Physical Gold Withdrawals from the Shanghai Gold Exchange and The New Silk Road Jesse

I would add to government accumulation the likelihood that as incomes rise in the East there will also be increased demand from households. There already is. 

In the West, physical gold is mostly bling, with much of the saving in gold held largely in derivates as financial saving. And, as Jesse observes, the "paper gold" — "digital gold" really — is an issue owing to hypothecation and re-hypothecation.

In the East physical gold doubles as ornament and real saving. In addition, in Hindu India physical gold serves as a temple token. Some of the great temples have enormous stores of gold.

With global turmoil extending to the money system governments, especially in the East, and rising incomes there, with people traditionally desiring to hold physical gold, physical gold is being accumulated in that part of the world more than others.

While the gold bugs may be over the top in their assessments, demand for physical gold seems to be strong, it seems to me, for some of these reasons.

I don't want to get into the controversy over whether gold is "money," but a whole lot of people treat it as "money," and central banks have traditionally dealt in it and vault gold is considered the foundational real reserve. So, while there are many technical reasons for not considering gold to be "money," there are also a lot of practical reasons that many people do view it as "money." 

More precisely, physical gold is the historical numéraire, along with silver as secondary and copper third. For example, in the Bretton Woods system, the value of the dollar was fixed by a conversion rate into gold. Gold ceased to be the de jure numeraire when Nixon ended international settlement in gold, but many still view gold as the de facto numéraire.

Economists don't put much emphasis on the monetary significance of gold – with silver and copper now being chiefly industrial commodities, especially copper. However, conventional economists still tend to assume a gold standard and they reason "as if" on a gold standard. 

The financial world is much more focused on precious metals as not only commodities but "an asset class" that serves as a saving vehicle that can be the basis for derivatives. Thus, this asset class includes both the physical metal as real saving and derivatives based on it as financial saving.

If one wishes to integrate economics and finance, then the gold becomes important as a bridge concept.

Jesse's Café Américain
Physical Gold Withdrawals from the Shanghai Gold Exchange and The New Silk Road

Jesse

Why Trump now wants talks with Iran — Pepe Escobar

Maybe Iran holds the Trump card? Putting the West on notice.

The Vineyard of the Saker
Why Trump now wants talks with Iran
Pepe Escobar

See also

Reminiscence of the Future
Pepe Escobar's Superb Segment On European Elections.
Andrei Martyanov

Pam and Russ Martens — U.S. Quietly Drops Bombshell: Wall Street Banks Have $2 Trillion European Exposure

Wall Street On Parade
U.S. Quietly Drops Bombshell: Wall Street Banks Have $2 Trillion European Exposure

Pam Martens and Russ Martens

Ellen Brown — Bail-In and the Financial Stability Board: The Global Bankers’ Coup

On December 11, 2014, the US House passed a bill repealing the Dodd-Frank requirement that risky derivatives be pushed into big-bank subsidiaries, leaving our deposits and pensions exposed to massive derivatives losses. The bill was vigorously challenged by Senator Elizabeth Warren; but the tide turned when Jamie Dimon, CEO of JPMorganChase, stepped into the ring. Perhaps what prompted his intervention was the unanticipated $40 drop in the price of oil. As financial blogger Michael Snyder points out, that drop could trigger a derivatives payout that could bankrupt the biggest banks. And if the G20’s new “bail-in” rules are formalized, depositors and pensioners could be on the hook. 

The new bail-in rules were discussed in my last post here. They are edicts of the Financial Stability Board (FSB), an unelected body of central bankers and finance ministers headquartered in the Bank for International Settlements in Basel, Switzerland. Where did the FSB get these sweeping powers, and is its mandate legally enforceable? 

Those questions were addressed in an article I wrote in June 2009, two months after the FSB was formed, titled “Big Brother in Basel: BIS Financial Stability Board Undermines National Sovereignty.” It linked the strange boot shape of the BIS to a line from Orwell’s 1984: “a boot stamping on a human face—forever.” The concerns raised there seem to be materializing, so I’m republishing the bulk of that article here. We need to be paying attention, lest the bail-in juggernaut steamroll over us unchallenged.

Using state capture to institutionalize capitalizing gains and socializing losses through the force of law.

Web of Debt
Bail-In and the Financial Stability Board: The Global Bankers’ Coup
Ellen Brown

Ellen Brown — The Global Banking Game Is Rigged, and the FDIC Is Suing

Taxpayers are paying billions of dollars for a swindle pulled off by the world’s biggest banks, using a form of derivative called interest-rate swaps; and the Federal Deposit Insurance Corporation has now joined a chorus of litigants suing over it. According to an SEIU report:

Derivatives . . . have turned into a windfall for banks and a nightmare for taxpayers. . . . While banks are still collecting fixed rates of 3 to 6 percent, they are now regularly paying public entities as little as a tenth of one percent on the outstanding bonds, with rates expected to remain low in the future. Over the life of the deals, banks are now projected to collect billions more than they pay state and local governments – an outcome which amounts to a second bailout for banks, this one paid directly out of state and local budgets.

It is not just that local governments, universities and pension funds made a bad bet on these swaps. The game itself was rigged, as explained below. The FDIC is now suing in civil court for damages and punitive damages, a lead that other injured local governments and agencies would be well-advised to follow. But they need to hurry, because time on the statute of limitations is running out.

Web of Debt
The Global Banking Game Is Rigged, and the FDIC Is Suing
Ellen Brown

Jan Kregel: The Continuing Risk of Derivatives - Interview with Marshall Auerback [Video]

INET

Jan Kregel: The Continuing Risk of Derivatives

Janet Tavakoli — President Obama Might Ask Who Benefits from U.S. Debt Default

Bloomberg News' Yalman Onaran wrote an article on Monday about the disaster that would unfold if we don't raise the debt ceiling and the U.S. has a technical default by missing an interest payment on U.S. Treasuries. James Kochan's quote summed up my feelings: "Well, holy cripes!" It has never happened in modern history and would be a disaster greater than the September 2008 financial crisis. 

China and Japan combined own $2.4 trillion in U.S. Treasuries, and they are understandably upset with the U.S. about the possibility of a technical default.
Most of the financial press has focused on how awful a technical default would be, and who is upset. But our leaders might ask a different question. Who are the reprobates that are cheering for the possibility of a technical default on the U.S.? Who stands to gain? Who might be happy to set off this financial bomb?...

Follow the Money 

My reason for writing the 2010 commentary was to encourage Congress to ban credit derivatives on U.S. debt due to the potential for abuse. Perhaps no one is abusing this situation for financial gain. But while we're asking about the horrific consequences of not raising the debt ceiling--and possibly throwing the U.S. into a technical default--we should also ask who would benefit if this happened?

If you follow the money, you often find someone moving levers behind the scenes.

The Huffington Post
President Obama Might Ask Who Benefits from U.S. Debt Default
Janet Tavakoli | President, Tavakoli Structured Finance

Ellen Brown — The Armageddon Looting Machine: The Looming Mass Destruction from Derivatives

Did you know that shadow banking carries a government guarantee, too?

According to Hervé Hannoun, Deputy General Manager of the Bank for International Settlements, investment banks as well as commercial banks may conduct much of their business in the shadow banking system (SBS), although most are not generally classed as SBS institutions themselves. At least one financial regulatory expert has said that regulated banking organizations are the largest shadow banks.

The Hidden Government Guarantee that Props Up the Shadow Banking System
According to Dutch economist Enrico Perotti, banks are able to fund their loans much more cheaply than any other industry because they offer “liquidity on demand.” The promise that the depositor can get his money out at any time is made credible by government-backed deposit insurance and access to central bank funding. But what guarantee underwrites the shadow banks? Why would financial institutions feel confident lending cheaply in the shadow market, when it is not protected by deposit insurance or government bailouts?
Perotti says that liquidity-on-demand is guaranteed in the SBS through another, lesser-known form of government guarantee: “safe harbor” status in bankruptcy. Repos and derivatives, the stock in trade of shadow banks, have “superpriority” over all other claims.Perotti writes....

The amendment to the Bankruptcy Reform Act of 2005 that created this favored status for repos and derivatives was pushed through by the banking lobby with few questions asked.

Talk about moral hazard. This is a financial Armageddon not just waiting to be happen but potentially being engineered by the TBTF-TBTJ banks since it would lead to an unprecedented windfall and further consolidation of banking.

The Web of Debt
The Armageddon Looting Machine: The Looming Mass Destruction from Derivatives
Ellen Brown

Sell On News — Leverage versus debt

Capitalism, I suspect, is doing its best to follow communism into the grave yard. Its strength was that it was not an ideology, just a practice – markets, after all, have been around for thousands of years. But the capitalist ideology of “financial deregulation” whose fruits are now so evident, the worship of markets as the solution to everything, is threatening the system itself.

Macrobusiness
Leverage versus debt
Sell On News
(h/t Lambert Strether at Naked Capitalism)

Sasha Breger — How Big Finance is Eating the World’s Lunch Agricultural Wealth

If you hear a kind of whooshing, rushing noise, don’t worry—it’s not US jobs moving to China. Today’s great sucking sound is the sound of agricultural wealth being siphoned off into the global financial system. Dragging poverty and insecurity in its wake, this broad movement of wealth from agriculture into finance is enriching and empowering finance capital at the expense of farmers, traders, consumers, rural communities and the earth. In fact, that sucking sound is really the sound of injustice.

Finance capital globally deploys a huge variety of methods and techniques that generally serve to redistribute wealth from agriculture to finance. These include debt, farmland acquisition, commodity hoarding, and derivative and insurance markets. In the following posts, I outline the wealth transfer mechanism in each of these contexts, focusing largely on new data and evidence from the past several years.

Naked Capitalism
Sasha Breger: How Big Finance is Eating the World’s Lunch Agricultural Wealth

Ellen Brown — Winner Takes All: The Super-priority Status of Derivatives

Cyprus-style confiscation of depositor funds has been called the “new normal.” Bail-in policies are appearing in multiple countries directing failing TBTF banks to convert the funds of “unsecured creditors” into capital; and those creditors, it turns out, include ordinary depositors. Even “secured” creditors, including state and local governments, may be at risk. Derivatives have “super-priority” status in bankruptcy, and Dodd Frank precludes further taxpayer bailouts. In a big derivatives bust, there may be no collateral left for the creditors who are next in line.

Web of Debt
Winner Takes All: The Super-priority Status of Derivatives
Ellen Brown | Attorney

More to be incensed about.

Ellen Brown — It Can Happen Here: The Confiscation Scheme Planned for US and UK Depositors

Think deposits in US banks are "safe"? Think again.

Web of Debt
It Can Happen Here: The Confiscation Scheme Planned for US and UK Depositors
Ellen Brown | Attorney

Robert Oak — Wall Street's Derivative Shell Game

Wall Street is now winding their way through the swiss cheese loophole maze financial reform is. Remember credit default swaps, those deadly, bad math, bad computation derivatives which were behind the financial crisis? These same types of risky derivatives are making a comeback masked as futures.

Wall street has found a new way to avoid regulation and continue their derivative CDS gambling casino and it is setting up the way for a new financial crisis. They are re-wrapping credit default swaps and other derivatives into futures, which are exempt from Dodd-Frank. more stringent regulations.

The Economic Populist
Wall Street's Derivative Shell Game
Robert Oak

Zombie finance? Looks like the Ponzi phase is not over yet.

Winterspeak — Securitization of real estate serves no purpose

The purpose of banking is to make credit decisions by having private capital in first loss position against default. To ensure that that private capital remains in first loss position, any loan extended by an institution which has made a credit evaluation should stay on the books of that institution until the loan has matured.

This may make loans more expensive, but you're getting what you are paying for -- good credit decisions where the incentives are to lend out money when you expect it will be paid back.

Winterspeak.com
Securitization of real estate serves no purpose
Winterspeak

Do we want banks to be chiefly risk managers or risk takers?

Macrobusiness — Finance and the Mafia State

As I have argued before, it is impossible to deregulate financial markets because money is rules about value and obligation. So what happened instead when financial markets were “deregulated” is that the governments’ role as the setter of rules was handed over to traders, who made up their own rules: more than $700 trillion of derivatives, intense high frequency trading and so on. It results in a weird contradiction: governments trying to save their systems from the new rules being created by the traders, yet the traders relying on the state’s rules about finance to overlay their games of meta money. Meta money traders have to have conventional share trades between buyers and sellers to apply algorithms to manipulate the markets at high speed.

You need conventional commerce in commodities to use derivatives to play commodity futures, for example. It is why governments are constantly attacked by players in the financial markets who are simultaneously hard at work exploiting those “errors” to make money. Meta hypocrisy to accompany the meta money, I suppose.

The tsunami of this meta money, which is borderless, stateless and has no thought for its effect on governments or polities, still relies for its very existence on the rules set up by governments. And as has been obvious since the GFC, governments and tax payers are expected to clean up the mess when it inevitably all goes wrong. That can be done once. When it goes wrong a second time, the firepower will not be there, as is increasingly evident in Europe. The conventional rules will have been weakened too much by the rules invented by the traders of meta money....

The danger is that it is a road to anarchy, no matter how often one quotes Adam Smith and fantasises about the invisible hand. Even Alan Greenspan eventually figured that out: that letting self interest and greed run rampant is not a sure fire route to an altruistic result. Such liberalist logic can be defensible in commercial markets; it is nonsense in finance.

Rather than Bobbit’s market state, the breakdown of rules, the capturing of policy and the utter mess that is confused public and private interests suggests something more redolent of Moises Niam’s “Mafia State”.

It represents a comprehensive failure of government, and will not lead to the creation of a new type of state. It is rather a new type of chaos.

Read it at Macrobusiness
Finance and the Mafia State
Posted by Sell on News in Capitalism
(h/t Yves Smith at Naked Capitalism)

Yves Smith — The FDIC Continues to Promote the Fantasy That It Can Resolve Megabanks

This all sounds wonderfully tidy and neat, right? Problem is it won’t work.

The rather large fly in the ointment is that counteryparties would be concerned that putting the holding company into what Satyajit Das calls “a strange hypnotized state” would trigger cross defaults across agreements, including derivative agreements, where the holding company had guaranteed a contract.

Read it at Naked Capitalism
The FDIC Continues to Promote the Fantasy That It Can Resolve Megabanks
by Yves Smith

The short version: We're screwed. The swamp monsters (systematically dangerous institutions aka SDIs) can't be killed by any ordinary means. They really are too big to fail and also too big to exist. Rock meet hard place.

Steve Roth — Encouraging Deadly Financial Viruses

Steve quotes Randy Wray.

Read it at Asymptosis
Encouraging Deadly Financial Viruses (short)

by Steve Roth

Joshua Holland lambasts John Carney

But before digging into what passes for an “argument” on CNBC's blog, let me again restate that it was not home-mortgages that caused the world-wide recession. Even if Carney weren't completely wrong about regulators forcing lenders to adopt ridiculously lax standards, it would still be the case that the global meltdown was caused by an array of “innovative” financial instruments that were cooked up in the by-then-largely-deregulated financial sector. I wrote:

"The entire subprime mortgage market was worth only $1.4 trillion in the fall of 2007, and that includes loans that were up-to-date. As former Goldman Sachs trader Nomi Prins noted in her book, It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street, the federal government could have bought up every single residential mortgage in the country – good, bad and in between – and it would have cost a trillion less than the bailouts.

"What brought down the global economy was as much as $140 trillion worth of financial gimmickery built on top of the mortgage industry. It was the alphabet soup of the credit meltdown – the CDOs, default swaps and other derivatives that made less than a trillion dollars of foreclosed loans into an economic weapon of mass destruction that would cost the American economy alone $14 trillion in lost wealth."

In other words, it was the massive pile of paper and heavy “leverage” built on top of those home loans that caused the financial crash. Ignoring a central argument that one can't refute is a sure a sign of intellectual dishonesty, and despite the fact that I begin my piece with this simple reality, Carney doesn't touch it at all in his rant.

Instead, he devotes his post to advancing, yet again, the frequently and decisively debunked fable about how the Community Reinvestment Act (CRA) mandated that banks loosen their standards – a narrative disassembled not only by myself and Nomi Prins, but also by Nobel Prize-winning economists Joseph Stiglitz and Paul Krugman, former FDIC Chair Sheila Bair, the Federal Reserve Board of Governors, and many, many others. I called it a “zombie lie” because no matter how frequently it's stabbed by factual reality, there is always someone like Carney ready to dig up its remains and bring it back to life to divert attention for Big Finance. 

Read it at AlterNet
CNBC Editor Launches Sloppy, Dishonest Attack on AlterNet in Defense of Wall Street

by Joshua Holland

Hollands initial post and Carney's response are linked to in the post above.

Looks like the CRA kerfuffle is going to be with us at least through the '12 general. The left holds it is a "zombie lie," while the right holds it to be obvious fact.

The country is deeply divided over the facts. So what else is new.

An open letter to the CME

Since MF Global was a clearing member of the CME it is likely that the CME knew about the firm's financial difficulties and its positions and did nothing about it.

Here is a pretty hard hitting letter written by someone named Warren Pollock:

Open Letter to the CME To: Terrence A Duffy, Chairman CME Group As illustrated by the failure of MF Global, I am of the opinion that, the CME has not met its basic obligations to the marketplace as a “public fiduciary.” Our society depends on “basic finance” to provide “utility function” such as banking, hedging, insurance, and/or capital formation. Presently, we have an “innovative system” that degrades the integrity needed for “basic finance” to perform as required in a well-structured economy. Worse yet, our “innovative” financial system impedes the effectiveness of the greater “physical economy.” The “physical economy,” consisting of all those individuals and entities tasked with meeting actual need. The "physical economy" consists of many of your customers including farmers, manufactures and electric companies. Our society needs people working in the "physical world" to create jobs more desperately than it needs the continuity of the CME. Must we endure another market catastrophe to figure this out? Read rest of the letter here.

Has the CME become more of a liability than an asset to our financial system? I am speaking here as a former member of the exchange.

Money as rules and meta-money

Sell on News posted a very interesting piece at MacroBusiness. Overruled is short and worth reading in its entirety. (h/t) Yves Smith)

Here is a teaser.

... let’s start with a definition of what money is. It is rules. Rules about value and obligation. Those rules are usually based on legally enforced structures, although that need not be the case. In the case of cross border capital markets, the enforcement is informal because there is no supranational government to impose penalties. Disputes are resolved by a handful of law firms, the main penalty is to be prevented from participating for a period....

Sell on News develops the idea of money as rules to include "meta-money," the result of financial innovation such as derivates.

That is the world we are now in. It is why such huge distortions are appearing in areas like quantitative easing, extremely low interest rates, an ailing cost of capital, the hankering after something solid in precious metals like gold and silver, equity markets whose pricing seems strange. Governments have given up oversight of the financial markets, handing it over to the traders. We must now suffer the consequences as the traders try to outdo each other in an infinite game of pass the parcel. Or, more accurately, taking out bets on who will pass the parcel to whom.

The conclusion?

That is the world we are now in. It is why such huge distortions are appearing in areas like quantitative easing, extremely low interest rates, an ailing cost of capital, the hankering after something solid in precious metals like gold and silver, equity markets whose pricing seems strange. Governments have given up oversight of the financial markets, handing it over to the traders. We must now suffer the consequences as the traders try to outdo each other in an infinite game of pass the parcel. Or, more accurately, taking out bets on who will pass the parcel to whom.

Eventually, I suspect, GFC version 2 will come along, and the rules will finally collapse. Governments will have to come in and re-set them. There will be a huge re-regulation backlash. But how is it that governments allowed it to get to this stage? What ever happened to governing?

I agree with the notion that money is rules. Money is not a thing or a set of things, it is essentially an idea. This idea is one of the greatest intangible inventions of humankind, like markets. Money and markets go together like horse and carriage or ox and plow. Once there was a domesticated horse, it was a simple step to the carriage. Same goes for ox and plow. But horses, oxen, carriages and plows are real things. Money and markets are not. Automobiles are horseless carriages, and tractors are ox-less plows. No great imaginative jump. But money and markets have evolved in ways that could never be imagined or anticipated, and only on the basis of transforming rules.

Money and markets just took a fiant step as ideas and the global financial crisis was the result of an failure to harness those ideas sufficiently. The question is now that the genie is out of the bottle, whether it can be controlled.