China alarmed by US money printing - "He who goes borrowing, goes sorrowing," quote Benjamin Franklin.

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Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, said Beijing was dismayed by the Fed's recourse to "credit easing".

"We hope there will be a change in monetary policy as soon as they have positive growth again," he said at the Ambrosetti Workshop, a policy gathering on Lake Como.

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"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.

China's reserves are more than – $2 trillion, the world's largest.

"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added.

The comments suggest that China has become the driving force in the gold market and can be counted on to
buy whenever there is a price dip, putting a floor under any correction.

Mr Cheng said the Fed's loose monetary policy was stoking an unstable asset boom in China. "If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise.

"Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down."

Mr Cheng said China had learned from the West that it is a mistake for central banks to target retail price inflation and take their eye off assets.

"This is where Greenspan went wrong from 2000 to 2004," he said. "He thought everything was alright because inflation was low, but assets absorbed the liquidity."

Mr Cheng said China had lost 20m jobs as a result of the crisis and advised the West not to over-estimate the role that his country can play in global recovery.

China's task is to switch from export dependency to internal consumption, but that requires a "change in the ideology of the Chinese people" to discourage excess saving. "This is very difficult".

Mr Cheng said the root cause of global imbalances is spending patterns in US (and UK) and China.

"The US spends tomorrow's money today," he said. "We Chinese spend today's money tomorrow. That's why we have this financial crisis."

Yet the consequences are not symmetric.

"He who goes borrowing, goes sorrowing," said Mr Cheng.

It was a quote from US founding father Benjamin Franklin.

What Would the United States Look Like Without the Federal Reserve?

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Since H.R. 1207 was introduced by Dr. Ron Paul in Congress this February, there has been a growing movement questions whether the Fed should continue to operate without more oversight and some question whether or not the Federal Reserve should continue to operate at all.

Currenty, Paul’s “Audit the Fed” legislation has 282 co-sponsors and there are two similar pieces of legislation in the senate. If the legislation is passed, it will allow the Government Accountability Office (GAO) to review the Federal Reserve’s balance sheets and their policy deliberations and monetary transactions. Currently Federal Reserve Chairman, Ben Bernanke, opposes the plan, saying it would undermine the Fed’s independence.

The “Audit the Fed” act has a real chance in passing, but some supporters of the legislation, including Ron Paul, want to take it further than that by ending the Federal Reserve all together. Paul introduced a piece of follow-up legislation, entitled H.R. 833: The Federal Reserve Board Abolition Act which would wind down and eliminate the Federal Reserve over the course of the year. Currently, the act has no co-sponsors, but is gaining a lot of grass-roots support. Paul hopes that members of Congress will join his movement to end the Federal Reserve after they see the results of a full audit of the Federal Reserve. Paul also authored a book about his proposal to end the Federal Reserve, entitled “End the Fed.”

Although the movement is in its infancy and still gaining momentum, it’s not too crazy to think that the United States wouldn’t be better off without the Federal Reserve. Since the Federal Reserve System was brought into force into 1914, the United States economy has grown at a slower pace than it did before 1914, despite significantly improved productivity. The rate of inflation has been substantially worse since the introduction of the Federal Reserve, despite the fact that the Federal Reserve was around during the greatest period of deflation in US History—the Great Depression.

Apologists for the Fed would certainly have a different take. They would note that the United States was in recession half of the time between the Civil War and 1914 and only 21% of the time since the Fed came into force. However, the frequent down-turns before 1914 weren’t the result of a lack of a central bank, but more-so because of poorly thought government regulations, such as bans on branch banking making it so that banks could not survive localized economic trouble. The Federal Government also forced banks to trade notes at a discount whenever the bank offering the note was from another area.

Throughout the Civil War, state bank notes were taxed into oblivion to make the way for nationalized banks. Since national banks were forced to accept each other’s notes at their face value, the currency was uniformed, but those national bank notes had to be backed by Federal bonds. That requirement proved disastrous after the Civil War because of a shortage of bonds, which resulted in 4 currency panics between 1873 and 1907, which prompted the establishment of the Federal Reserve.

Until 1907, many reformers simply hoped to abolish the restrictions placed on banks during the Civil War, and allowing them to issue notes and allowing banks to branch nationwide to standardize currency instead of the requirement to have the backing of government bonds. Reformers looked to Canada where a similar system had been functioning successfully for several decades.

Although Congress did consider several pieces of legislation similar to what Canada had, none of those made it out of Congress because local bankers were determined to block any proposal for branch banking that would threaten their local monopolies.

After the adoption of a system similar to Canada’s failed, only then did reformers consider the establishment of a central reserve bank. As a result, the Federal Reserve Act allowed for the creation of 12 new banks to do what other banks were prevented from doing themselves, establishing branch networks and issuing currency backed by commercial assets.

The Federal Reserve was a poor substitute for deregulation. Since the Fed had monopoly privileges in issuing currency, it allowed them to cause unchecked inflation. By 1919, the US Inflation rate jumped to nearly 20%. Since the Federal Reserve had a monopoly on currency, it also had to make sure that there was enough currency in the market to avert a crisis. Soon after, two of the worst monetary contractions in history, the first in 1921, and the second between 1929 and 1933 took place.

Would a Canadian-style asset-based currency have survived the Great Depression any better? It turns out that Canada’s did. Between 1929 and 1933, 1/3^rd of the United States’ money stock was wiped out and Canada’s monetary supply only dropped by 13%. In Canada, there were no bank failures, where as there were over 6,000 in the United States! Although Canada fared better during the great depression, it moved to Central Banking in 1935 because of a movement to get more easy money.

If it were 1934, a call to end the Federal Reserve would not have been considered anywhere close to crazy. 75 years and several crisis’s later, we’ve all but forgotten what the world would look like without the Federal Reserve system, but that doesn’t mean the idea is any less valid than it was during the Great Depression.

Be sure to read our follow up article, “What Would the United States Look Like Without the FDIC?“

How Washington is Screwing Up Health Care Reform – and Why It May Take a Revolt to Fix It

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Let's start with the obvious: America has not only the worst but the dumbest health care system in the developed world. It's become a black leprosy eating away at the American experiment - a bureaucracy so insipid and mean and illogical that even our darkest criminal minds wouldn't be equal to dreaming it up on purpose.

The system doesn't work for anyone. It cheats patients and leaves them to die, denies insurance to 47 million Americans, forces hospitals to spend billions haggling over claims, and systematically bleeds and harasses doctors with the specter of catastrophic litigation. Even as a mechanism for delivering bonuses to insurance-company fat cats, it's a miserable failure: Greedy insurance bosses who spent a generation denying preventive care to patients now see their profits sapped by millions of customers who enter the system only when they're sick with incurably expensive illnesses.

The cost of all of this to society, in illness and death and lost productivity and a soaring federal deficit and plain old anxiety and anger, is incalculable - and that's the good news. The bad news is our failed health care system won't get fixed, because it exists entirely within the confines of yet another failed system: the political entity known as the United States of America.

Just as we have a medical system that is not really designed to care for the sick, we have a government that is not equipped to fix actual crises. What our government is good at is something else entirely: effecting the appearance of action, while leaving the actual reform behind in a diabolical labyrinth of ingenious legislative maneuvers.

Over the course of this summer, those two failed systems have collided in a spectacular crossroads moment in American history. We have an urgent national emergency on the one hand, and on the other, a comfortable majority of ostensibly simpatico Democrats who were elected by an angry population, in large part, specifically to reform health care. When they all sat down in Washington to tackle the problem, it amounted to a referendum on whether or not we actually have a functioning government.

It's a situation that one would have thought would be sobering enough to snap Congress into real action for once. Instead, they did the exact opposite, doubling down on the same-old, same-old and laboring day and night in the halls of the Capitol to deliver us a tour de force of old thinking and legislative trickery, as if that's what we really wanted. Almost every single one of the main players - from House Speaker Nancy Pelosi to Blue Dog turncoat Max Baucus - found some unforeseeable, unique-to-them way to fuck this thing up. Even Ted Kennedy, for whom successful health care reform was to be the great vindicating achievement of his career, and Barack Obama, whose entire presidency will likely be judged by this bill, managed to come up small when the lights came on.

We might look back on this summer someday and think of it as the moment when our government lost us for good. It was that bad.

Here's where we are right now: Before Congress recessed in August, four of the five committees working to reform health care had produced draft bills. On the House side, bills were developed by the commerce, ways and means, and labor committees. On the Senate side, a bill was completed by the HELP committee (Health, Education, Labor and Pensions, chaired by Ted Kennedy). The only committee that didn't finish a bill is the one that's likely to matter most: the Senate Finance Committee, chaired by the infamous obfuscating dick Max Baucus, a right-leaning Democrat from Montana who has received $2,880,631 in campaign contributions from the health care industry.

The game in health care reform has mostly come down to whether or not the final bill that is hammered out from the work of these five committees will contain a public option - i.e., an option for citizens to buy in to a government-run health care plan. Because the plan wouldn't have any profit motive - and wouldn't have to waste money on executive bonuses and corporate marketing - it would automatically cost less than private insurance. Once such a public plan is on the market, it would also drive down prices offered by for-profit insurers - a move essential to offset the added cost of covering millions of uninsured Americans. Without a public option, any effort at health care reform will be as meaningful as a manicure for a gunshot victim. "The public option is the main thing on the table," says Michael Behan, an aide to Sen. Bernie Sanders of Vermont. "It's really coming down to that."

The House versions all contain a public option, as does the HELP committee's version in the Senate. So whether or not there will be a public option in the end will likely come down to Baucus, one of the biggest whores for insurance-company money in the history of the United States. The early indications are that there is no public option in the Baucus version; the chairman hinted he favors the creation of nonprofit insurance cooperatives, a lame-ass alternative that even a total hack like Sen. Chuck Schumer has called a "fig leaf."

Even worse, Baucus has set things up so that the final Senate bill will be drawn up by six senators from his committee: a gang of three Republicans (Chuck Grassley of Iowa, Olympia Snowe of Maine, Mike Enzi of Wyoming) and three Democrats (Baucus, Kent Conrad of North Dakota, Jeff Bingaman of New Mexico) known by the weirdly Maoist sobriquet "Group of Six." The setup senselessly submarines the committee's Democratic majority, effectively preventing members who advocate a public option, like Jay Rockefeller of West Virginia and Robert Menendez of New Jersey, from seriously influencing the bill. Getting movement on a public option - or any other meaningful reform - will now require the support of one of the three Republicans in the group: Grassley (who has received $2,034,000 from the health sector), Snowe ($756,000) or Enzi ($627,000).

This is what the prospects for real health care reform come down to - whether one of three Republicans from tiny states with no major urban populations decides, out of the goodness of his or her cash-fattened heart, to forsake forever any contributions from the health-insurance industry (and, probably, aid for their re-election efforts from the Republican National Committee).

This, of course, is the hugest of long shots. But just to hedge its bets even further and ensure that no real reforms pass, Congress has made sure to cover itself, sabotaging the bill long before it even got to Baucus' committee. To do this, they used a five-step system of subtle feints and legislative tricks to gut the measure until there was nothing left.

Continue reading - http://bit.ly/XYFPb

China to Buy Up to $50 Billion in IMF SDRs

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Word comes in this Bloomberg report that China will buy up to $50 billion in new debt from the IMF (International Monetary Fund) otherwise known as SDRs (special drawing rights).

The note-purchase deal enables China to take part in a $500 billion increase in the IMF’s coffers to which the Group of 20 industrial and emerging nations agreed in April.

Russia and Brazil said in June that they would each buy $10 billion of bonds from the IMF. India also has indicated it would contribute to an IMF bond program. The three nations plus China make up the so-called BRICs.

SDRs represent a basket of currencies consisting of the U.S. dollar, the euro, the yen and the British pound. They were created by the IMF in 1969 to support the Bretton Woods exchange-rate system that collapsed in 1971. They act as a unit of account rather than a currency. The cash is disbursed in proportion to the money each member nation pays into the fund.

It should be interesting to see how this all pans out - that is, how popular these become. The Chinese have been complaining loudly about the U.S. dollar for some time now, pining for an alternative of some sort with IMF SDRs being their preference since late last year.

Bailed-Out Banks' Executives Set to Cash In Again

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Top executives of bailed-out banks, who were awarded stock options as the sector bottomed out earlier this year, are set to pocket millions of dollars in profits as prices rebound, according to a report released on Wednesday.

The top five executives at 10 financial institutions that took some of the biggest taxpayer bailouts have seen a combined increase in the value of their stock options of nearly $90 million, the report by the Washington-based Institute for Policy Studies said.

"Not only are these executives not hurting very much from the crisis, but they might get big windfalls because of the surge in the value of some of their shares," said Sarah Anderson, lead author of the report, "America's Bailout Barons," the 16th in an annual series on executive excess.

The report - which highlights executive compensation at such firms as Goldman Sachs Group Inc [US;GS 160.17 --- UNCH ], JPMorgan Chase & Co [US;JPM 41.37 -0.30 (-0.72%) ], Morgan Stanley [US;MS 27.62 0.17 (+0.62%) ], Bank of America Corp [US;BAC 16.29 -0.16 (-0.97%) ] and Citigroup Inc [US;C 4.53 -0.01 (-0.22%) ] - comes at a time when Wall Street is facing criticism for failing to scale back outsized bonuses after borrowing billions from taxpayers amid last year's financial crisis.

Goldman, JPMorgan and Morgan Stanley have paid back the money they borrowed, but Bank of America and Citigroup are still in the U.S. Treasury's program.

It's also the latest in a string of studies showing that despite tough talk by politicians, little has been done by regulators to rein in the bonus culture that many believe contributed to the near-collapse of the financial sector.

The report includes eight pages of legislative proposals to address executive pay, but concludes that officials have "not moved forward into law or regulation any measure that would actually deflate the executive pay bubble that has expanded so hugely over the last three decades."

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"We see these little flurries of activities in Congress, where it looked like it was going to happen," Anderson said. "Then they would just peter out."

The report found that while executives continued to rake in tens of millions of dollars in compensation, 160,000 employees were laid off at the top 20 financial industry firms that received bailouts.

The CEOs of those 20 companies were paid, on average, 85 times more than the regulators who direct the Securities and Exchange Commission and the Federal Deposit Insurance Corp, according to the report.

Lecturing Bernanke The Fed chairmans old teacher worries that Washington isn't fixing the too-big-to-fail issue

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Economist Stanley Fischer was Ben Bernanke's thesis advisor at MIT; he knew better than most that his former student had the right stuff to avert a depression. Bernanke was an "expert" at injecting liquidity into a sinking economy, Fischer said last year before the markets took their frightening plunge. Fischer had no doubt that Ben would do what it took (Ben did, earning himself a second term as Fed chairman this week). But serious questions remain in the minds of Fischer and other critics whether the most serious problem of the financial crisis—the too-big-to-fail issue—is proving too big for Bernanke and Washington's power elites to handle.

Fischer was not only Bernanke's teacher; he was also one of the preeminent economic officials of the '90s, the era of the "Washington consensus" bias in favor of deregulation. After leaving the IMF he became vice chairman of Citigroup—the corporate embodiment of the too-big-to-fail problem. So it was all the more remarkable to hear Fischer apparently jumping to the other side of the issue and chiding his former student at the annual Jackson Hole, Wyo., conference for central bankers last week. Fischer also seemed to take aim at his former allies from the deregulatory '90s, Larry Summers and Tim Geithner. "We seem to be taking it for granted that we should go back to the structure of the financial system as it was on the eve of the crisis," said Fischer, who is now the governor of the Bank of Israel.

This is still the central pathology of our economic era. We have a free-market system dominated by institutions so huge and "systemically important" that they don't have to play by free-market rules. Excessive risk-taking is built into the system because bailouts are; the promise of the latter begets the former. And as The Washington Post reported Friday, the problem is getting worse rather than better: nurtured by government bailouts and a hands-off approach to their size, the biggest banks are getting even bigger and, therefore, harder to control. Both Bernanke and the Obama administration are acutely aware of this "moral hazard" problem and have sought to address it. But the biggest undercurrent of worry at Jackson Hole was that reform efforts were getting bogged down in political bickering, and nothing would happen this year. With each passing month—it's nearly the first anniversary of the Lehman Brothers collapse—the memory of how close we came to the abyss recedes and the impetus for radical change loses force. "I think the concern was that the administration was focusing on too many different things at once and [regulatory reform] was getting pushed to the bottom," says Mark Gertler of New York University, Bernanke's longtime academic collaborator.

A Treasury Department spokesman, asked to comment, says the administration still believes financial-reform legislation will pass by the end of the year. But many at Jackson Hole talked about resistance on Capitol Hill, which is particularly susceptible to Wall Street lobbying. Treasury Secretary Tim Geithner has also been embroiled in an angry dispute with regulators, especially FDIC chair Sheila Bair, over whether the Fed should play the role of systemic risk regulator or that more of that task should fall to a council of regulators. Geithner wants the Fed to do it, but Bernanke has pushed back against taking on the whole job. He sometimes seems to side more with Bair and SEC chairwoman Mary Schapiro, along with Gary Gensler, chair of the Commodity Futures Trading Commission, who all want a piece of the regulatory action.

It's a major mess, in other words, and Fischer has reason to worry. He's hardly alone. It is no accident, perhaps, that Fischer has been a member of the Group of Thirty, the financial advisory panel chaired by Paul Volcker. And Volcker, the former Fed chairman, has also been trying to push the Obamaites and Bernanke in the direction of more fundamental reform. Among other things, Volcker wants to bar federally insured commercial banks from proprietary trading so that the Citigroups and Bank of Americas of the future cannot again become the systemic risks they have been. But he, too, has been ignored, even though he gets to talk to Barack Obama on occasion as head of the president's largely cosmetic financial-recovery advisory board.

Oddly enough, the too-big-to-fail problem is one of the very few in Washington that seems to unite the left and right sides of the political spectrum. Renowned economist Joseph Stiglitz, who has been the left's most prominent voice since the '90s, has criticized the administration's proposals as too meek. Rather than breaking up the big banks that failed, "the Obama administration has actually expanded the notion of 'too big to fail,' " Stiglitz told me in June. Now giant institutions like Citigroup, he says, are considered "too big to be financially restructured." On the other side of the aisle, Nicole Gelinas of the Manhattan Institute recently complained that the administration's June financial-regulatory proposal actually "formalizes" the too-big-to-fail pathology by providing loans, purchasing assets, guaranteeing liabilities, and making equity investments in faltering giant firms. She says the proposal does nothing about making sure that bondholders and other uninsured lenders take losses.

Bernanke believes that an expanded "resolution authority," of the kind the FDIC now has to take over and break up troublesome firms, will be effective in restraining them. Perhaps he's right. But Congress still has to say yes to such new powers—whoever it is that eventually wields them. Bernanke himself has undergone something of a battlefield conversion. Once an devotee of Milton Friedman's free-market economics who was expected to follow in Alan Greenspan's footsteps, he was praised by Obama on Monday for his "bold, persistent experimentation"—the quote is from FDR in 1933—in saving the economy from a depression. The president also said the Fed would help to lay the "foundation" for the future, and that "part of that foundation has to be a financial regulatory system that ensures we never face a crisis like this again." But with the administration now bogged down in so many different issues—health care being only the latest—is that foundation really getting put in place?

China Deploys Rare Earth Metals For Strategic Leverage

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As I've previously noted, China has cornered well over 90% of the market for rare earth metals, which are essential in various high-tech products.

The Telegraph ran an article on August 24th pointing out that China is now deploying these resources to gain strategic advantage:

Beijing is drawing up plans to prohibit or restrict exports of rare earth metals that are produced only in China and play a vital role in cutting edge technology, from hybrid cars and catalytic converters, to superconductors, and precision-guided weapons.

A draft report by China’s Ministry of Industry and Information Technology has called for a total ban on foreign shipments of terbium, dysprosium, yttrium, thulium, and lutetium. Other metals such as neodymium, europium, cerium, and lanthanum will be restricted to a combined export quota of 35,000 tonnes a year, far below global needs.

China mines over 95pc of the world’s rare earth minerals, mostly in Inner Mongolia [My note: Mongolia is not part of China, but is an independent nation]. The move to hoard reserves is the clearest sign to date that the global struggle for diminishing resources is shifting into a new phase. Countries may find it hard to obtain key materials at any price...

No replacement has been found for neodymium that enhances the power of magnets at high heat and is crucial for hard-disk drives, wind turbines, and the electric motors of hybrid cars. Each Toyota Prius uses 25 pounds of rare earth elements. Cerium and lanthanum are used in catalytic converters for diesel engines. Europium is used in lasers.

Blackberries, iPods, mobile phones, plasma TVs, navigation systems, and air defence missiles all use a sprinkling of rare earth metals. They are used to filter viruses and bacteria from water, and cleaning up Sarin gas and VX nerve agents...

New uses are emerging all the time, and some promise quantum leaps in efficiency. The Tokyo Institute of Technology has made a breakthrough in superconductivity using rare earth metals that lower the friction on power lines and could slash electricity leakage.

The Telegraph points out that Japan is also taking steps to secure a supply of rare earths, but the West has not:

The Japanese government has drawn up a “Strategy for Ensuring Stable Supplies of Rare Metals”. It calls for 'stockpiling' and plans for “securing overseas resources’. The West has yet to stir.

The Telegraph also notes that China is not necessarily using its near-monopoly of rare earths to dominate the world, and that other countries may be able to extract more rare earths after slowly ramping up production:

Alistair Stephens, from Australia’s rare metals group Arafura, said ... “This isn’t about the China holding the world to ransom. They are saying we need these resources to develop our own economy and achieve energy efficiency, so go find your own supplies”...

It will take years for fresh supply to come on stream from deposits in Australia, North America, and South Africa.

The bottom line is that the West has been asleep while China has amassed tremendous control over scarce resources which are vital for both technological innovation and security. China's deployment of its dollar reserve holdings (which may lose value) to purchase these key strategic assets is very clever, indeed.

Rep. Frank eyes Fed audit, emergency lending curbs

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WASHINGTON (Reuters) - Rep. Barney Frank, the chairman of the U.S. House of Representatives Financial Services Committee, said he plans legislation to restrict the Federal Reserve's emergency lending powers and subject the central bank to a "complete audit."

At a recent town hall meeting, Frank said the House would pass a bill to use an audit to crack open the central bank's books more widely, but in a way that will not encroach on the central bank's monetary policy independence.

In addition, he said the House would move to rein in the authority that allows the Fed to lend to a wide range of non-bank firms in "unusual and exigent circumstances."

A bill sponsored by Texas Republican Rep. Ron Paul that would allow the Government Accountability Office, a federal watchdog agency, to audit Fed interest-rate decisions has won the co-sponsorship of more than half of the House.

Fed Chairman Ben Bernanke has warned that the bill would compromise the U.S. central bank's policy-making independence and could undermine financial markets and the economy.

Frank said he has been working with Paul on compromise language. "He agrees that we don't want to have the audit appear as if it is influencing monetary policy because that would be inflationary," Frank told constituents. A video of his remarks was posted on the popular video file-sharing website YouTube athttp://www.youtube.com/watch?v=J2DX9Iu4wNo

Steven Adamske, a spokesman for Frank, told Reuters compromise language had not yet been written. He provided no further details. A spokesman for Paul could not be reached.

OCTOBER TARGET

Frank said the audit and emergency lending provisions would be incorporated in broader legislation to revamp U.S. financial regulation that would likely pass the House in October. By seeking a compromise with Paul, Frank could strengthen the broader legislation's chance at passage.

As chairman of the House Financial Services Committee, Frank is a key player in the effort to overhaul U.S. financial regulation.

The Obama administration has proposed giving the Fed responsibility for overseeing firms whose collapse could endanger the entire financial system. At the same time, it wants to strip the central bank of its consumer protection function, and invest that authority in a new agency.

Frank expressed unease at what he called the Fed's power to "lend money to anybody they want" in emergency circumstances. "We are going to curtail that lending power. We are going to put some restraints on it," he said.

Since the financial crisis struck two years, the Fed has used this emergency authority to prop up a number of non-bank financial firms with billions of dollars in loans, including insurer American International Group.

The Fed's actions have angered many lawmakers who are concerned the central bank has put taxpayer money at risk. Fed officials have defended their actions as necessary to prevent a deeper credit crisis and widespread damage to the economy.

Bernanke, who President Barack Obama nominated this week to serve a second four-year term at the helm of the central bank, told lawmakers in July that the Fed understands the need to be accountable to taxpayers but that monetary policy decisions needed to be shielded from political interference.

In congressional testimony on July 22, he signaled a willingness to work toward a middle ground. "We are quite willing to work with Congress to try to figure out exactly where the line should be," he said.

Frank said the House legislation would pave the way for an audit to look into what the central bank "buys and sells," but he said the data would be released after a period of several months to avoid impacting financial markets.

Bernanke is widely expected to win needed Senate backing for a new term as Fed chairman, but the central bank's aggressive efforts to stem the financial crisis have stirred controversy that is likely to color his re-nomination hearing.

His current term expires on January 31, 2010.

Gold Is Pale Because It Has So Many Thieves Plotting Against It

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The title is a quotation from Diogenes Laertius (fl. 2nd century A.D.) This was the favorite quotation of the late Chicago economist and gold expert Melchior Palyi.

25 years ago I visited Comex at the World Trade Center, watching the feverish activity in the gold pit from behind the glass wall in the gallery. A gentleman standing next, unknown to me, remarked: "One day this make-believe charade will come to a bad end. All that these guys are doing down there is creating ever more claims to the same lump of gold -- just as governments have been doing before they met their ignominious fate."

Later that day I went to see the Director of Research of Comex. During our chat that lasted about an hour he intimated that he was greatly disturbed by the mystery that the gold basis has been steadily declining year in and year out. Perhaps it was the fact that he could not solve the puzzle that bothered him so much that he quit his job a few months later.

I must confess that I could not solve that puzzle myself until the Twin Towers of the World Trade Center came tumbling down many years later. For me it was a symbolic event, conjuring up the unknown gentleman and bringing back his cryptic remark. We are watching a game of musical chairs. When the music stops, paper claims to gold will be dishonored, and the gold futures markets will tumble down just like the Twin Towers.

In my earlier article The Dress Rehearsal for the Last Contango I observed that "a very strange phenomenon has been manifesting itself during the past thirty-five years, since the inception of gold futures trading. The basis as a percentage of the rate of interest, rather than remaining constant, has been vanishing and, by now, it has dropped to zero." In the rest of that article I drew

attention to the apocalyptic consequences of the prospect of permanent backwardation in gold threatening the world, which is completely ignored by the makers of monetary policy, as I had opportunity to convince myself during my recent encounter with Paul Volcker, the Chairman of President Obama's Economic Recovery Advisory Board. As I see it, the Debt Tower will topple, just as the Twin Towers of the World Trade center have, when hit by permanent gold backwardation. The reason is that the availability of gold is absolutely indispensable for maintaining our system of irredeemable debt. Only then will bondholders, like the participants of the game of musical chairs, be satisfied that there is a goodly number of vacant chairs available, so let's get on with bond trading, gold futures trading, and let the music roar on.

But once permanent backwardation in gold establishes itself, gold is no longer available at any price. Bondholders will scramble to sell their irredeemable bonds before they lose all their remaining value. There is no other way to pacify bondholders than letting the game of musical chairs go on, that is, continue the charade of gold futures trading putting ever more claims on the same lump of gold.

The response to my article was overwhelming. I have never realized how many people out there are following my writings on the internet so closely. I want to thank every one of you and assure you that I take this responsibility most seriously. Even if I cannot answer every message I get from you individually, I will continue to do my best to explain the results of my research in simple, understandable terms.

Let me spell out for my readers what the vanishing of the gold basis means from the point of view of the puppet-masters of the gold futures markets. It means that they are fighting a losing battle. They are desperately trying to coax gold out of hiding by offering ever higher bribes -- not in terms of the price but in terms of the basis. A low basis means that they offer to take your cash gold and let you have gold futures in exchange at a discount price. (The discount is contango minus the basis, so that the two are inversely related: as the basis falls, the discount increases.) This will allow you to invest an amount equal to the price of gold (less five percent, the margin on the gold future) in any way you want and, having paid the reduced contango, you can keep the profits. The point is that you will still benefit from any advance in the gold price, same as you would if you owned cash gold. You can have your cake and eat it.Remember, in a full carrying charge market, such as the gold futures markets were at inception, no such bribe money was offered.

But, lo and behold, people who are willing to take the bribe are few and far in between. So the pot is sweetened. The basis is lowered. Maybe at one point gold will be coaxed out of hiding, once the bribe is high enough.

No such luck. When the basis gets as low as zero, it means that the discount on gold futures has gone so high that it is equal to the opportunity cost of holding gold. Therefore, again, if you give up your cash gold in exchange for gold futures, you can invest an amount equal to the price of gold (less five percent) in any way you wish, but now they let you keep your profit in its entirety. Andyou can still benefit from any advance in the gold price, same as you would if you had the cash gold in your hands.

This is where we are now. Indications are that the game fish still does not bite. What now? Where do the futures markets in gold go from here? Well, the pot can be further sweetened. The basis can be pushed down into negative territory. Gold could be forced into backwardation. Let's see what that means. It means that you can sell cash gold andbuy it back for future delivery at an outright discount. Somebody wants your gold so badly that he is willing to pay you for the privilege of holding it for a few days, few weeks, few months paying your storage and insurance fees. You get your gold back at a cheaper price. You make a risk-free profit on this deal. If the gold price goes up in the meantime, you benefit fully, just as if you have held on to the cash gold.

Now risk-free profits are a promise of unlimited profits because, if you are nimble enough, then you can make any number of round trips. However, opportunities to earn risk-free profits from arbitrage do not last. Other nimble speculators would jump in and their unlimited action would close the spread that gave rise to the risk-free profit in the first place. Yet I predict that, after a period of initial vacillation between backwardation and contango (due to action by misinformed traders) gold will settle in permanent backwardation.

Wouldn't that be loverly? Risk-free profits galore. No need to bother with storage charges and insurance premiums. Just sit back and enjoy the ride to riches.

But hey, wait a minute! Is the arbitrage really risk-free? You give up your cash gold, but what if your gold futures contract expires and they refuse to return your gold? Commodity markets can change the rules of the game mid-stream. They just declare 'cash settlement only' for outstanding contracts. Unsaid and unstated, not even mentioned in small print, is the fact that the trap door may be slammed shut. The investor who has taken the bribe is neatly separated from his gold when the hairy godfather waves his magic wand. "Gold is pale because it has so many thieves plotting against it." There are all too many trap doors, sprung wide open, ready to devour gold belonging to the unweary.

That's it. That's why more people do not fall for the bribe even when tickled with promises of risk-free profits. The promise is mendacious. There is a risk: the risk that you lose your gold and you may never be able to buy it back at any price. There is no other explanation for the fact that the promise of risk free profits does not eliminate the discount on the futures price of gold. This is the true explanation for the coming permanent backwardation in gold.

Gold futures trading is clearly a con-game, but it is in a symbiotic relation with the regime of irredeemable currency and irredeemable debt, on which our 'democracy' is based. So we have a double con-game. We have a smaller con-game of gold future trading inflicted upon gullible people who want to have their cake and eat it and, then, we have the much bigger, all-embracing con-game of irredeemable currency, inflicted upon the rest of us, innocent bystanders. It is inflicted by the United States government that stoops so low as to trample on the Constitution mandating a metallic monetary system for this country precisely in order to outlaw all Ponzi-schemes. The government could never muster the moral courage to propose an Amendment that would make the Constitution conform to its monetary system -- as it would open Pandora's box. Rather, it would live with the onus of being in contempt of the Constitution. The government of the United States had looted gold from its own subjects in 1933. It looted even more gold from people not under its jurisdiction in 1971. It continues to operate in the same tradition.

The larger con-game of the irredeemable dollar could not have gone on so long, but for the smaller con-game of gold futures trading from which it takes its strength. Historically, every regime of irredeemable currency has met its Nemesis in no more than 18 years. The present experiment with irredeemable currency has been going on for twice that long. Of course, gold futures trading is a relatively new invention that was not available to the managers of the assignats, mandats, or the Reichsmarks. Nor was it available to the managers of the most recent experiment with the Zimbabwe dollar. But, as the relentless fall in the gold basis clearly shows, people cannot be conned forever. The clock is ticking. Sand in the hourglass keeps dropping. When it runs out, the present experiment with fiat dollar will also meet its Nemesis, as all the earlier experiments have. That's the good news.

The bad news is that the government of the United States persists in continuing the double con-game and Ponzi-scheme through thick and thin. It is callous to the economic damage it is causing world-wide, and it disregards the danger of permanent gold backwardation that would inflict utter economic pain on the innocent people of this country, to say nothing of the people of the rest of the world. As explained above, it would make the runaway debt-tower of Babel topple, burying people under the rubble as the Twin Towers of the World Trade Center buried people working inside.

When that happens, the government of the United States will not have the excuse that it has not been warned. I have delivered the message in person to the Chairman of President Obama's Economic Recovery Advisory Board, Paul Volcker, when we met at the Santa Colomba Conference last July. I also consider it my moral duty to warn all the people who are willing to listen of the danger lying ahead. It is incredibly naïve to believe that gold can be removed from the international monetary system with impunity at the stroke of a pen, as they pretended to do it in 1973. The gold corpse still stirs. When it rises from its prostrate position it will, like Gulliver, dust off the Lilliputians who like ants have been scurrying all over his body. The day of reckoning will have dawned.

Keynesian and Friedmanite economists bear a special responsibility for the disaster. They dug in and monopolized their positions at universities and research institutes. They never allowed a free discussion on the gold standard. They did everything to aggrandize and perpetuate their own power as the sole advisors on government policy. They will not be able to live down this shame in a thousand years.

Masters Gold Fund

In my previous article More Dress Rehearsal of the Last Contango (see References below) I mentioned the unique Masters Gold Fund, soon to come on stream, structured to take advantage of the permanent backwardation in gold when it comes, which would ground all other gold funds. I have acted as advisor from inception and during the incubation period. In that article I listed seven exclusive features spelling out how the Masters Gold Fund would operate in these perilous times. It would take its clues, not from the gold price that is open to manipulation, but from the gold basis which is a pristine indicator telling you about the willingness of gold holders to carry on in playing the game of musical chairs and putting their gold at stake.

Racketeering 101: Bailed Out Banks Threaten Systemic Collapse If Fed Discloses Information

Reading - Racketeering 101: Bailed Out Banks Threaten Systemic Collapse If Fed Discloses Information - http://bit.ly/4j7kAL

And so the guns come out blazing. The Clearing House Association, another name for all the banks that were bailed out over the past year with the generous contributions from all of you, dear taxpayers, are now threatening with anotherinstance of complete systemic collapse if Bloomberg's lawsuit is allowed to proceed unchallenged, let alone if any of the "Audit The Fed" measures are actually implemented.

As a reminder, The Clearing House Association consists of ABN Amro, Bank Of America, The Bank Of New York, Deutsche Bank, HSBC, JP Morgan Chase, US Bank and Wells Fargo.

In a declaration filed in the Bloomberg Case (08-CV-9595, Southern District of New York), the banks demonstrate no shame in attempting to perpetuate the status quo with regard to the Federal Reserve and demand that the wool over the eyes of the general population remain firmly planted in perpetuity.

The Clearing House submits this declaration because the Court's Order threatens to impair the ability of our members to access emergency funds through the New York Fed's Discount Window without suffering the severe competitive harmthat public disclosure of their identity will cause.

Our members have accessed the New York Fed's Discount Window with the understanding that the Fed will not publicly disclose information about their borrowing, especially their identity. Industry experience, including very recent and searing experience, has shown that negative rumors about a bank's financial condition - even completely unfounded rumors - have caused competitive harm, including bank runs and failures.

Surely transparency would facilitate rumor-mongering to an unprecedented degree. After all rumors spread much easier when everyone knows the true financial condition of banks.

And here, in plain written Times New Roman, you see what racketeering by a major bank consortium looks like:

If the names of our member banks who borrow emergency funds are publicly disclosed, the likelihood that a borrowing bank's customers, counterparties and other market participants will draw a negative inference is great. Public speculation that a financial institution is experiencing liquidity shortfalls - which would be a natural inference from having tapped emergency funds - has caused bank customers to withdraw deposits, counterparties to make collateral calls and lenders to accelerate loan repayment or refuse to make new loans. When an institution's customers flee and its credit dries up the institution may suffer severe capital and liquidity strains leaving it in a weakened competitive position.

Pardon me if I am a broken record here, but would rumors not spread much less if there was more transparency, if investors and other financial intermediaries were fully aware of the conditions of their counterparties, if banks did not have to cover their billions in reserve losses by pretending they are viable and essentially being constant wards of the state?

The Banks' racketeering has gone on for far too long.

And yet, it does not stop: the conclusion from the banks' letter:

In sum, our experience differs from the factual conclusions the Court appears to have reached about the nature of competition in the banking industry:

• The competitive harm to institutions that are publicized as needing emergency funding is not "speculative," but demonstrated by the recent multiple failures of financial institutions whenever information about their funding difficulty has been disclosed.
• The disclosure does not involve mere "embarassing publicity" but information that could result in the immediate demise of an institution.
• The disclosure would not merely "stigmatize [ ]"the institution or make it "look [ ] weak," but goes to its very viability.
• The disclosure of accessing emergency funding is not an "inherent risk" of market participation, but an extraordinary risk in extraordinary circumstances.
• Competitors can use the disclosure to advertise or publicize that they are financial stronger because they don't need emergency funding.

In a nutshell - the banks want their complete opacity cake and eat it too, or else, the racket goes, the transparency that will somehow promote massive rumor mongering will again destroy capitalism. In the meantime, the Ken Lewises of the world can continue touting how stable their businesses are based on optimistic future projections, while implicitly, they continue to survive merely thanks to the cash granted them by you, taxpayers.

Full filing here:

Clearinghouse_Decl -

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