Sunday, November 07, 2010

SURPRISINGLY, “RICH MAN, POOR DAD: Conspiracy of the Rich” DESCRIBES WHAT THE U.S. FEDERAL RESERVE HAS JUST DONE DUE TO MASS ELECTION OF REPUBLICAN OL

SURPRISINGLY, “RICH MAN, POOR DAD: Conspiracy of the Rich” DESCRIBES WHAT THE U.S. FEDERAL RESERVE HAS JUST DONE DUE TO MASS ELECTION OF REPUBLICAN OLD-SCHOOLERS

By Kevin Stoda, Taiwan

Now, should I return to the USA in 2011 as I have been planning?

The U.S. Federal Reserve’s most recent decision to run up 600 Billion more in debt (on top of the USA Defense Budget) this past week shows that most of the planet that the USA is into deflating the value of the U.S. dollar greatly over the next year. I would not be happy to move back to the USA and earn dollars in the mess the federal reserve and Republicans will be making in 2011-2012 with Obama and Bernanke at the helm.

http://www.nytimes.com/2010/11/04/business/economy/04fed.html

Overseas, I do not get paid in U.S. currency. I earn in the currency of the local economy.

With the election of the new class of Republicans, the Federal Reserve decided this week to shoot for the moon in-debt in order to (1) deflate the dollar, (2) increase the value of gold and foreign currencies, and (3) try to jump-start the U.S. economy.

While it certainly will do the former, “[m]any outside the Fed, and some inside, see the move as a 'Hail Mary' pass by Fed Chairman Ben Bernanke. He embraced highly unconventional policies during the financial crisis to ward off a financial-system collapse. But a year and a half later, he confronts an economy hobbled by high unemployment, a gridlocked political system and the threat of a Japan-like period of deflation, or a debilitating fall in consumer prices.”

http://online.wsj.com/article/SB10001424052748703506904575592471354774194.html

Most of us savvy progressives have noted long-ago that the Obama Administration backed the wrong horse in selecting his federal reserve players two years ago. He should have gotten players who were not-so-tied to the world’s worst banks—like Citicorp and friends, who were Bernanke’s most recent paymasters.

http://www.uow.edu.au/~bmartin/dissent/documents/health/citicorp_early.html

Meanwhile, earlier this autumn, I happened to be reading Robert Kiyosaki’s “RICH MAN, POOR DAD: Conspiracy of the Rich”.

http://en.wikipedia.org/wiki/Rich_Dad_Poor_Dad

As I have had my first child and need to do some long-term planning for investments, home, family, and retirement, this book, “Conspiracy of the Rich” had been suggested to me for priming myself on how the other-half has made its money off the poor. While I was only minimally impressed by the work (because the piece is repetitive and badly edited), I did realize (1) that Kiyosaki’s critiques of the U.S. monetary and financial system—and economy--were generally on the mark and (2) for the non-students of political economy, the book was an easy read.

In fact, like myself, Kiyosaki is a promoter of education, especially financial education, in American public schools. (I support better education at the primary, secondary, and tertiary level—and feel that financial education and social welfare education need to be woven into the educational delivery at all levels.) Certainly, with a better understanding of our society and economy, we Americans would not elect the pro-big-bank lobby to government time-after-time.

GOLD WARS?

I am also skeptical of Kiyosaki’s premise in most of his RICH DAD, POOR DAD (book) series that gold is a great investment all of the time for the long-term.

Moreover, one of the assumptions--about buying gold--is the same bad assumption that Kiyosaki makes elsewhere in his publications. In short, Kiyosaki assumes his readers currently have money and equity. In America in 2010, that is a false assumption—and leaves a great many readers totally untouched by his advice. Worse still, even if I suddenly inherit gold, gold (contrary to Kiyosaki’s claim) does not, in fact, always hold its value in the long-term.

http://goldinfo.net/yearly.html

Much of Kiyosaki’s information seems to come straight from gold information and sales websites.[1] However, by simultaneously attacking the fact that the USA went off the gold standard in the early 1970s and the founding of the Federal Reserve Kiyosaki should be getting accolades from the extreme right as well as the left and progressive parts of the American public. (Even Tea-partiers should join in such criticism at times.) Meanwhile, as I do not possess money to buy gold and realize that like property prices, gold prices do, in fact, go up and down for years at a time do not see gold or asset-producing property as being the only way to save or invest in my future.

http://www.the-privateer.com/gold.html

The attack on the federal reserve is another story. However, I believe that Nobel Prize Winner, Joseph Stiglitz and Michael Hudson, the president of the Institute for the Study of Long-Term Economic Trends—and author of Super Imperialism: The Economic Strategy of American Empire, tell the story of the Federal Reserves bad behavior better than Kiyosaki --and the unnamed authors on Gold Sales websites. Moreover, under Clinton, under W. Bush and (now) under Obama the richest banks and richest Americans are still soaking up the poorest American’s capital right-and-left while sinking the value of the dollar.

Mr. Hudson was on Democracy Now this past Friday. Democracy Now interviewers noted, “The Federal Reserve will [now] pump $600 billion more into the US economy and keep interest rates at historical low levels. The short-term impact of the Fed’s move, known as quantitative easing, has been a jump in stock prices across the globe. Many nations, however, have accused the United States of waging a currency war by devaluing the dollar.”

"The object of warfare is to take over a country’s land, raw materials and assets, and grab them," Hudson said on the broadcast. "In the past, that used to be done militarily by invading them. But today you can do it financially simply by creating credit, which is what the Federal Reserve has done."

http://www.democracynow.org/2010/11/5/new_600b_fed_stimulus_fuels_fears

CURRENCY GAMBLE WITH AMERICAN MONEY

Hudson continued, “It’s created $600 billion. It hasn’t gone into the economy. The head of the Fed is known as ‘Helicopter Ben’ because he talks about dropping money into the economy. But if you see helicopters, they’re probably not your friends. Don’t go out and wait for them to drop the money, because the money is all going electronically into the banks. And the Fed has said, we want to give the banks so much money that they will lend it out so you can begin to bid up prices on real estate again and pull the banks out of the real estate negative equity that it’s in. So the purpose, according to the Fed, is to raise the price of real estate, to inflate asset prices. But that’s not happening. The actual banks have lent less today than they did in 2007. So the money is going abroad. And it’s going abroad not really to buy foreign companies so much, but to speculate in currency.”
Moreover, “the Fed and the Congress, two weeks ago, said, ‘We want China to raise its currency by 20 percent.’ This would create billions and billions of dollars of bonanza for Wall Street banks, and it would enable them to earn their way out of debt by essentially looting the China central bank, the Brazilian central bank, the Turkish central bank and the other central banks, because you can now borrow money in America at one percent. So you’d put down, let’s say, a billion dollars of your own—a million dollars of your own money, borrow $99 million of the bank’s money—that’s $100 million. You would buy Chinese currency, RMB, for $100 million. You then say, ‘Raise your currency by 20 percent,’ which is what the Fed has asked them to do. That means that your million dollars now has turned into a $20 million gain, because $100 million is now worth $120 million. You’ve made a 200 percent profit. And for Wall Street, they deal in billions, not millions. And so, this would enable the banks to make up their money by buying out, essentially, foreign currency. They’re doing the same in Australia. It’s currency gamble.”
This is the sort of legal money-making-scam that Kiyosaki has warned his readers about in his CONSPIRACY OF THE RICH and other Rich Dad, Poor Dad books. I wish we all could play the game but the way the Federal Reserve works, all Americans cannot play. [However, if more Americans played and invested like Kiyosaki recommends, the federal government would have had to step in to regulate bad banks decades ago.]
Interviewer, Juan Gonzalez, noted, “Well, and meanwhile, the impact, because obviously this decision was made the day after the elections at the Fed meeting, they saw what the political landscape was. There wasn’t going to be any kind of stimulus coming from Congress, so they had to come up with a stimulus for Wall Street the day after the elections. But the impact on the American people of maintaining these historically low interest rates—you know, as we were talking earlier before the show, if you have a little bit of money in a savings account right now, you’re getting virtually no interest. So you’re, in essence, being pressured to end up going into the stock market to be able to get any kind of return on your money—those who still have savings. The same thing with the pension funds. What’s happening to the American people as a result of this same kind of policy?”
Hudson nodded, “Well, if they have money to put in pension funds or savings, they’re only able to get about one percent, if they keep it safe. Otherwise, they’re taking a risk in the stock market. But the key is not simply lowering interest rates. The idea is to flood the economy with credit so the banks will lend out more debt. And if the Fed’s policy works, then housing prices are going to go back up so high that most consumers are going to have to pay 40 percent of their income for housing. They’re going to have to pay more money for credit card debt. The purpose is to help the banks make money at the expense of the economy. It’s not to help the economy at all. That’s the really important thing. When they say the economy, they mean—the Fed means its constituency: the banks. And the banks’ product is debt. And that’s what they’re trying to produce.”
Again, Kiyosaki has indicated that if all Americans had a proper financial education in the primary and secondary schools, this system would not be in existence today—but Kiyosaki notes that the rich and powerful have like the system this way.
DOLLAR BECOMES PARIAH CURRENCY
Gonzalez added, “But there is the reality now that the world has changed dramatically over the last thirty or forty years, and you have now this sort of new independent force on the world scene, even in finance, which is the countries like China, Brazil and other countries of the third world that are, in essence, standing up on some of these issues. What’s happening in terms of their reaction?”
Hudson concurred, “The world is dividing into two currency blocs. And over the last few months, China has gone to Turkey, Malaysia, Thailand, and said, ‘We want to avoid using the dollar altogether.’ They’re treating it like a pariah currency. They’re saying, ‘Well, let’s make a currency swap. We’ll give you our Chinese RMB, you give us your currency, the baht, and we’ll do our trade in our own currency. We are isolating the dollar, so that people are not going to use the dollar anymore.’ That’s why the dollar is plunging on world foreign exchange markets. The whole world that America created after World War II of open markets is now closing off. And it’s closing off, really, because the United States is trying to rescue the real estate market from all the junk mortgages, all the crooked loans, all of the financial fraud, instead of just letting the fraud go and throwing the guys in jail like other economists have suggested.”
I note: “Americans need to ask again, ‘Are all of these big bad banks and bad lenders worth our time and money now?!”

THE WORLD WILL NOT STAND FOR IT
http://www.democracynow.org/2010/10/20/nobel_laureate_joseph_stiglitz_on_how
Joseph Stiglitz was on Democracy Now only two weeks before and had noted that the world was not happy with the American governments plans to continue to devalue the U.S. Dollar. [2]
Stiglitz had shared, “So the money isn’t going into the American economy. The lending is actually below what it was in 2007. In a globalized economy, the money is looking for the best place to go. And where is it finding it? In the emerging markets. So, the irony is that money that was intended to rekindle the American economy is causing havoc all over the world. Those elsewhere in the world say, what the United States is trying to do is the twenty-first century version of ‘beggar thy neighbor’ policies that were part of the Great Depression: you strengthen yourself by hurting the others. You can’t do protectionism in the old version of raising tariffs, but what you can do is lower your exchange rate, and that’s what low interest rates are trying to do, weaken the dollar. The flood of liquidity abroad is trying to push the exchange rates abroad. And they say—they’re saying, ‘We can’t allow that.’”
I don’t have a lot of money at this time. It would appear better for this boy not to move back to Kansas.
China’s economy or Europe’s economy are better bets, don’t you think?
What do you say, Toto?









NOTES

[1] Here is what two such web pages say. Kiyosaki could have been the author—as his narration in Conspiracy of the Rich is similar:

http://www.the-privateer.com/gold2.html

The Early Gold Wars
The Congress shall have power ...to coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures."
1787 - The Constitution of the United States - Section 8
That is precisely what the Congress did. In 1792, the Dollar was fixed by law at 24.75 grains or 0.05156 troy oz. of Gold. In 1837, the coinage was reworked and the Dollar was defined at 25.8 grains of Gold "nine-tenths fine". That gives 20.67 Dollars to one troy oz. of Gold. That was the Dollar's "fixed value" (see the quote above) for 96 years from 1837 to 1933.
War Declared - 1933-34
(The reference for this material is: Economics And The Public Welfare - A Financial and Economic History of the United States, 1914-1946 by Benjamin M. Anderson)
March 4, 1933
Not quite 20 years after the establishment of the Fed, President Franklin D. Roosevelt was inaugurated for his first term in office.
March 6, 1933
Using a wartime statute passed in 1917, Mr Roosevelt issued a proclamation closing every bank in the U.S. for four days. The banks were closed from March 6 to March 9.
March 9, 1933
Day One of "The Hundred Days". The President called a Special Session of the newly-elected Democratic Congress for the purpose of debating an act prepared in advance by the President's advisors. In a few hours, with minimal if any debate, Congress passed the act: "to provide relief in the existing national emergency in banking, and for other purposes".
April 5, 1933
President Roosevelt, acting under the sweeping authority passed to him by Congress on March 9, signed Presidential Executive Order 6102 which invoked his authority to make it unlawful to own or hold gold coins, gold bullion, or gold certificates. The export of Gold for purposes of payment was also outlawed, except under license from the Treasury.
June 5, 1933
A joint resolution signed by the President was introduced into Congress. This resolution abrogated the gold clause on all existing government and private contracts. Needless to say, the resolution passed.
October 1933
The Roosevelt Administration decided to implement a policy suggested by Professor George F. Warren of Cornell University. This policy advocated controlling "inflation" (firmly defined by this time as "rising prices") by raising and lowering the "gold content" of the Dollar. This policy was implemented, amongst many others, under the first big measure of the New Deal, the "National Recovery Act" (NRA). By January of 1934, the "adjustable Dollar policy" was an obvious and perceived failure, and it was dropped. The NRA itself was declared Unconstitutional on May 27, 1935.
January 30, 1934
The "Gold Reserve Act" became law. It had passed through Congress in five days, with minimal debate. Under this act, the Federal Government took away title to all "Gold Certificates" and gold held by the Federal Reserve Bank (the independent Fed?) and vested sole title with the U.S. Treasury. The Fed banks were to be provided with "Gold Certificates" in return for their Gold, but these certificates had no specific value in Gold assigned to them. When one witness testifying before the Senate Committee protested, he was taken aside by an Administration Senator and the situation explained to him:
"Doctor, you don't understand about these gold certificates. These are not certificates that you can get gold. These are certificates that gold has been taken away from you."
January 31, 1934
The day after the passage of the Act, President Roosevelt fixed the weight of the Dollar at 15.715 grains of Gold "nine-tenths fine". The Dollar was thereby devalued from $20.67 to one troy ounce of Gold to $35.00 to one troy ounce of Gold - or by 69.3 percent. The Treasury, which had become the possessors of all the nation's Gold on the previous day, saw the value of their Gold holdings increase by $US 2.81 Billion. The Treasury now "owned" the Gold, and no one else inside the U.S. was allowed to own any Gold except by the express permission of the Treasury.
The new ratio of $US 35 was adopted at Bretton Woods in July 1944. The U.S. Dollar was made the world's Reserve Currency and the IMF and World Bank established in 1947. The now international ratio of 35 U.S. Dollars to one troy ounce of Gold lasted until August 15, 1971.
The End Of the "Fixed" Dollar
Gold War I - The "London Gold Pool" - 1961 to 1968
By the beginning of the 1960s, the $US 35 = 1 oz. Gold ratio was becoming more and more difficult to sustain. Gold demand was rising and U.S. Gold reserves were falling, both as a result of the ever increasing trade deficits which the U.S. continued to run with the rest of the world. Shortly after President Kennedy was Inaugurated in January 1961, and to combat this situation, newly-appointed Undersecretary of the Treasury Robert Roosa suggested that the U.S. and Europe should pool their Gold resources to prevent the private market price for Gold from exceeding the mandated rate of $US 35 per ounce. Acting on this suggestion, the Central Banks of the U.S., Britain, West Germany, France, Switzerland, Italy, Belgium, the Netherlands, and Luxembourg set up the "London Gold Pool" in early 1961.
The Pool came unstuck when the French, under Charles de Gaulle, reneged and began to send the Dollars earned by exporting to the U.S. back and demanding Gold rather than Treasury debt paper in return. Under the terms of the Bretton Woods Agreement signed in 1944, France was legally entitled to do this. The drain on U.S. Gold became acute, and the London Gold Pool folded in April 1968. But the demand for U.S. Gold did not abate.
By the end of the 1960s, the U.S. faced the stark choice of eliminating their trade deficits or revaluing the Dollar downwards against Gold to reflect the actual situation. President Nixon decided to do neither. Instead, he repudiated the international obligation of the U.S. to redeem its Dollar in Gold just as President Roosevelt had repudiated the domestic obligation in 1933. On August 15, 1971, Mr Nixon closed the "Gold Window". The last link between Gold and the Dollar was gone. The result was inevitable. In February 1973, the world's currencies "floated". By the end of 1974, Gold had soared from $35 to $195 an ounce.
Gold War II - The IMF/U.S. Treasury Gold Auctions - 1975 to 1979
On January 1, 1975, after 42 years, it again became "legal" for individual Americans to own Gold. Anticipating the demand, the U.S. Treasury in particular and many other Central Banks sold large quantities of Gold, taking large paper profits in the process. This had two results. It depressed the price of Gold, which fell to $US 103 in eighteen months. More important by far, it "burned" large numbers of small individual investors.
But this "pre-emptive strike" against the Gold price did not solve the imbalances inherent in the floating currency regime. As the Gold price began to recover from its August 1976 low, the (US-controlled) IMF along with the Treasury itself, began a series of Gold auctions in an attempt to hold down the price through official means. But the problem of yet another free fall in the international value of the Dollar got in the way. Between January and October of 1978, the Dollar lost fully 25% of its value against a basket of the currencies of its major trading partners. By early 1979, due to this precipitous fall, the demand for Gold was overwhelming the amount that the IMF/Treasury dared supply, and the Gold auctions came to an end.
Gold regained its ($195) December 1974 level by July 1978. It then pressed on to new highs, hitting $250 in February 1979 and $300 in July. Also in July, Paul Volcker was appointed as Fed Chairman by a desperate Jimmy Carter. Gold continued to surge, hitting $400 in October. While this was happening, Mr Volcker was attending a conference in Belgrade. There the assessment was made that the global financial system was on the verge of collapse. When Mr Volcker returned to the U.S. from Belgrade, he took a momentous step. He announced that the Fed was swiching its policy from controlling interest rates to controlling the money supply.
This new Fed policy took some time to have effect. In the meantime, Gold soared from $381 on Nov. 1, 1979 to $850 on Jan. 21, 1980. The public, who had been burned in 1975, were late on the scene. The great burst of public Gold buying came in the four weeks between Christmas 1979 and the Jan 21, 1980 high. As in 1975, they were "burned" again.
The Paper Era Begins
In early 1980, Mr Volcker's new Fed policy began to bite. U.S. interest rates began to skyrocket. As they rose, the Dollar first slowed its descent, then stopped falling, and then began to rise. Both the public and the investment community which had stampeded into Gold was lured back into paper by this huge rise in interest rates - and by the prospect of a higher U.S. Dollar. The threat of financial meltdown was averted, but at a cost. The U.S. Prime rate hit 20% in April 1980 and stayed there (with a brief dive in mid-1980) until the end of 1981. There was a rush out of Gold and back to Dollars.
Once interest rates began to come down, in early/mid 1982, the choice of where to put the Dollars faced investors once more. The initial solution was just as it had been in the 1970s. The Dow took off - rising from 776 to almost 1100 between mid August 1982 and late January 1983. Gold started earlier and took off even harder - rising from $296 in late June 1982 to $510 at the end of January 1983.
That's where the similarity to the 1970s ended. Gold fell $105 in the last four trading days of February 1983. As it fell, the Dow broke above the 1100 point level for the first time. The long bull market in stocks, and the long stagnation of Gold, had begun.
Many facets went into this change in investment attitude, but one concrete change in the U.S. financial system was the most telling. Way back in March 1971, four months before Nixon closed the Gold window, the "permanent" U.S. debt ceiling had been frozen at $US 400 Billion. By late 1982, U.S. funded debt had tripled to about $US 1.25 TRILLION. But the "permanent" debt ceiling still stood at $US 400 Billion. All the debt ceiling rises since 1971 had been officially designated as "temporary(!?)". In late 1982, realising that this charade could not be continued, The U.S. Treasury eliminated the "difference" between the "temporary" and the "permanent" debt ceiling.
The way was cleared for the subsequent explosion in U.S. debt. With the U.S. being the world's "reserve currency", the way was in fact cleared for a debt explosion right around the world. It was also cleared for five of the biggest bull markets in history.
The global stock market boom of 1982-87
The Japanese stock market/real estate boom of 1988-90
The Dow (and then Nasdaq) led boom - late 1994 to March/April 2000
The great global real estate boom of 2002-06
The global stock market revival of 2006-07
http://www.the-privateer.com/gold3.html

The HIDDEN Gold Wars
In the early 1980s, when world stock markets boomed in tandem everywhere in the world, Gold reached the $500 level twice. The first time was in early 1983, just as the global boom was getting started. The second time was at the end of 1987, two months after the infamous crash of October 1987. From $499 in December 1987, Gold fell throughout 1988 and dipped below the $400 level in January 1989. Gold has only ever regained the $400 for four very short periods since then.
Gold traded as high as $422 in December 1989 - January 1990.
It reached as high as $415 in the lead up to the Gulf war in August 1990.
It reached $408 in August 1993.
And finally, Gold reached a high close of $414 in February 1996.
But Gold's history in the years since the 1987 crash is that at all the actual crisis points, the Gold price has not risen, it has fallen. The best single example of this phenomenon remains Gold's performance on January 17, 1991, the day that the "air phase" of the Gulf war began. On that single day, Gold fell $30 from its previous close. In fact, it fell $40 from its intra-day high. Gold had been rising in the months leading up to the war. As soon as the war started, Gold plummeted.
The Gold price has failed to respond to the fact that Gold demand has exceeded newly-mined Gold supply in every year since 1988. It has, consistently done the opposite of what all of its previous history shows that it "should" do. Why has this happened?
From Overt To Covert
As we have documented in this series, in the 1960s and 1970s, governments fought Gold in the open. They announced what they were going to do before they did it. Of course, they failed miserably. But people in government, just like the rest of us, are quite capable of learning from their mistakes, The first thing they learned was that the best way to "fight" Gold was to go underground. They did so, with great success.
The plan adopted was to fight Gold on their own ground. In order to do this, they greatly expanded the ways in which Gold could be traded. More important, they introduced and developed an indirect market for Gold, they invented a Gold "derivatives" market.
The Paper Blizzard - "Derivatives"
Forward and futures markets were not, of course, an invention of the 1980s. What was an invention of the 1980s was the massive increase in paper trading instruments. These instruments, which became known as "derivatives", were first developed in the currency and debt markets. They then spread into the equity markets and into the Gold market.
The advantage of "derivatives" in the paper markets was twofold. First, they provided more and more leverage for more and more aggressive trading. Second, and far more important, they provided a method to hugely expand the amount of money in circulation without expanding the "money supply"! The traditional measures of money in circulation (M1, M2, M3, M...) expanded much more slowly. What did expand was the blizzard of "derivative paper" using paper money as its underlying "asset". This was one of the main reasons why "inflation" (defined as rising prices) slowed down.
The advantages of a Gold derivative market were similar. Governments learned in the 1960s and 1970s that it was impossible to meet an increased demand for Gold with physical Gold. They needed a paper substitute. Gold "derivatives" provided that substitute. With more tradeable alternatives to physical Gold, it became far easier to control the Gold price. But on top of the derivatives themselves, other specific mechanisms were developed to help control the price of Gold.
One of these methods was forward selling by Gold mining companies. This practice began with Gold's retreat from the $500 level in the wake of the 1987 crash. By the mid 1990s, Gold companies everywhere, but notably in Australia, were routinely forward selling years worth of their projected Gold production.
As the performance of Gold in the fifteen years between the market crash of 1987 and the start of the current $US Gold bull market in 2002 illustrates, these mechanisms worked very well indeed.
http://www.the-privateer.com/gold4.html
Paper Gold?
For as long as Gold has been prized, there have been men who have tried to create it. For hundreds, if not thousands of years, the Alchemists strove to transmute base metals into Gold, without success. But even after its introduction to the West and the invention of the printing press by Gutenberg at the end of the Thirteenth century, no-one had the idea of trying to turn paper into Gold. In past centuries, those who would control money contented themselves with substituting paper for Gold, with limited success.
It took some true "visionaries", and the end result of a long process of economic wishful thinking, to seriously propose "paper gold". The notion goes back about 30 years, to the period just before the dawn of the "floating currencies" era. When the U.S. closed the the "Gold Window" in August 1971, the Dollar promptly dived against all its major trading partners. By February 1973, it had become impossible to pretend that any fixed ratio still existed between currencies, and the era of "floating currencies" began.
The IMF actually invented what became referred to as "Paper Gold" in 1971 - months before the U.S. severed the tie between the Dollar and Gold. The IMF knew this step was coming, and so it invented the "SDR" (Special Drawing Right). It was touted as a Reserve "Currency" that would replace both the U.S. Dollar and Gold in the basements of the world's Central Banks.
While these SDRs still exist, they have not done much over the past three decades or so except gather dust. Their prime purpose, to provide a substitute for Gold, was not fulfilled. The SDR was the last major attempt to provide a "substitute" for Gold. For at least the past two decades, the approach has been that no substitute for Gold is necessary. And to "prove it", Gold has been progressively debunked as either a money or even a viable investment option. The price has been forced down, then held down, then forced even lower.
If You Can't Replace It - Dilute It
The price of Gold cannot be held down by selling the physical metal. The decade between 1970 and 1980 proved that conclusively. Hundreds of years of history have proven conclusively that nothing can be sold as a "substitute" for Gold. In the years since the 1987 crash - when the $US 400 "glass ceiling" on Gold has been put and kept in place, Central Banks have continued to sell Gold, but only in emergencies. The real mechanism for holding down the price has been different.
Forward Selling - By Gold Producers
For most of the past decade, Gold mining companies gradually changed the way they market their Gold. To an ever-increasing extent, they have "forward sold". The mechanism is quite simple. A Gold mining company with proven reserves in the ground wants to sell a portion of these reserves forward. The company representative goes to a bullion dealer who agrees to pay him, for example, $500 per ounce for Gold to be delivered two years from now. The Gold company has locked in a profit, and on top of that, has the money now for Gold which is still in the ground.
The Gold bullion dealer is exposed, however. He is exposed to a possible loss if the Gold price falls in the future. So, to hedge this position, the bullion dealer sells Gold - for immediate delivery. "Wait a minute" (you cry), where is the bullion dealer to get the Gold to provide for immediate delivery? The answer brings us directly to the second part of the mechanism for maintaining the $US 400 Gold "glass ceiling".
Gold "Leasing" - The Central Banks' Contribution
Our intrepid bullion dealer goes out and "borrows" the Gold. Where does he borrow it from? That's easy. From the formidable 36,000 Tonne hoard still owned by the world's Central Banks.
To get the Gold - or more accurately, to get a marketable claim to the Gold - our bullion dealer pays what is known as the Gold lease rate (an extremely low rate of interest). He then sells the Gold - or the claims to Gold, and invests the money. This is the way the difference between the spot and forward prices for Gold is determined. The forward price is the money interest rate which our bullion dealer receives for his investment minus the lease rate which he paid to borrow the Gold.
The point is that this entire fandango (that's "fandango" - not "contango") can be performed by lending physical Gold, or it can be performed by lending a paper claim to Gold. The miners' Gold is still in the ground. The Central Bank sometimes lends Gold, or it lends a claim to Gold. These are what our bullion dealer sells. And since most demand for Gold is not a demand for the physical metal but a demand for paper (forward, future, etc) claims to the metal, this mechanism can meet the demand without an undue strain upon the available supply of the physical metal, and the upward pressure on the price of Gold that would cause.
[2] Here is the complete interview from Stiglitz—an interview that was read and heard often by European bankers over the past 2 weeks.

http://www.democracynow.org/2010/10/20/nobel_laureate_joseph_stiglitz_on_how
Nobel Laureate Joseph Stiglitz: Foreclosure Moratorium, Government Stimulus Needed to Revive US Economy

As the Obama administration rejects a foreclosure moratorium and austerity protests grip Europe, we assess the state of the US and global economy with Nobel Prize-winning economist Joseph Stiglitz, author of Freefall: America, Free Markets, and the Sinking of the World Economy. Stiglitz backs calls for a foreclosure moratorium and says opponents of a new government stimulus "don’t understand basic economics." On war, Stiglitz says Iraq and Afghanistan are "the first wars in America’s history financed totally on the credit card." [includes rush transcript]
AMY GOODMAN: Federal law enforcement officials are launching an investigation into possible criminal violations of US law by banks and other financial firms involved in the foreclosure crisis. The multi-agency task force on financial fraud, led by investigators in the Justice, Treasury and Housing departments, are exploring whether banks broke the law and misled federal agencies when using fraudulent documents to foreclose people’s homes.
The federal probe coincides with an effort by investors to hold firms accountable for selling securities composed of improperly serviced mortgages. Late Tuesday, a consortium of eight investors, including the Federal Reserve Bank of New York, demanded that Bank of America buy back some $47 billion worth of troubled home loans packaged into bonds by Countrywide Financial, which is owned by Bank of America. The New York Fed is also considering suing Bank of America.
The inter-agency federal investigation was announced a day after Bank of America and GMAC Mortgage said they’re resuming foreclosures in the twenty-three states where a court’s approval is needed to foreclose. Ten days ago, Bank of America had imposed a nationwide halt on foreclosures following revelations employees at several lenders had approved thousands of foreclosure affidavits and other documents without proper vetting.
On Tuesday, White House Press Secretary Robert Gibbs said the Obama administration is committed to holding banks accountable for any legal violations tied to foreclosures.
PRESS SECRETARY ROBERT GIBBS: Our concern has been ensuring that the process adequately complies with the law. That’s what led—like I said, that’s what led FHA to get involved in this. That’s what’s led the Financial Fraud Enforcement Task Force to be involved in this process, as well as our support for fifty state attorneys general ensuring, again, compliance with the law. Obviously, they have certain requirements in the law that have to be met, and if they’re not meeting those requirements, they certainly can face fines from us and they can face legal action from homeowners.
AMY GOODMAN: Well, members of President Obama’s Financial Fraud Enforcement Task Force and other administration officials are scheduled to meet today to discuss the foreclosure crisis.
For more on the state of the economy in this country and around the world, I’m joined here in New York by the Nobel Prize-winning economist Joseph Stiglitz. He’s a professor at Columbia University and the author, most recently, of Freefall: America, Free Markets, and the Sinking of the World Economy. It’s just out in paperback.
Welcome to Democracy Now!
JOSEPH STIGLITZ: Nice to be here.
AMY GOODMAN: OK, let’s start with foreclosures. What do you think needs to be done? If you were in that room today in Washington, DC, what would you say?
JOSEPH STIGLITZ: Well, first, I’d begin with the problem of so many Americans owing more on their homes than the value of their homes. We have to put this in context. The mortgage companies, the banks, engaged in predatory lending practices. They weren’t asking what was the best mortgage for these homeowners; they were asking what was the mortgage that generated most fees for me. The way the mortgage system worked, they could take bad mortgages, sell them off to investment banks that would repackage them and sell them on to other people. That’s the other part of the story that you were talking about, where PIMCO, Federal Reserve, all these people who have wound up with these securities, say, "You gave us a lot of junk." So, it’s all the way along the pipeline that there has been fraudulent behavior, all the way from the foreclosures that you were talking about, but really going back to the creation. So, in my mind, what we should begin is trying to protect Americans.
So, we ought to have a homeowners’ Chapter 11. Let me explain what that idea is. You know, when corporations have trouble paying what they have to pay, what we say is we can write down the debt. It’s so important to keep those enterprises going, keep the jobs, keep the suppliers going, that we allow them to write down the debt and restructure. Well, keeping American families going is even more important, I think, than keeping corporations going. So, that should be part of the philosophy, that we ought to say, look at, the banks were really derelict in the loans that they made. They should have known that there was a bubble going on. I certainly talked about it; other people talked about it. They were really engaged in predation. So let’s use a homeowners’ Chapter 11 that allows a speedy write-down of what is owed, converting some of the debt into equity, so that when they sell the loans sometime—when they repay—sell their house sometime in the future, if the market recovers, some of the capital gain will go to the bank. But meanwhile, the payments that the homeowners will have to make will go way down. And that will mean that they can stay in their home. And that will be good for the families. It’ll be good for the communities. When people are thrown out of their homes, it’s bad for the family, it’s bad for the community. And we have this, you know, real evidence that our market system isn’t working when we have empty homes and homeless people. That’s not the way a market economy is supposed to operate.
AMY GOODMAN: Would you support a foreclosure moratorium?
JOSEPH STIGLITZ: Well, I think probably the answer is yes. The fact is that they’ve generated so many bad mortgages, so many fraudulent mortgages. And by the way, this problem of fraud has been known for a long time. The FBI started reporting on this years ago. I talk about that problem in my book. It’s not just risky lending. It was fraudulent, predatory, all these—and so, we have a backlog now. And we shouldn’t be surprised that our legal system is not capable of processing the numbers of foreclosures that have to be processed. We’re talking about probably something in the order of magnitude of three million, three-and-a-half million foreclosures actions this year. Last year, the estimate was about two million lost their home; the year before, two million. Our system isn’t geared to do that.
But there’s a more—there’s a deeper point that I’d like to raise, which is the following. You know, in a democracy like ours, people have to have confidence in the fairness of our legal system. And if they feel that the legal system is stacked against them, then voluntary compliance—our whole social fabric starts fraying. And I think a lot of Americans have come to the view that the system is stacked against them. It began, in a way, with the bankruptcy law that was passed back in 2005 that, in effect, reintroduced bondage in America. I mean, people haven’t realized how bad that law was. If you owe a hundred percent—you know, amount of money that’s equal to a hundred percent of your income—you have a $40,000 income, you wound up with a credit card debt and other debt of $40,000—for the rest of your life you may be working 25 percent of your time for the banks. The way it works is very simple. They can take 25 percent of your income—you know, it used to be easy that you could go bankruptcy and you get discharged of the debt. They made it very difficult. So, you can pay 25 percent of your income every year to the bank, but then the bank can charge you 30 percent interest. So, the end of the year, you owe more money than you did at the beginning of the year, even though you gave 25 percent of your income to the bank. Now, this is an example of something that is clearly socially unjust.
AMY GOODMAN: This was passed when the Republicans were in control.
JOSEPH STIGLITZ: That’s right.
AMY GOODMAN: And this was 2005.
JOSEPH STIGLITZ: That’s right.
AMY GOODMAN: Now, we’re talking about foreclosures by banks, and which President Obama is not for a nationwide foreclosure moratorium. But even the government, it is the largest foreclosure entity out there, according to Bruce Marks of NACA, a housing activist. FHA mortgages, government-owned, are doing massive numbers of foreclosures; Fannie Mae, massive numbers of foreclosures, he said. So he said President Obama maybe doesn’t want to do a full moratorium. But why not make the government-owned entities, the ones that the taxpayers own and control, let’s start with them?
JOSEPH STIGLITZ: It actually makes sense for our economy. And let me explain why that is, because when you dump all these mortgages, these houses, onto the market, it depresses the prices, and that means that the real estate market is destabilized. One of the advantages that the government has is that it can and should take a longer-term horizon. It should realize that if it holds onto these a little longer, provided it can maintain those homes, then it’s a lot better as an owner of the home. They don’t have to be shortsighted in the way the banks are so shortsighted. So, in a sense, it’s even good economics for the taxpayer. And again, it goes back to the point I made before. It makes absolutely no sense in our economy to be creating homeless people, throwing people out of their homes, disrupting the education of their children, undermining the communities, and at the same time, having these empty homes. What really happens, when you throw people out, very quickly the house debts starts to get wasted.
AMY GOODMAN: And this, of course, affects these midterm elections. If President Obama cares about Democrats controlling the House and the Senate, this is the major issue, is the economy, jobs, foreclosures. And yet, they constantly—just in the last few days, David Axelrod, the White House adviser, speaking for the President, says there are in fact valid foreclosures that probably should go forward. HUD, they’re saying the same thing. Where do people gain any confidence that the President, who said he was taking on the big corporations, cares more about them than the banks?
JOSEPH STIGLITZ: Well, you know, one of the key words here that you said is "valid" foreclosures, because we believe we have a system with a rule of law, but what we have to recognize is that there was fraud all along the line. They were creating these mortgages at such a rate that the documentation wasn’t done well.—they were creating these mortgages as such a rate that the documentation was not done well, that we know there are lots of instances where—when the people went into the final signing of the mortgages, the income that was stated was not the income that the person told them. And then they would say something, "Oh, don’t worry, that’s a technical detail." So, is that a valid mortgage or not? The fact was, it looked like the documentation was right, but in the creation of the documentation, there was fraud. Now, we were manufacturing—or the financial sector was manufacturing bad mortgages at such a rate that, literally, it’s extraordinarily difficult to tell, at this juncture, what is a good mortgage and what was not. When there was misrepresentation to the borrower, is that valid or not? And so, I think we have to recognize that this process, from 2003, '04 on, was just rife with these problems. And it allowed the banks to book high profits then, and now the key issue is they don't want to admit the losses that are associated. And that’s really what the battle is about.
AMY GOODMAN: We’re talking to Joseph Stiglitz, Nobel Prize-winning economist, professor at Columbia University. His book is just out in paperback; it’s called Freefall: America, Free Markets, and the Sinking of the World Economy. If you want to join in the discussion, you can send in your questions at Facebook, facebook.com/democracynow. We’ll be back in a minute.
[break]
AMY GOODMAN: Our guest is Joseph Stiglitz, Nobel Prize-winning economist, professor at Columbia University. His book is out in paperback, Freefall: America, Free Markets, and the Sinking of the World Economy.
So, just to summarize, you are for a national moratorium on foreclosures.
JOSEPH STIGLITZ: I think—inevitably, I think we have to be moving towards that. And the reason is very simple. There were such—the bad practices were so rife, the inequities were so rife, the fraudulent behavior was so common, that at this point we don’t know what is a valid mortgage and not. And the consequences of throwing somebody out of their home, when they shouldn’t be, are hard to reverse. I mean, just imagine what it does to the family— education of the kids are interrupted—what it does to the community. So, when we have to balance the injustices—and life is unfortunately always balancing one side versus the other—and where will their mistakes be easily reversed and where not? My view is, if we keep them in the homes for a little longer, they owe the money—they still owe the money, that doesn’t let them off the hook—but what we’re saying is we’re not going to speed up this process of—where there’s the serious risk of an inequity that will not be easily compensated for.
AMY GOODMAN: Joe Stiglitz, the deficit, the battle cry of the Tea Party movement, of the Republicans, as well. Robert Rubin has weighed in, says any new stimulus plan is highly likely to be counterproductive. What do you think has to happen? Does the deficit matter? And how do you think it should be dealt with?
JOSEPH STIGLITZ: My view is we cannot afford not to stimulate the economy. So, you know, anybody that says we should go back to austerity or we should not have a second-round stimulus just doesn’t understand economics. And let me be very clear about this. If we don’t stimulate the economy, the economy is going to get weaker. When the economy gets weaker, tax revenues go down and expenditures go up. Already, more than 40 million Americans are on food stamps. Number of people on Medicaid is reaching record levels. So, revenues go down, expenditures go up, deficits get worse. If you stimulate the economy, then people get jobs, they spend money, tax revenues go up. Now, if we spend the money on investments—investments in education, technology, infrastructure—you grow the economy in the short run from the stimulus, you grow the economy in the long term because of the returns that you get on these investments.
I mean, just think about this from the point of view of a firm. If you are a firm and you could borrow at zero to two-and-a-half percent, which is what the government can borrow, and you have investment opportunities that you owe ten, 15, 20 percent, you would be irresponsible, you would be foolish, not to undertake those investments. So, anybody that says, "I’m going to only look at one side of the balance sheet, the liabilities; I’m not going to look at the other side, the assets," is really not understanding economics. It’s that kind of reasoning that got our country in the trouble in the first place, the people who didn’t—you know, shortsighted behavior of the banks that got our country in trouble in the first place. And to me, I just view those kinds of statements as totally irresponsible.
AMY GOODMAN: Let me ask you how war fits into this. I mean, you co-wrote the book with Linda Bilmes, The Three Trillion Dollar War. How does war fit into our problems with the economy?
JOSEPH STIGLITZ: Well, war fits in because you’re creating a liability, you’re spending money. And when we went to war in Iraq and Afghanistan, we already had a deficit. And so, these wars were the first wars in America’s history financed totally on the credit card. So, you’re creating a liability, but you’re not creating an asset. So that’s the kind of spending that does weaken the economy, because it’s one-sided. Now, we came out just a couple weeks with new numbers that unfortunately show that our old numbers were a little wrong, in the sense that they were too conservative.
AMY GOODMAN: Three trillion dollars.
JOSEPH STIGLITZ: Was too little. And particularly what we looked at in a report—we testified before Congress—what we looked at was the large number of troops returning who are disabled. Turned out that the numbers returning disabled are higher than we had estimated. It’s close to 50 percent now. And the cost per disabled, injured troop is higher. So we had talked then about the cost of healthcare and disability payments for our returning troops in the order of maybe a little less than a half-a-trillion dollars. That’s a lot of money. Our new numbers are, best estimate, in excess of $900 billion. These are unfunded liabilities, a moral obligation—they fought for us—unfunded, totally unfunded. The good news is that they were trying to put together a coalition of people who believe in responsible budgeting, that said, "OK, if we’re going to send our troops overseas, we ought to at least put aside the money to pay for the full in costs. The full in costs include the costs of these disabled people.
AMY GOODMAN: So what you’re estimating the cost of both the wars in Iraq and Afghanistan now at?
JOSEPH STIGLITZ: Well, well in excess of the $3 trillion. Before, the numbers that we said were actually three to five trillion. That doesn’t sound as catchy a title as—"The Three to Five Trillion Dollar War." The numbers now are much more like four to six trillion. And—
AMY GOODMAN: And yet, across this country, as the debates over—you know, for various congressional and Senate seats, for any seat, whether you’re talking about a state one, as well, war is almost never raised.
JOSEPH STIGLITZ: Yeah, I don’t understand that, because what should be so clear is that we have a limited amount of resources. And the critics who say we have to worry about the debt are right in emphasizing the economics of scarcity, that we have a limited amount of resources. But the issue isn’t whether to cut back; the issue is how we spend our money, because cutting back would weaken the economy, but reallocating our money, more money for those who are unemployed—remember, we have one of the worst systems of social protection, unemployment insurance, of the advanced industrial countries. We are a whole group of people called the ninety-niners, who have come to the end of their unemployment benefits and are being, you know, left to fend for themselves. So, what we really need to do is to rethink how we spend the money, make sure that we spend the money in a way that will energize our economy. Spending money in Afghanistan, paying money for contractors, are not the way to energize our economy and make our economy strong, competitive for the long run.
AMY GOODMAN: How much do you think a stimulus should be in this country?
JOSEPH STIGLITZ: Well, I think we really need $400, $500 billion a year. Part of the reason why we should try to keep those kinds of numbers in mind is to realize that we have a federal system, about a third of all spending is at the state and local level, and the states have balanced budget frameworks, which mean when the revenues go down, they have to cut back spending or raise taxes, which is very difficult in the current environment. And their revenues are going down. They depend very heavily on property taxes. Values of real estate have gone down 30, 40 percent, in some places 50 percent. And the result of this is that we’re laying off teachers. We’re laying off basic—those who provide basic services. So, while the government is coming to the end—the federal government is coming to the end of the stimulus, the states are retracting. We saw that in the September numbers on jobs. Sixty-seven thousand private-sector jobs were created—not enough for the new entrants in the labor force, less than half the amount we needed. But we lost, in total, 95,000 jobs. In other words, there was about a 140,000 loss in the public sector, predictable—I talk about that in my book—predictable, unless we find some ways of making up for their shortfall.
AMY GOODMAN: And you say the stimulus would do that?
JOSEPH STIGLITZ: If we have another stimulus, it could do that.
AMY GOODMAN: So why don’t you think President—since that even in his own interest—I mean, when you see the Democrats caving, falling all over the country, what looks like the predictions for this election.
JOSEPH STIGLITZ: You know, I said that that’s what we should have done in the first round of stimulus, because it was so clear where we were going.
AMY GOODMAN: So, who’s not listening to you? President Obama? Timothy Geithner? Larry Summers, now gone?
JOSEPH STIGLITZ: I think—you know, let me be frank. I think what happened is that some of these people who helped create the crisis, who, you know, were in favor of the deregulation, who didn’t do their job regulating the banks that they should have done—
AMY GOODMAN: Naming names here?
JOSEPH STIGLITZ: Well, you can figure out who those are.
AMY GOODMAN: No, no, you tell us.
JOSEPH STIGLITZ: Well, well, Geithner was the head of the New York Federal Reserve Board, whose responsibility is overseeing New York banks.
AMY GOODMAN: Now the Treasury secretary, Timothy Geithner.
JOSEPH STIGLITZ: And we know Larry Summers was—you know, his great achievement was passing the law that deregulated—made sure that derivatives, these risky securities that led to the downfall of AIG, costing $180 billion—his great achievement was to make sure that this was not regulated, not regulated as a gambling product, not regulated as an insurance product, not regulated as securities.
Well, having created these problems, they had an incentive, quite frankly, to try to say this is—you know, "The problems are not that deep. All we have to do is fix the banking system. You know, there’s been an accident. Who could have predicted this?" And the answer is, a lot of us did. But it was something that happened to the banking system, rather than something the banking system did to us. So their incentive—this is a problem of accountability—their incentive was to try to say, "OK, we’ve had an accident. We put the banks into the hospital. We give them a little money. Let’s not try to interfere how they spend the money, because that’s not the way we do things," so that they could take that money, rather than recapitalize, give it out in bonuses or dividends. But we just put it in the hospital for a couple years, and meanwhile, we have this moderate-size stimulus. But then, year-and-a-half later, two years later, the banks have recovered, and we go back to where we were before 2007.
Well, reality is that the economy was sick before that, and you can’t go back to 2007. And now we are at the end of the two years. It’s so clear that the economy is not back to health and that 200—that two-year stimulus was too small, not well enough designed, and we’re left in the situation that we have today, where the economy clearly is—continues to be sick, not in the sense that the banks are making profits again—Wall Street is not doing badly—but sick in the real sense: one out of six Americans who would like a full-time job cannot get one. That is a sick economy, in my mind.
AMY GOODMAN: Nobel Prize-winning economist Joseph Stiglitz, his book Freefall is just out in paperback, subtitled America, Free Markets, and the Sinking of the World Economy. So let’s go to the world economy. There have been a wave of protests across Europe against the so-called austerity measures and budget cuts in several European countries. In France, workers are striking for the seventh straight day over pension reform. In Britain, the government is preparing to reveal the biggest program of budget cuts in decades. Unions held a rally in London Tuesday to protest the cuts.
BRENDAN BARBER: These cuts will lose over a million jobs. And let’s be clear, this is not an economic necessity, but a political choice that they’re making.
TONY WOODLEY: It’s absolutely crucial at the moment that we don’t allow our public sector to be assassinated and decimated, not just because public services will be affected, but because the whole of our country’s economy will be—may be leading for a double-dip recession. We may not recover for many years to come.
AMY GOODMAN: That’s Britain. Your response, Joe Stiglitz?
JOSEPH STIGLITZ: I’m terribly worried, not just for Britain, but for the world economy. You know, there was a moment after Lehman Brothers fell, the world came together. We were all Keynesians. That is to say, we all knew that what the economy needed was each country had to stimulate their economy. That moment of global consensus is gone. And what is going on now is, in a very large number of countries, that we’re going back to what I call Hooverite policies. I mean, we’ve tried this experiment, where you have conservatives say, "OK, the deficit has gone up, and if we’re going to restore confidence, we have to bring down the deficit by cutting back spending." This is an experiment we’ve tried over and over again. After the stock market crashed, Hoover succeeded in bringing us into the Great Depression by exactly that kind of reasoning.
What happens is interesting: it’s self-defeating. Because the economy gets weaker, the deficit—tax revenues go down, the deficit doesn’t get that much better. But meanwhile, because the spending goes down, the economy—jobs get destroyed, economy gets weaker and weaker, confidence gets destroyed, not restored. Because we live in a globally integrated economy, what happens in Europe will affect us. President Obama, many other leaders who had hoped that one of the ways that the US economy would be restored would be through exports, but if Europe is weak, we’re not going to be able to export.
AMY GOODMAN: This is a question we just got submitted to our Facebook page from Stevia Hawkins in Atlanta, Georgia: "Some people on the right are labeling the French uprising as the 'dangers of socialism.' What would you say to them?"
JOSEPH STIGLITZ: No, what they’re asking is, "We need social protection." You know, workers individually can’t control the economic environment. You know, in the old economy, agriculture economy, you could work your field, you were still buffeted by vagaries in weather, international prices, but you could always get a job, because you could work your own field. But in a modern economy, if firms are firing, you have no choice. You know, there are very limited opportunities that the individual has. So it is the responsibility of state, of the government, to maintain the economy at full employment. And we recognized that in the Full Employment Act of 1946. Unfortunately, we are not living up to the commitment we made in 1946 to maintain the economy at full employment. We have, as I said, one out of six workers who are unemployed. Increasingly, a large number are unemployed now for over six months.
AMY GOODMAN: Joe Stiglitz, we just have time for one question, last question, which is about China raising its interest rates for the first time in nearly three years, coming a day after the Treasury secretary vowed not to devalue the dollar to boost the economy. Explain the significance of this.
JOSEPH STIGLITZ: Well, the one source of strength in the global economy has been the emerging markets. And they’ve been doing very, very well. The problem is that the Federal Reserve has been letting forth a lot of liquidity in the hope that it would reignite the American economy. But the administration and Federal Reserve did not fix the banking system, did not deal with the mortgage problem, that we were talking about before. So the money isn’t going into the American economy. The lending is actually below what it was in 2007. In a globalized economy, the money is looking for the best place to go. And where is it finding it? In the emerging markets.
So, the irony is that money that was intended to rekindle the American economy is causing havoc all over the world. Those elsewhere in the world say, what the United States is trying to do is the twenty-first century version of "beggar thy neighbor" policies that were part of the Great Depression: you strengthen yourself by hurting the others. You can’t do protectionism in the old version of raising tariffs, but what you can do is lower your exchange rate, and that’s what low interest rates are trying to do, weaken the dollar. The flood of liquidity abroad is trying to push the exchange rates abroad. And they say—they’re saying, "We can’t allow that."
AMY GOODMAN: And thirty seconds. China, in particular?
JOSEPH STIGLITZ: Well, in the case of China, in particular, if it slows down significantly, it’s going to be bad for the US economy, not just directly, but China has been the support for Latin America, Africa. China has become the real engine of global economic growth. If it slows, Africa, Latin America slows, and that means American markets all over the world are going to have difficulties.
AMY GOODMAN: We’re going to leave it there. Joseph Stiglitz, winner of the Nobel Prize in Economics, his book Freefall is just out in paperback, America, Free Markets, and the Sinking of the World Economy.

Labels: ,

0 Comments:

Post a Comment

Links to this post:

Create a Link

<< Home