) have implemented negative interest rates in a bid to revive stuttering economies." (International Business Times, February 2016)
 

Exterior of the European Central Bank

 
So, it might be a little anti-anglo-saxon of Willem Buiter to include the U.K. in the above list. Or just short-sighted. But considering Mark Carney's position is so well published, it is a little odd for a supposed expert "economist" to confuse the countries which are potentially involved in NIRP.
 
Secondly, isn't it striking that this "expert" misnames Gold as a "currency."  Currency is a word for imaginary money; paper notes and digital numbers that have no inherent value of their own, except as agreed by the parties involved who exchange such currency for goods or services.  I've discovered that it is very hard to find a modern definition of "currency" in normal modern dictionaries.  Most modern dictionaries call it "money" but that's not technically true. Merriam Webster, for example, defines "currency" as; "the money that a country uses : a specific kind of money" which is to put it so simplistically as to be arguably misleading.  The second line of the definition then reveals a little more, while somewhat contradicting the definition just given by itself; "something that is used as money."  By definition, this must mean that currency is not money, if it is used "as" money. I use my finger covered in toothpaste "as" a toothbrush precisely because I forgot my toothbrush!
 
Actual financial dictionaries move a great deal closer to revealing the truth of our "currencies" in the following more accurate defintions; 
 
"Currency or cash" is "the coins and bank notes which constitute the physical component of a country's money supply i.e. coins and notes have a physical identity, whereas the other assets comprising the money supply such as bank deposits, are book-keeping entries and have no tangible life of their own."  Collins Dictionary of Business, 3rd ed. © 2002, 2005 C Pass, B Lowes, A Pendleton, L Chadwick, D O’Reilly and M Afferson.
 
Read "no tangilbe value" of their own in the words "no tangible life of their own." A little disconcerting.
 
I like the definition from the Collins Dictionary of Economics even more; "currency - the bank notes and coins issued by the monetary authorities that form part of an economy' money supply. The term currency’ is often used interchangeably with the term cash in economic analysis and monetary policy." Collins Dictionary
of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005
 
This shows that currency is part of a game of policies; an all too flexible player on a giant chest board.
 
On the one hand, it is a good sign that even a die-hard banking economist is admitting that Gold can be used as a "currency." This means times are continuing to strengthen the Gold (and Silver) positions. On the other hand, it is telling that a prominent banking economist misplaces and misnames gold into the same pot as paper money. I think that shows a great deal of his thinking and "economic experts" like him who have lived for decades both within the EU and within banking.
 
"Money" on the other hand is defined as either "an asset or commodity (or most commonly currency)" by the very same financial dictionaries. You can still spot the area of over-familiar use of the word "currency" by their addition of the words in brackets. But at least, they see "money" as something far larger than just "currency."
 
So, let's by-pass modern dictionaries and particularly the online variety - which change our terminology with the beliefs and fashions of modern "progressive" times - and go back centuries and millennia. In the ancient classical language of Hebrew, for example, the word for money is simply "silver."  In fact, to this day, the word for "money" in Israel is still "silver", an interchangeable word for both one and the same!  "Honey, where have I put my money/silver?!"  Delete as appropriate.
 
Move forward through time to the Greek language and there is already a shift. The Greek for "money" is translated as "coin" and even refers to the "drachma" which is, of course, a currency, and one that Greece may well be returning to soon as the eurozone collapses. So, already, in the space of a few hundred years the word for money shifted from its true form of "silver" and gold, to a currency.
 
Why is this understanding so important? Because, we are about to witness the collapse of international currencies; from the euro to the dollar.  It is mathematically certain, based on the amount each global currency has been over-inflated.
 
But still, "economists" like Buiter cling to their positions as they create words riddled with internal somersaults of logic. Buiter "still maintains that gold is a fiat commodity that has limited intrinsic value because it doesn’t have many industrial uses, and only has value because people say so. But he admits this is true of all paper currencies and bitcoin as well and gold may even have an advantage right now. “I will never argue with a six thousand-year-old bubble. So gold, in times of uncertainty and especially in days of uncertainty laced with negative rates looks pretty good,” he said. (Zerohedge, 19th July 2016)
 
Here's how he contradicts himself. Name one other "bubble" that has lasted 6,000 years?  He won't be able to. Bubbles don't last 6,000 years. By definition, a bubble is fragile, inflated and can pop at a milliseconds notice, while we move away from our screens to make a quick cup of tea in the office.
 
He won't be able to name another bubble that is 6,000 years old. That is because both empires and currencies come and they go. The cycle of the rise and fall of empires - always along with their currencies - litter the promenades of history. But Gold and Silver are still here precisely because they are not a fiat and nor are they, as he states, even a "fiat commodity" - a sort of hybrid creation of real and imaginery. "Fiat" is latin for "let there be" and no man said "let there be" Gold and Silver, they are found in the earth, much like diamonds.
 
Stone vs. brick is the perfect allegory here.  Ancient buildings were made with stone, dug straight from the ground. Later, man discovered he could make brick, a cheaper, quicker and easier alternative, just like paper notes and currencies. So, more modern buildings are made with brick. Which ones still stand after millennia?  Only those made of stone. Just take a walk around the archaeological finds of the Middle East.
 
Gold and Silver are not bubbles, they are metaphorical stone.  No one would argue that stone is in any way a "fiat commodity" i.e. that man had a part in creating it.  Man uses it, shapes it, creates beautiful buildings with it. But man didn't make it. Gold and Silver are the same. We value it, we use it, we shape it even. But we didn't make it, so here's the rub. We can't wreck it the way we can man-made economies.
 
Russia knows this difference between Gold and currency. China knows this also, very well. The arrogance of the EU doesn't seem to however.  I love old books and articles. The internet steals us of the wisdom from the voices of the past, because it simply deletes them, making us believe that views and the modern definitions were always this way, when they clearly were not. The internet also deletes the reality of past voices that would have served us well to heed, even in their arrogance. Here are the words of the Spanish Finance Minister at the time, Pedro Solbes, as reported at the Madrid Conference on 15th December 1995:
 
"Thou art Euro, and on this Euro I will build Europe."
 
Wow. That's balanced. Not at all Nero-esque. 
 
Back to modernity, and this week the I.M.F. stated their view that; "the UK’s decision to withdraw from the EU had added “downward pressure to the world economy at a time when growth has been slow”. Their "chief economist" said that; “the direct effects specifically due to Brexit are greatest in Europe, especially the UK”.  However, the Telegraph went on to report that, "Despite the downgrade, economic growth in Britain will still outstrip Germany and France, whose economies are expected to expand by 1.2pc next year. The UK will also beat Italy, where GDP is forecast to rise just 1pc." (The Telegraph Business, 19th July 2016)
 
That's a strange position to take considering only as recently as March the real reason for the slowdown in Europe was reported to be the Euro! "Recession in Europe could lead to the collapse of the eurozone, as the single currency would buckle under the political turmoil unleashed by a fresh downturn, a leading investment bank has warned. In a research note titled "Close to the edge", economists at Swiss bank Credit Suisse warned the fate of monetary union hangs in the balance if Europe's policymakers are unable to ward off another global slump and quell anti-euro populism."  (The populace's common sense can be irritating to the goals of an unelected socialist federalist bureaucracy, huh?) "If the euro area were to relapse back into recession, it is not clear it would endure. Although the bloc's nascent recovery was likely to persist in the coming months, Credit Suisse said there were worrying signs of deterioration emanating from Europe's economies. These included an industrial slowdown, heightened credit stress in the banking sector and market volatility." ("Fresh Recession would cause eurozone collapse warns Swiss Bank", 2nd March 2016.)
 
Firstly, it's interesting to note that there was no mention of Brexit causing a down-turn because the eurozone downturn was already well and truly embedded back in March. And secondly, a Swiss bank's view is more likely to be impartial on this point, precisely because the economically successful Switzerland is not in the eurozone.

I predicted in previous blogs that a recession would be blamed on Brexit, rather than the economic decisions of the last seven years.  Recession in eurozone countries, such as Italy, Greece, Spain, Ireland, Portugal and Germany, has been in the pipeline actually since before the last economic collapse of 2008 - way before.

"The idea that a single currency would reduce unemployment is fanciful in the extreme.  First, to qualify for E.M.U. (Economic and Monetary Union), all states must cut their government deficits below 3 per cent of GDP and their public debt below 60 per cent of GDP. Yet nearly all EU countries are way over these limits - this implies large cuts in public expenditure or, more likely given difficulties in such cuts, rises in taxation - hardly a recipe for growth and job creation.  The greatest likelihood is that the stringent Maastricht criteria will be somehow relaxed, permitting the political process of monetary union to proceed with little regard for the economic consequences. Secondly, a single currency removes the state's ability to reduce its interest rates below that set by the Central Bank and, of course, to move its exchange rate.  This will certainly deepen recessions when they occur.  Some countries, facing severe lack of competitiveness and prevented from interest rate cuts and devaluation, may face prolonged unemployment to force down wages." 
 
What a prescient and accurate synopsis of the fate of the EU. But when was it written? Back in 1995! Again, it is another gem found in the pages of old manuals, this time written by Professor Minford in The European Journal back in November of 1995.
 
So, no Brexit won't cause us a recession in the U.K. It will be a massive mitigating factor in limiting our own recession, brought on since quantitative easing and U.K. government and personal debt rising since 2008.
 
Today, the GDP to debt ratio in the following European countries is widely above the 60% the E.U. made as it's own "shift-able" goal line back in 1995. So, exactly the point this professor predicted actually then happened. Italy's debt to GDP is double that figure at 132%.
 
Again, another voice, this time from the more recent past of 2014, is Jeremy Warner. 
 
He wrote; "As if the fast degenerating geo-political situation isn’t bad enough, here’s another lorry load of concerns to add to the pile. The UK and US economies may be on the mend at last, but that’s not the pattern elsewhere. On a global level, growth is being steadily drowned under a rising tide of debt, threatening renewed financial crisis, a continued squeeze to living standards, and eventual mass default. I exaggerate only a little in depicting this apocalyptic view of the future as the conclusion of the latest “Geneva Report”, an annual assessment informed by a top drawer conference of leading decision makers and economic thinkers of the big challenges facing the global economy. Aptly titled “Deleveraging? What Deleveraging?”, the report points out that, far from paying down debt since the financial crisis of 2008/9, the world economy as a whole has in fact geared up even further. The raw numbers make explosive reading.
 
Historically, big debt overhangs have tended to be dealt with via inflation and currency adjustment, the natural, market based way of haircutting creditors. Both these options are denied to the Eurozone economies, and when everyone is in the same high debt boat may in any case no long work as they once did." ("Mass Default Looms as the world sinks beneath a Sea of Debt", 29th September 2014)
 
Once again, the EU has changed its own rules behind the scenes. Yesterday, an article appeared in Bloomberg, sent in to Bleyer by an eagle-eyed client. It described a term called "bail-in."  I expect we all, by now, know of the term "bail-out."  This is where the European Central Bank will "give money" (create more government debt) to failing banks and economies etc.  The term bail-in is less well known but has been in discussion for a number of years.  The Guardian described it thus, almost exactly three years ago this month;
 
"Under the [EU] regime being created, a clear pecking order for collapsing banks is set out: shareholders are first; certain types of bondholders; and then customers who have deposits over the guaranteed level of €100,000 (£85,000). These three types of creditors would need to take minimum losses of 8% of a troubled bank's total liabilities."  Put simply, investors beware!
 
To show how close a shave England, and hopefully Great Britain, may have with this "new" unelected change in the law over members of the EU, this "regime" will come into E.U. member state law in 2018; 
 
"But a final agreement will need to clinched with the European Parliament and even then the plans would not come into force until 2018."  The final agreement is what occurred this last week, yesterday infact (Tuesday). 
 
Will we still be bound by this new "law" in this country? It depends how fast we can collectively paddle away from the sinking euro ship:  "Britain should probably formally quit the EU around December 2018, new Brexit Secretary David Davis has  signalled. The senior Conservative MP outlined his vision for a “brisk but measured approach to Brexit”, with crucial new trade deals being swiftly struck with countries around the globe. “This means that some of the economic benefits of Brexit will materialise even before the probable formal departure from the EU around December 2018,” he told the Conservative Home website before his appointment yesterday as Secretary of State for Exiting the European Union." (Evening Standard, 14th July 2016)  Faster please!  That's a little too close for comfort for the thousands of Great British people who have more than £75,000 in their bank accounts. Keep a watch on this and be prepared to research and discuss other places to both invest and hold your hard-earned investments, particularly if this comes into law at the beginning of 2018 and we don't manage to extrict ourselves until the end. That's a year of your money being vulnerable. And yes, that's now only £75,000 protected, not £85,000 as the above Guardian article quoted three years ago. The amount that is protected has been reduced by, yes, you've guessed it, the E.U.! You can probably guess which way this figure will go over the coming years.
 
I felt it important to step back this week and look at what is happening around us economically from a long time ago.  History is a very calming, wise teacher. It speaks above the daily noise of this and that. It shouts a long, clarion call above the ephemeral musings of the often well-meaning millennial view; a toddler compared to the white hair of learned centuries, which has watched empire building and falling with surprisingly nothing new under the sun.
 
At the end of the day, it doesn't really matter who or what is to blame for an economic collapse around us, it matters that we saw it coming and acted.
 
To browse the wide selection of Gold and Silver bars and coins on offer at Bleyer, please visit bleyerbullion.co.uk or simply call on 01769 618618.
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7/26/2016 11:02 PM
Utility wins.