Thursday, January 24, 2013

Simon Johnson — Germany’s Gold Delusion

Germany’s gold is on the move. For the first time since official gold transactions became more transparent, the Bundesbank has given notice that a significant portion of its holdings will be transferred home from France and the United States. Ostensibly, this is just a matter of monetary housekeeping. But why now?

One possibility is that German policymakers believe that we are approaching an every-country-for-itself scenario – and only gold guarded by one’s own police is worth anything....
Project Syndicate
Germany’s Gold Delusion
Simon Johnson, former Chief Economist of the IMF, Professor at MIT Sloan, and Senior Fellow at the Peterson Institute for International Economics

27 comments:

Matt Franko said...

Once those Teutonic morons get their gold back in their own possession who knows what they will be capable of!

Ralph Musgrave said...

Teutonic morons? Not as bad as Britain’s moronic finance minister, Gordon Brown, who sold 400 tons of Britain’s gold at about $275 an ounce in 1999/2000 only to see its price rise to something like $1,600 today.

Matt Franko said...

Ralph,

At least he got rid of it... IMO just keep enough for industrial purposes...

Perhaps use platinum jewelry for self adornment....

Rsp

googleheim said...

this post is relevant.

if they bring gold home by selling off US Treasuries, that is a stimulus to the U$D !

if we can only get Japan and China and OPEC to do the same, we could have ourselves a $4 trillion dollar stimulus plan hitting our currency zone !



Matt Franko said...

goog,

They are not going to pay for it this is gold that they already own...

It was allegedly moved to the US for safe keeping during the Cold War... (the Germans didnt want the Rueskies to invade and get hold of it....)

Now that the Cold War is over, looks like they want it back in northern Europe so they can have it nearer and even dearer... weird-o-rama!

Ed R. reported last week that this transfer process allegedly will take 7 years... very strange scene all around...

rsp,

Matt Franko said...

Here is Hamilton reporting on the German indifference to this metal back in the 1700s (Federalist 12):

" The hereditary dominions of the Emperor of Germany contain a great extent of fertile, cultivated, and populous territory, a large proportion of which is situated in mild and luxuriant climates. In some parts of this territory are to be found the best gold and silver mines in Europe. And yet, from the want of the fostering influence of commerce, that monarch can boast but slender revenues. He has several times been compelled to owe obligations to the pecuniary succors of other nations for the preservation of his essential interests, and is unable, upon the strength of his own resources, to sustain a long or continued war."

Seems like back then they didnt care about the gold but now they really do... something must have happened over there in the 1800s... now they act as zealous loving zombies for this metal.... hmmmmmm....

rsp,

The Rombach Report said...
This comment has been removed by the author.
The Rombach Report said...

"Ed R. reported last week that this transfer process allegedly will take 7 years... very strange scene all around..."

Let's see..... If I attempted to postpone paying my obligations for 7 years, would my creditors call it a default?

Roger Erickson said...

Ed, how is evolution obligated to gold? You lost me.

The Rombach Report said...

Roger - I lost you? I guess that makes two of us. Where does the part about evolution come in?

Dan Kervick said...

I wonder if this gold repatriation was supposed to be some kind of implicit threat that Germany is considering leaving the Euro, so that unless all of those swarthy debtor countries stick with the austerity program and stop saying mean things about Germans, Germany will bolt.

Dan Kervick said...

Hamilton is writing in a time in which gold bullion was, in fact, the dominant medium of international exchange, especially important for the purpose of hiring mercenaries to make war, and in which countries all over Europe were in hot colonialist pursuit of gold mines and reserves abroad. His point here seems to be that because of the German prince's lazy neglect of industrial development in their principalities, which included the the failure to energetically mine their own gold, they had placed themselves in the position of debtors and dependents to foreign princes and states.

Matt Franko said...

I suppose it could be a gold loving minority over there Dan similar to our Ron Paul wanting to audit our own Ft Knox ..... and they got this vote this time ... so they will retake custody, rsp

The Rombach Report said...

Gold Bank Run Accelerating….. Now the Swiss Want Their Gold Back- All 1040 Tons of It! What next? Chocolate?

It appears that Switzerland may be next to the game, much to the dismay of the SNB. The Swiss gold initiative, an initiative to Secure the Swiss National Bank’s Gold Reserves, launched in March 2012 by four members of the Swiss parliament, has grown to 90,000 supporters.

Once 100,000 supporters have signed on the dotted line, the Swiss Parliament must take up the referendum.

1. To keep Swiss gold physically in Switzerland (ie repatriate Switzerland’s gold).

2. Preventing/forbidding the SNB from selling any more of its gold reserves.

3. Requiring the SNB to massively increase their gold holdings to a minimum of 20% of its reserves within
5 years, held within Switzerland.

http://www.silverdoctors.com/gold-bank-run-accelerating-now-the-swiss-want-their-gold-back-all-1040-tons-of-it/

Tom Hickey said...

Yeah, this is going to end badly, but there's money to made in this madness, if that's your cup o' tea.

The Rombach Report said...

Tom - If you have any good ideas about how to game this madness, would you care to share them with me?

Cheers - Eduardo

The Rombach Report said...

BTW... Don't know if this is related, but gold lease rates have spiked sharply negative coinciding with unsubstantiated reports surfacing that the Chinese are going to back the yuan with gold.

http://bit.ly/TjCEFI

Tom Hickey said...

Central bank buying and selling drives major moves in gold. It looks like cb's are acquiring gold for two reasons.

First, general suspicion, and an increasing "go-it-alone" attitude in the face of on-going crisis. The global economy is showing instability, and most mainstreamers are confused, lacking a coherent explanation. Or else they are holding to an ideology like religious fanatics.

Secondly, the only avenue that govts see out of the fiscal mess they have created is through exporting their way out, which means they gain advantage by devaluation. Buying gold puts more of their currency in the market and devalues it against other currencies. If cb's start competing with each other in this regard, they will drive up the gold price for sure.

Thirdly, since gold is regarded as the numeraire by gold bugs, they will look at silver through this lens and taking the historical ratio of 16:1, they will find Ag underpriced wrt Au and drive up silver, too, thinking it is a "bargain." If Au moves, so will Ag follow, at least to a degree.

Since there is no way to assess what Au is actually "worth," things can get crazy.

This can go on until the real interest rate starts moving upward, or cb's slow their buying and momentum falters.

I don't think we've seen the blow off in Au or Ag yet.

However, I would not trade this market without a good technical system, since there are no fundamentals and no landmarks. Otherwise it is seat of the pants gambling.

The Rombach Report said...

Tom - Many thanks for the crisp analysis!

Bob said...

The last time there was a race to debase we had a world war. Everytime the guns are taken away from the public in a country genocide occurs. The gold move is a signal that sad things are coming. But what the hell the stock market is rising buy on the dip!

The Rombach Report said...

"The last time there was a race to debase we had a world war."

How true! This period we're in is very reminiscent of the 1930s. What troubles me most is that the currency wars were followed by global conflict in WWII.

Tom Hickey said...

I follow the geopolitical scene as well as the economic, and other related, and the wheels are getting ready to come off. When global warming ramps up, and it is in the process of doing so, there is going to be whole new ball game, too.

There are positive developments, but the momentum is on the side of drag due to ignorance and narrow self-interest. The prognosis is not good at this point, since adaptability rate is falling as a result of the rising tide of going-it-alone instead of increasing coordination on the part of the global powers that be. And there is rising concern that a future war will involve WMD.

On one hand, preppers are building bunkers individually and other the other, greens are building resilient local networks and communities, as Nero fiddles while Rome burns.

The Rombach Report said...

"And there is rising concern that a future war will involve WMD. ....

On one hand, preppers are building bunkers individually and other the other, greens are building resilient local networks and communities, as Nero fiddles while Rome burns."

Tom - That's a pretty scary outlook. Do you have any data on what you refer to as the "adaptability rate"? Is this what Roger Erickson is so passionate about?

Tom Hickey said...

Ed, I stole that from Roger. The basic idea is that modern societies are complex adaptive system that are continually growing, hence, increasing in complexity. This system is reflexive in that it is directed by feedback loops that result in autocatalysis, or self-augmentation. The way to increase adaptability rate is through cooperation and coordination. Those individuals and groups survive and prosper than can adapt most successfully to emergent challenges arising in the system. IN this way some groups and life forms are selected in and others selected out over time. We would prefer that our group (nation) and species (humanity) gets selected in.

The way we are going that is problematical due to the changing rate of complexity exceeding our adaptability rate. We have the knowledge but seemingly cannot scale it up fast enough to implement it effectively in a timely fashion to deal with challenges.

The Rombach Report said...

"The basic idea is that modern societies are complex adaptive system that are continually growing, hence, increasing in complexity."

Right. Economic development over the course of history has increasingly required an ever more complex division of labor for the human race to reproduce itself at progressively more advanced levels. I may be missing something, but isn't this how free markets are supposed to work?

Over the weekend I was listening to an interesting interview of Black Swan author Nassim Taleb by Libertarian Nick Gillespie at Reason TV. The interview featured a discussion of "Anti-Fragility", which unless I'm mistaken seems to have some parallels with this adaptability rate concept. Here's the link. http://youtu.be/ehXxoUH1AlM

Tom Hickey said...

I may be missing something, but isn't this how free markets are supposed to work?

The theory is that perfectly competitive markets allocate scarce resources including labor most efficiently and effectively. However, that is an assumption that is never met in practice for a variety of reasons. Presently, for instance, vested institutions create a drag on innovation and extract rent, perpetuating the status quo beyond its obsolescence, until there is systemic breakdown that occasions a reset, or even collapse of the system at the end of a cycle. Schumpeter wrote about this, for instance, and Minsky was Schumpeter's student. Wray was Minsky's student. Michael Hudson is another UMKC Minskyan.

The Rombach Report said...

Right, practice often (usually) differs substantially from theory. Of course theory pretty much goes out the window altogether when the system is set up as a rigged casino to benefit the key insiders at the top of the food chain at the expense of everyone else. Here is
the Keiser report on Tim Geithner's heads up to banks in Aug 2007.

http://market-ticker.org/akcs-www?post=216691