The Bernanke Agenda - It Isn't What You Think It Is

[theo]

An interesting article about a big change this August:

http://seekingalpha.com/instablog/45969 ... hink-it-is

Here is what I see happening. The Fed withdraws market support, the market crashes in a shocking and rapid descent back to the 2009 lows, the Eurozone recession worsens, China's slowdown magnifies the problem, Japan's last ditch effort back fires and the world plunges into recession.

In short order a solution is offered - a new monetary system that promises to resolve our problems. The system has the added benefit of a partially gold backed re-set of all sovereign currencies - in effect monetizing the debts of troubled nations once and for all and bringing debt to GDP ratios back in line with historic norms.

Thereafter, economies start to improve as confidence is restored and the perception of value is evident in all asset classes. Excess reserves rapidly shrink as money lending resumes and investments increase - again based in part on the perception of real value and also the confidence in the new monetary system. In other words, the next secular bull market begins.

As banks lend M2 will expand rapidly and inflation will be the short term consequence. And yes, the gold bugs will be proven right as inflation will push gold sharply higher and that will also be of benefit to sovereigns who now hold gold as a partial backing of their own currencies. Bond's will fall and yields will rise once again rewarding the prudent amongst us who will benefit from normalized rates. In fact, higher interest rates will be necessary to keep inflation in check."

My thoughts:

I don't buy into the idea of Bernanke as the hero and I think only the naive will truly trust the that SDR/Bancor is actually partially backed by gold. After all the, as the author implies, the apparent gold price manipulation we've been seeing is likely being engineered as part as the transition to the new system. Asking us to trust a system built on fraud takes a lot of nerve. Nonetheless, I like articles that discuss future possibilities and this one is pretty well written.

[shinnosuke]

Thanks for sharing that. The takeaway is to stack more. Oh, that and a pox on SDRs and the fraudsters who invented them.

[IdahoCopper]

Asking us to trust a system built on fraud takes a lot of nerve.

None of us will be asked anything. They will do what they will do and we will have no choice but to go along with it. Unless 40,000 Ninjas go after the 10,000 elites all in one night and eliminate them all, once and for all.

[InfleXion]

I don't believe it is possible to have a partially backed gold standard, at least not successfully. For a gold standard to work there needs to be a fixed ratio of dollars per ounces of gold. Otherwise it is subject to central planning and undermines the gold standard since the purchasing power would fluctuate based on monetary policy, and that is contrary to a gold standard which should remove the human element from monetary policy (aside from how much gold we can mine).

However many dollars a nation has in circulation divided by how many ounces of gold it has backing them will result in the price of gold in that currency. If ounces of gold are decreased then the price of gold will automatically rise to absorb the excess dollars. So "partial" backing is really just full backing with a weaker currency. Ideally if gold is purchased then dollars would be created according to the ratio. If gold is sold by a central bank then those dollars must be destroyed to maintain the ratio and the purchasing power. You can't just print money and expect to be able to buy as much gold with it as you could before, that's having your cake and eating it too.

It was partial backing (weakening the currency) that led to the eventual closing of the gold window when other nations started asking for their gold back in lieu of devaluing dollars that used to be as good as gold. In order to fund our wars we printed a lot of new money without adding to the gold supply. That is why gold had to be revalued multiple times. So it was undermined long before 1971.

Since we do not have a gold standard today all it would take to implement one is to peg it at the current ratio of dollars to gold, and keep that ratio going forward. Assuming we have all the gold in Fort Knox that's $8,000+ per oz according to James Turk. Assuming we don't, the sky is the limit.

Whether we get a new currency or go forward with the current dollar at fair gold value, I don't think it really matters. We could have a whole bunch of weak dollars or a lesser amount of strong dollars, and ultimately the overall money pool will still represent the same value of goods and services. I have no idea if that could happen under Bernanke or someone else, but it does seem like a plausible eventuality based on China and Russia buying up so much gold, since it stands to reason that as soon as one of them goes to a gold standard that every other nation who wants to be a player will need to follow suit otherwise nobody would want their inferior currency.