The „Road To Recovery“ Is A Dead End

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The high profile financial analyst and investment manager Marshall Auerback explains in this exclusive interview his views on: the IMF; the ongoing financial crisis; the commodities rally; the implications of the current oil price; the conflict in Libya/Middle East; the rigging of the precious metal markets; and last but not least this, ironically spoken, “bunch of cranks“ – the Gold Anti-Trust Action Committee, GATA.

By Lars Schall

Marshall Auerback, born July 27, 1959 in Toronto, Canada, is familiar with the international scenery of finance firsthand. After graduating “magna cum laude” in English and Philosophy from Queen’s University in 1981 and receiving a law degree from Corpus Christi College, Oxford University, two years later, he was from 1983-1987 an investment manager at GT Management Ltd. in Hong-Kong.

From 1988-91, Mr. Auerback was based in Tokyo, where his Pacific Rim expertise was broadened to include the Japanese stock market. In 1992 he went to New York to ran an emerging markets hedge fund for the Tiedemann Investment Group until 1995. The next four years he worked as an international economics strategist for Veneroso Associates, which provided macroeconomic strategy to a number of leading institutional investors.

From 1999-2002, he managed the Prudent Global Fixed Income Fund for David W. Tice & Associates, a global investment management firm, and assisted with the management of the Prudent Bear Fund. Since 2003 he was serving as a global portfolio strategist for RAB Capital Plc, a UK-based fund management group. He was also co-manager of the RAB Gold Fund and an independent economic consultant for PIMCO, the world’s largest bond fund management group.

He is now the Director of and Corporate Spokesperson for Pinetree Capital Ltd, a Toronto-headquartered diversified investment, financial advisory and merchant banking firm focused on investing in early stage micro and small-cap resource companies. Pinetree, which has a market cap of $439 million, is invested primarily in Uranium and Coal, Oil & Gas, Precious Metals, Potash, Lithium and Rare Earths and Base Metals.

Moreover, he is a fellow of the Economists for Peace & Security (www.epsusa.org) and of the Japan Policy Research Institute in California (www.jpri.org). As Braintruster of the Franklin and Eleanor Roosevelt Institute, he is a frequent commentator at “New Deal 2.0” (www.newdeal20.org). At present, Mr. Auerback lives in Denver, U.S.A.

In addition to the following interview, I also want to recommend another comprehensive interview that I’ve conducted with Marshall Auerback in the past: “Many years of economic stagnation lie ahead of us.”

Mr. Auerback, the IMF chief Dominique Strauss-Kahn was caught in a „Honey Trap.“i Do you have any comment on who wants Strauss-Kahn out? Who wants whom in? And what does it mean to the US dollar and the European debt workouts?

Marshall Auerback: Well, I don’t know if I would classify this as a ‚honey trap‘. These are very serious charges and although one must make a presumption of innocence, it is also true that Mr Strauss-Kahn has a history of this kind. It certainly makes any future public role for him untenable in my view, but I don’t think it has any implications for the debt workouts.

Regardless of who runs the IMF, they are all deficit reduction, anti-employment, mainstream market fundamentalist neo-liberals. Their policies have been totally wrong and disastrous for the entire global economy (especially the developing world) since inception, and there is little reason to think that things will change significantly no matter who is the leader.

It’s the institution which is the problem, and their „solution“ for the euro debt crisis is not a „solution“ in any sense of the word, just as their „solution“ in 1997 to the nations of emerging Asia turned out to be a cancer which exacerbated the problems. It’s an institution that exists for the benefit of banks and bondholders, nothing else.

We’ll come back to the IMF in a minute. But now that we go through the financial crisis for the third year, I would like to know: is that crisis from a more “cynical perspective“ a success? At least it was deliberately caused by systemic deregulation, privatization and fraud, wasn’t it?

Marshall Auerback: Yes, that is fundamentally correct. I have nothing really to add to the excellent comments made by my friend, Bill Black. The reason so little fraud has yet been detected is because nobody has chosen to look at this. And nobody has chosen to look at it because the very people who would be implicated are now the ones running the show. Why on earth would they incriminate themselves?ii

Furthermore, I would argue that it is fundamentally a political problem, not an economic one that we face today. With deregulation came the rise of “managed money”—pension funds (private and public), sovereign wealth funds, insurance funds, university endowments, and other savings that are placed with professional money managers seeking maximum returns. Also important was the shift to “total return” as the goal—yield plus price appreciation. Each money manager competes on the basis of total return, earning fee income and getting more clients if successful. Of course, the goal of each is to be the best—anyone returning less than the average return loses clients. But it is impossible for all to be above average—generating several kinds of behavior that are sure to increase risk.

Money managers will take on riskier assets to gamble for higher returns. They will innovate new products, using marketing to attract clients. Often these are purposely complex and opaque—the better to dupe clients and to prevent imitation by competing firms. And, probably most important of all, there is a strong incentive to overstate actual earnings—by failing to recognize losses, by overvaluing assets, and through just plain fraudulent accounting. This development is related to the rising importance of “shadow banks”—financial institutions that are not regulated as banks. Recall from what I’ve argued before that the New Deal imposed functional separation, with heavier supervision of commercial banks and thrifts.

Over time, these lost market share to institutions subject to fewer constraints on leverage ratios, on interest rates that could be paid, and over types of eligible assets. The huge pools of managed money offered an alternative source of funding for commercial activities. Firms would sell commercial paper or junk bonds to shadow banks and managed money rather than borrowing from banks. And, importantly, securitization took many types of loans off the books of banks and into affiliates (special investment or purpose vehicles—SIVs and SPVs) and managed money funds. Banks continually innovated in an attempt to get around regulations, while government deregulated in a futile effort to keep banks competitive. In the end, government gave up and eliminated functional separation in 1999.

Note that over the past two or three decades there was increased “outsourcing” with pension, insurance, and sovereign wealth fund managers hiring Wall Street firms to manage firms. Inevitably this led to abuse, with venerable investment houses shoveling trashy assets like asset backed securities (ABS) and collateralized debt obligations (CDOs) onto portfolios of clients. Firms like Goldman then carried it to the next logical step, betting that the toxic waste they sold to clients would crater. And, as we now know, investment banks would help their clients hide debt through opaque financial instruments, building debt loads far beyond what could be serviced—and then bet on default of their clients through the use of credit default swaps (CDS).

This is exactly what Goldman did to Greece. When markets discovered that Greece was hiding debt, this caused CDS prices to climb, raising Greece’s finance costs and causing its budget deficit to climb out of control, fueling credit downgrades that raised its interest rates in a vicious death spiral. Goldman thus benefited from the fee income it got by hiding the debt, and by gambling on the inside information that Greece was hiding debt!

Such practices appear to have been normal at global financial institutions, including a number of European banks that also used CDSs to bet against Greece. For example, Goldman encouraged clients to bet against the debt issued by at least 11 US states—while collecting fees from those states for helping them to place debt. Magnetar, a hedge fund, sought the very worst subprime mortgage backed securities (MBS) to package as CDOs. The firm nearly single-handedly kept the subprime market afloat after investors started to worry about Liar and NINJA loans, since Magnetar was offering to take the very worst tranches. Between 2006 and summer 2007 (after housing prices had already started to decline), Magnetar invested in 30 CDOs, which accounted for perhaps a third to a half of the total volume of the riskiest part of the subprime market—making it possible to sell the higher-rated tranches to other more skittish buyers. And Magnetar was quite good at identifying trash; according to an analysis commissioned by ProPublica, 96% of the CDO deals arranged by Magnetar were in default by the end of 2008 (versus “only” 68% of comparable CDOs). The CDOs were then sold on to investors, who ultimately lost big time. Meanwhile, Magnetar used CDS to bet that the CDOs they were selling would go bad.

Actually, that is not a bet. If you can manage to put together deals that go bad 96% of the time, betting on bad is as close to a sure thing as a financial institution will ever find. So, in reality, it was just pickpocketing customers—in other words, it was a looting.

The point is, you couldn’t do this for several decades after the Great Depression. After WW II, you had a high-consumption economy (high and growing wages created demand), with countercyclical government deficits, a central bank standing ready to intervene as necessary, low interest rates, and a heavily regulated financial sector. The “golden age” of capitalism began—what Minsky called “paternalistic capitalism,” or the “managerial-welfare state” form of capitalism. John K. Galbraith called it the “new industrial state.” Recessions were mild, there were no financial crisis until 1966, and when they began, crises were easily resolved through prompt government response.

This changed around the mid-1970s with deregulation, with a long series of crises that became increasingly severe and ever more frequent: real estate investment trusts in the early 1970s; developing-country debt in the early 1980s; commercial real estate, junk bonds, and the thrift crisis in the United States (with banking crises in many other nations) in the 1980s; stock market crashes in 1987 and again in 2000 with the dot-com bust; the Japanese meltdown from the late 1980s; Long Term Capital Management, the Russian default, and Asian debt crises in the late 1990s; and so on. Until the current crisis, each of these was resolved (some more painfully than others—impacts were particularly severe and long-lasting in the developing world) with some combination of central bank or international institution (IMF, World Bank) intervention plus a fiscal rescue (often taking the form of US Treasury spending of last resort to prop up the US economy, and to maintain imports that helped to generate rest of world growth).

Is the havoc of the financial crisis from a more “cynical perspective“ also a success, insofar – and here comes the IMF back into the picture – it could in Max Keiser’s words:

“…setup the necessary crisis to usher in a beefed up SDR/world currency that the IMF would have a huge role in administering and banks on Wall St. and the City would benefit with hundreds of billions in fees.“iii

Marshall Auerback: I don’t know about a world currency, but we’re certainly experiencing a substantial degradation and corruption of our democracies and the increasing growth of Mussolini style corporatism.

What has to be said on quantative easing?

Marshall Auerback: Quantitative easing is a slogan, not a policy. See my analysis here:

http://www.newdeal20.org/2011/04/27/qe2-the-slogan-masquarading-as-a-serious-policy-43072/.

The liquidity is a big driver of the commodities rally, isn’t it? Do you think that there’s a direct link betwen monetary policies in the United States and the Arab revolts via higher food and energy prices?

Marshall Auerback: Not really a link in the direct sense. But if you induce speculators to embrace great risk along the risk spectrum and, at the same time, „financialise“ the commodities complex (as has been done via ETFs, commodities type products for pension funds, endowments, etc.), and the increasing offshoring of commodities exchanges (e.g. the Dubai Merc) with less regulatory oversight, then you get the kinds of bubbles developing in commodities that you see in other asset classes.

Would you say that war and monetary policy are in general intertwined subjects or at least could be?

Marshall Auerback: I don’t know about war and monetary policy, but certainly there’s a link between war and energy policy, as some of our more astute commentators, such as Michael Ruppert, have long noted.iv We seem to have developed a very basic rule of thumb when it comes to these wars of choice: if an insurgency threatens oil supplies directly or indirectly, we move. If it doesn’t, we don’t. Hence Syria can kill thousands of insurgents (as they did in the early 1980s) and we do nothing. Yemen doesn’t have oil facilities; so we do nothing. In Bahrain we have a huge base and unrest has repercussions for the Shiite part of Saudi Arabia where the oil is. We move via the Saudis. In Libya there is oil. Again, we moved.

Oil prices are at a level that can now impact demand. And not just by squeezing real incomes, but by depressing the sentiment of US consumers who are still lacking confidence from persistently high unemployment, threats of more downsizing, and falling house prices. The FHFA home price index for January with revisions just fell another full percentage point.

In short, we are out of policy levers to help the economy, especially now that we’ve unilaterally taken the fiscal policy option off the table. All of a sudden War #3 makes sense: We’re in Libya to make sure that the oil keeps flowing, because a high oil price depresses what’s left of consumer demand. In the meantime, as this nugget from The Hill illustrates, we’ve quickly blown through the budget “savings” proposed by the GOP, as we’re spending about $100 million a day in Libya. And oil prices have continued to rise as a consequence of perceived dangers to oil production facilities brought about by the escalation of this conflict.

What is pushing the price dynamic in oil?

Marshall Auerback: I think you had a fundamentally tight market, which probably made oil prices around $80-$85 a barrel justifiable, but I think the most recent rise has been largely driven by speculation. If you look at the latest Commitment of Traders data, the net spec long position in crude has barely come down despite a twenty  dollar peak to low decline. I am amazed. That means two things. The longs are  less technical than I thought and really believe. And the oil price really  belongs a lot lower because even in the high nineties it is being held up by  basically record spec and investment long positions. It also tells me that I might have been conservative when I suggested $85 as a downside target.  It could  easily overshoot that for a time.

I think the Saudis realize the world will not need more than nine million barrels a day from them over the next several years. Why? Because the growth of global oil demand has been 1.7% per year ever since the collapse in the price of oil in 1985. The collapse did not stimulate demand: that is a growth rate half that of global GDP calculated based on exchange rates.

The Saudis know that when the oil price rose in the 1970s it caused huge demand destruction. Intensity of use fell by six percent per year for five years in a row from 1981 to 1985 until the oil price collapsed and slowed the intensity of use decline. They know the rise in the real oil price over the last decade was as great as in the 1970s so there is a risk of a fall in intensity of use. At the same time they know that Iraq will probably add three million barrels a day to production over the next three years, and that the US production is now rising, not falling.

In the US we are now running three times as many horizontal rigs looking for liquids than we have over the last several years. With the lower levels of such rigs in operation we have increased our production by half a million barrels in two years. If we authorize off shore drilling again and end the offshore decline since Macondo the US could easily add more than half a million barrels a day to domestic production over the next three years. Brazil and Columbia now have steep production curves. Ghana is entering the market as a producer.

So you can do the arithmetic. If global demand rises at the twenty five year average that is an increase of five percent on a base of 87 million barrels over three years or 4.4 million barrels a day. The Iraqi and other production increases I have mentioned will provide more than that. Yes, there will be some depletions elsewhere. But the US is not the only place where higher prices are resulting in a reversal of depletion. Some areas of depletion will be offset by some increases. The North Sea will go down, but in Canada oil sands production will continue to rise and the Alberta Bakken will be a new source of production.

As to Russia, I have been hearing from Henry Groppe that Russian production will fall for eight years and instead it rose. So maybe the Saudis will have to add to raise their production by half a million barrels a day to 8.7. But it fits all the other numbers.

What the Saudis are worried about is the possibility of just a fraction of the demand destruction of the 1980- 1985 period. One Saudi expert to whom I spoke recently thinks it is going to happen in due time at these prices. If he is right, then you can’t assume that global demand will rise by the 1.7% a year average of the last 25 years. And if Saudi Arabia is the swing producer they have a big problem. Do the math. Assume demand grows at .7%. Remember it fell at a three percent rate for five years in the first half of the eighties. That is a loss of demand of 900,000 barrels a day each year. In five years that would be a loss of 4.5 million barrels a day. If Saudi Arabia is the swing producer they would have to cut production to 4 million barrels a day. They can’t do that. I think that peak oil was last decades issue.

Do you see “the road to recovery“ at risk with those high oil prices? And isn’t the relationship between energy, money and economic growth in general a tricky one, in particular if the Peak Oil scenario was becoming real?

Marshall Auerback: I think the „road to recovery“ as you put it, is in reality a dead end.  Higher oil prices could be the final nail in the coffin.  See this recent piece I wrote:

http://www.newdeal20.org/2011/05/03/get-ready-for-a-global-growth-slowdown-43616/.

Related to money/war/oil and that nasty NATO intervention in Libya, I want to ask you about this observation by Pepe Escobar:

“The going got even nastier when one learned that on March 19 the Washington/London/Paris financial elites authorized the Central Bank of Benghazi to have its own – Western dictated – monetary policy, unlike the state-owned, and fully independent, Libyan national bank in Tripoli; Gaddafi wanted to get rid of both the US dollar and the euro and switch to the gold dinar as an African common currency – and many governments were already on board.“v

Do you think that NATO is in this case a weaponized arm of central bank politics?

Marshall Auerback: Maybe not a weaponised arm of central bank politics, but certainly it’s playing a key role in terms of economic decision making. See my comments above. I think this applies particularly to the US. But as far as Britain and France are concerned, I think this war is about forestalling mass immigration of Muslim refugees to Europe, where anti-immigration and anti-multiculturalism has effectively destroyed social democratic parties in most of the continent. As you may recall, the Germans helped ignite the first Balkan war in the 1990s by recognizing Croatia ’s secession. Their purpose was to stem the flow of Croatian refugees to Germany. It was to keep Haitians from washing up on the Gulf shore that Clinton invaded Haiti.

I think we are going to see more of these pre-emptive interventions to avert mass refugee immigration, as the graying North faces a population imbalance with the younger South. You can make a case that keeping waves of poor immigrants from landing on your shores or streaming across your borders is a legitimate exercise of national defense. Certainly if there were a revolution in Mexico and mass refugee waves, we would intervene to try to support a regime to keep people there at home.

So I’m not sure that, as a purely strategic matter, the British and French (and Italians and Portuguese) are wrong, given their interests. However, we fortunately have a border with Mexico, not North Africa, so I don’t see what our interest is, all constitutional matters aside. Until now, I told people that while Obama was bad on economics, at least in foreign policy he is a realist in the Eisenhower tradition. Well, this is Obama’s Suez moment—and unlike Ike he has thrown in his lot with the French and British (and I note the Israelis, who are using the distraction to bomb Gaza ).

Mr. Auerback, the most interesting story in the future for me in general is the point in time when the Middle East countries will no longer sell their oil and natural gas for paper money. When do think will they be paid for it with precious metals? And what impact will this have on fiat currencies?

Marshall Auerback: Well, this question doesn’t really have much interest for me.  At the end of the day, if people want less dollars, they should export less to the US. In regard to the OPEC countries, or China or other members of the Asian savings bloc accumulating US dollars and treasuries, this is usually presented as foreign “lending” to “finance” the US budget deficit. One could just as well see the US current account deficit as the source of foreign current account surpluses that can take the form of accumulations of US treasuries. In a sense, it is the willingness of the US to simultaneously run trade and government budget deficits that provides the wherewithal to “finance” foreign accumulation of treasuries. Obviously there must be a willingness on all sides for this to occur—we could say that it takes (at least) two to tango—and most public discussion ignores the fact that the Chinese desire to run a trade surplus with the US is linked to its desire to accumulate dollar assets. At the same time, the US budget deficit helps to generate domestic income that allows our private sector to consume—some of which fuels imports, providing the income foreigners use to accumulate dollar saving—even as it generates treasuries accumulated by foreigners.

In other words, the decisions cannot be independent—it makes no sense to talk of Chinese or OPEC or Asian “lending” to the US without also taking account of their desires to net export. Indeed all of the following are linked (possibly in complex ways): the willingness of Chinese or Japanese to produce for export, the willingness of these countries to accumulate dollar-denominated assets, the shortfall of Asian domestic demand that allows them to run a trade surplus with the US, the willingness of Americans to buy foreign products, the high level of US aggregate demand that results in a trade deficit, and the factors that result in a US government budget deficit. And of course it is even more complicated than this because we must bring in other nations as well as global demand taken as a whole. While it is often claimed that the these countries might suddenly decide they do not want US treasuries any longer, at least one but more likely many of these other relationships would also need to change.

For example it is often said that China might decide it would rather accumulate Euros. However, there is no equivalent to the US treasury in Euroland. China could accumulate the euro-denominated debt of individual governments—say, Greece!—but these have different risk ratings and the sheer volume issued by any individual nation is likely too small to satisfy China’s needs. Further, Euroland taken as a whole (and this is especially true of its strongest member, Germany) attempts to constrain domestic demand in order to run trade surpluses. If the US is a primary market for China’s excess output but euro assets are preferred over dollar assets, then exchange rate adjustment between the dollar and euro could destroy China’s market.

Note, I am not arguing that the current situation will go on forever, although I do believe it will persist much longer than most commentators presume. I am instead pointing out that changes are complex and that there are strong incentives against the sort of simple, abrupt, and dramatic shifts that are posited as likely scenarios. We expect that the complexity as well as the linkages among balance sheets and actions to ensure that transitions will be moderate and slow.

With regard to gold and currency market interventions, open and especially surreptitious, and its purposes and likely mechanisms: what are your views on the findings of the Gold Anti-Trust Action Committee (http://www.gata.org) in the last 12 years?

Marshall Auerback: Anybody who has observed the precious metals markets over the last 15 years cannot help but be struck by the level of intervention which occurs. Of course, when Chris Powell, Bill Murphy and their colleagues at GATA first began making these allegations, only a few of us who followed the gold market very closely believed them, but I think the quality of their analysis, and their determination to put out the facts has now made this a very mainstream view.

GATA has consistently done the best work on this.  They were treated as jokers and financial quacks when they first started uncovering their findings, but now, even though few people dare to credit them, it is obvious that GATA has provided most of the intellectual foundation for truly understanding the gold market.  I’ve always found Bill Murphy’s work to be very credible.  The central banks have intervened for years in the forex markets, the bond markets and, now there is ample speculation that they do in the equity markets as well.  Why should gold be that different?  If anything, it’s the easiest market to manipulate, given the substantial above ground holdings of central bank gold stockpiles and the relatively small size of that market (relative to, say, the foreign exchange markets).  And yet for years, GATA’s work was dismissed as heresy.  Why?  I can only conclude that the vociferous way in which people tried to discredit them for years, demonstrates that they were giving us the truth and some very powerful people felt threatened by that.  But they courageously continued on and I think they are now recognized by most serious observers of the gold market as being fundamentally correct.

You are actully a good friend of Bill Murphy, GATA’s chairman, is this correct?

I’ve known Bill for around 15 years.  Great guy and a hell of a football player as well!

What impact do you believe has pass receiver Murphy had with GATA since its inception in January of 1998?

Marshall Auerback: Again, they are the only people who have provided a rigorous and intellectually honest account of what is happening in the gold market. GATA was once dismissed as a bunch of cranks, but their views are now the mainstream (although people are still reluctant to credit them fully for the courageous stances they took in the old days).

Do you think that the central banks / the IMF have the gold in their vaults that they say they have?

Marshall Auerback: In a strict accounting sense, they might, but it might be irrelevant.  Let me explain.  I suspect that the central banks have not been selling much gold over the past few years since the inception of the Washington Accord, but I think they have still be leasing considerable amounts into the gold market.  From a FLOW standpoint, it’s irrelevant whether the gold is sold or lent, as it appears as supply on the market.  So the key question becomes, can the leased gold be recovered by the central banks?  The work of GATA and other people such as Bob Landis and Reg Howe, suggests that it cannot.  You have, in effect, a „prison of the shorts“ situation, whereby the gold which has been lent out and, say, melted down to sit in some Indian bride’s dowry will not be coming back into the market.  So ultimately, I think the central banks will ratify this in an accounting sense by reclassifying the leased gold as sold, so from a STOCK standpoint, that will validate GATA’s argument that there is far less gold being held by the central banks than is commonly believed.

Would you recommend to the German Bundesbank to get its gold (according to GATA consultant Dimitri Speck 66% of the total amount of the German gold reserve) from the NY Fed to Germany? Egon von Greyerz for example stated recently in an interview with me:

„If these are real reserves and they are not traded, they don’t need to have it there. But the most likely reason they have it there is because they have lent it out and they are trading it, otherwise they would not need it to have it there. It’s that simple.“vi

Marshall Auerback: I think it’s irrelevant personally.  The Bundesbank ceased to be relevant when the Germans ceded their fiscal and monetary sovereignty to the European Central Bank, one of the dumbest things any German politician has done since the Second World War.  And now the Germans are unhappy about it, but they shouldn’t be blaming the Italians, Portuguese, Greeks or Irish, but their own leadership, who took them into the European Monetary Union without any kind of referendum.

Where do you see gold heading to in the next few years?

Marshall Auerback: Maybe $3000 an ounce, but largely because of the problems I see developing in the euro zone, not the US dollar.

What are your thoughts on silver?

Marshall Auerback: Well, silver came close to hitting my target of $50 an ounce recently and now has hit a speed bump.  I suspect it will go up again.

How do you interprete the recent margin requirement increasings for silver contracts?

Marshall Auerback: In regard to the hiking of margins on silver, I think this is another sign that „City Hall“ is getting anxious about the level of speculation in the commodities complex and clearly wants to get the message out that there is no linkage between their stupid policies of QE and the resultant speculation. It’s a case of shooting the messenger. I liken it to breaking a thermometer because it records that the patient has a flu bug!

One last question to conclude our discussion. There is quite a broad discussion going on about a return of the gold standard. You aren’t much of a friend of this concept. Why so?

Marshall Auerback: The gold standard is viewed as a panacea, unrealistically so in my opinion. It’s not as if bankers didn’t cheat the system during the 19th Century, the so-called halcyon days of the gold standard.Under a gold standard or other fixed exchange rate regime, bank funding can’t be credibly guaranteed. In fact, fixed exchange rate regimes by design operate with an ongoing constraint on the supply side of the convertible currency. Banks are required to hold reserves of convertible currency, to be able to meet depositor’s demands for withdrawals. Confidence is critical for banks working under a gold standard. No bank can operate with 100% reserves. They depend on depositors not panicking and trying to cash in their deposits for convertible currency.

The U.S. experienced a series of severe depressions in the late 1800’s, with the ‘panic’ of 1907 disturbing enough to result in the creation of the Federal Reserve in 1913. The Fed was to be the lender of last resort to insure the nation would never again go through another 1907. Unfortunately, that strategy failed. The depression of 1930 was even worse than the panic of 1907. The gold standard regime kept the Fed from being able to lend its banks the convertible currency they needed to meet withdrawal demands. After thousands of catastrophic bank failures, a bank holiday was declared and the remaining banks were closed by the government while the banking system was reorganized. When the banking system reopened in 1934, convertibility of the currency into gold was permanently suspended (domestically), and bank deposits were covered by federal deposit insurance. The Federal Reserve wasn’t able to stop depressions. It was going off the gold standard that did the trick.

It has been 80 years since the great depression. It would now take exceptionally poor policy responses for even the current severe recession to deteriorate into a depression, though misguided and overly tight fiscal policies have unfortunately prolonged the restoration of output and employment.

Thank you very much for taking your time, Mr. Auerback!

Sources:

i Mike Whitney: “IMF chief Strauss-Kahn caught in ‚Honey Trap'“, published at Global Research on May 16, 2011 under: http://www.globalresearch.ca/index.php?context=va&aid=24784

An interesting take offers Danny Schechter: “The Sexual Underground Of Bankers. Strauss-Kahn and The Secret Culture of Aggressive Sexuality In The High Pressure World Of Bankers and Banksters“, published at Global Research on May 20, 2011 under:

http://www.globalresearch.ca/index.php?context=va&aid=24878

ii Compare for example William K. Black: “Why CEOs Avoided Getting Busted in Meltdown“, published at Bloombergs BusinessWeek on May 10, 2011 under:

http://www.businessweek.com/news/2011-05-10/why-ceos-avoided-getting-busted-in-meltdown-william-k-black.html

iii Max Keiser: “IMF making its move on U.S.“, published at Max Keiser.com on April 6, 2011 under: http://maxkeiser.com/2011/04/06/imf-making-its-move-on-u-s/.

Kaiser was pointing in this specific case to Taylor Durden: “IMF Issues Biggest Criticism Of US Policy To Date: Says Treasury Should Put GSE Obligations On Balance Sheet“, published at Zero Hedge on April 6, 2011 under:

http://www.zerohedge.com/article/imf-issues-biggest-criticism-us-policy-date-says-treasury-should-put-gse-obligations-balance

In May of 2010, Dominique Strauss-Kahn, Managing Director of the IMF, called for “a new global currency issued by a global central bank, with robust governance and institutional features,” and said that the “global central bank could also serve as a lender of last resort.” Compare Dominique Strauss-Kahn: “Concluding Remarks at the High-Level Conference on the International Monetary System”, Zurich, May 11, 2010 under:

http://www.imf.org/external/np/speeches/2010/051110.htm

See also Jeffrey Garten: “We Need a Bank Of the World”, published in Newsweek on October 25, 2008, under:

http://www.newsweek.com/id/165772,

Ambrose Evans-Pritchard: “The G20 moves the world a step closer to a global currency”, published in The Telegraph on April 3, 2009, under:

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5096524/The-G20-moves-the-world-a-step-closer-to-a-global-currency.html,

and “IMF Plots Role as World’s Central Bank?“, published at the Daily Bell on April 11, 2011 under: http://www.thedailybell.com/2038/IMF-Plots-Role-as-Worlds-Central-Bank.html.

iv Compare Michael C. Ruppert: “Crossing the Rubicon. The Decline of the American Empire at the End of the Age of Oil“, New Society Publishers, Gabriola Island, 2004.

v Compare Pepe Escobar: “Bin Laden Out, Gaddafi Next“, published at Asia Times Online on May 12, 2011 under: http://www.atimes.com/atimes/Middle_East/ME12Ak01.html

See also Ellen Brown: “LIBYA: ALL ABOUT OIL, OR ALL ABOUT BANKING?“, published at Web of Debt on April 8th, 2011 under: http://www.webofdebt.com/articles/libya.php

vi Compare Lars Schall: “The War on Gold (and Silver)“, published at LarsSchall.com on May 4, 2011 under: http://www.larsschall.com/2011/05/04/the-war-on-gold/

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