Half way through the interview, I ask him where does he see the price of gold reaching in the days to come. “Well, I don’t see gold’s trajectory being typical of what you’d expect to see in a bull market….And I expect that physical gold will be repriced somewhere around $55,000 per ounce in today’s purchasing power. I have to add that purchasing power part because it will likely be concurrent with currency devaluation,” he replies. Meet FOFOA, an anonymous blogger whose writings on fofoa.blogspot.com have taken the world by storm over the last few years. In a rare interview he talks to Vivek Kaul on paper money, the fall of the dollar, the coming hyperinflation and the rise of “physical” gold.
The world is printing a lot paper money to solve the economic problems. But that doesn’t seem to be happening. What are your views on that?
Paper money being printed to solve the problems… this was *always* on the cards. It doesn’t surprise me, nor does it anger me, because I understand that it was always to be expected. The monetary and financial system we’ve been living with—immersed in like fish in water—for the past 90 years uses the obligations of counterparties as its foundation. These obligations are noted on paper. In describing the specific obligations these papers represent, we use well-known words like dollars, euro, yen, rupees and yuan. But what do these purely symbolic words really mean? What are these paper obligations really worth in the physical world? Ultimately, after 90 years, we have arrived at our inevitable destination: the intractable problem of an unimaginably intertwined, interconnected Gordian knot of purely symbolic obligations. A Gordian knot is like an unsolvable puzzle. It cannot be untangled. The only solution comes from “thinking outside the box.” You’ve got to cut the knot to untangle it. So the endgame was always going to be debasing these purely symbolic units. Anyone who expected anything else simply fooled themselves into believing the rules wouldn’t be changed.
Do you see the paper money continuing in the days to come?
Yes, of course! Paper money, or today’s equivalent which is electronic currency, is the most efficient primary medium of exchange ever used in all of human history. To see this you only need to abandon the idea of accumulating these symbolic units for your future financial security. They aren’t meant for that! They are great for trading in the here-and-now, not for storing for the unknown future. To paraphrase Silvio Gesell, an economist in favor of symbolic currency almost a century ago, “All the physical assets of the world are at the disposal of those who wish to save, so why should they make their savings in the form of money? Money was not made to be saved!” In hindsight, this statement is true whether money is a hard commodity like gold or silver, or a symbolic word like dollar, euro or rupee. In both cases, saving in “money” leads to monetary tension between the debtors and the savers. When money was a hard commodity, this tension was sometimes even released through bloodshed, like the French Revolution. So no, I don’t think we’re swinging back to a hard currency this time.
Do you see the world going back to the gold standard?
No, of course not! “The gold standard” means different things depending on which period you are talking about. But in all cases it used gold to denominate credit, the economy’s primary medium of exchange. Today we have a really efficient and ultimately flexible currency. Bank runs like the 1930s are a thing of the past. But that’s not to say that gold will not play a central role in the future. It will! The signs of it already happening are everywhere! Gold is not going to replace our primary medium of exchange which is paper or electronic units with those names I mentioned above. Instead, physical gold will replace paper obligations as the reserves—or store of value—within the system. Physical gold in unambiguous ownership has no counterparty. This is a much more resilient foundation than the tangled web of obligations we have today.
Can you give an example?
If you’d like to see this change in action, go to the ECB (European Central Bank) website and look at the Eurosystem’s balance sheet. On the asset side gold is on line 1 and obligations from counterparties are below it. Additionally, they adjust all their assets to the market price every three months. I have a chart of these MTM (marked to market) adjustments on my blog. Over the last decade you can see gold rising from around 30% of total reserves to over 60% while paper obligations have fallen from 70% to less than 40%. I expect this to continue until gold is more than 90% of the reserves behind the euro.
Where do you see all this money printing heading to? Will the world see hyperinflation?
Yes, this will end. I am pretty well known for predicting dollar hyperinflation. As controversial as that prediction is, I think it is a fairly certain and obvious end. I don’t like to guess at the timing because there are so many factors to consider and I’m no supercomputer, but ever since I started following this stuff I’ve always said it is overdue in the same way an earthquake can be overdue. As for other currencies, I don’t know. Perhaps yes for the UK pound and the yen, but I don’t know about the rupee. The important things to watch are the balance of trade and the government’s control over the printing press. If you’re running a trade deficit and your government can (and will) print, then you are a candidate for hyperinflation.
In that context what price do you see gold going to?
Well, I don’t see gold’s trajectory being typical of what you’d expect to see in a bull market. Instead it will be a reset of sorts, kind of like an overnight revaluation of a currency. I’m sure some of your readers have experienced a bank holiday followed by a devaluation. This will be similar. And I expect that gold will be repriced somewhere around $55,000 per ounce in today’s purchasing power. I have to add that purchasing power part because it will likely be concurrent with currency devaluation. So, in rupee terms, I guess that’s about Rs3.2 million per ounce at today’s exchange rate.
The price of gold has been rather flat lately. What are the reasons for the same? Where do you see the price of gold going over the next couple of years?
“The price of gold” is an interesting turn of phrase because I use it often to express “all things goldish” in the gold market. In today’s market, “gold” is very loosely defined. What passes for “gold” in the financial market is mostly the paper obligations of counterparties. These include forward sales, futures contracts, swaps, options and unallocated accounts. I often use the abbreviation “$PoG” to refer to the going dollar price for this loose financial “gold”.
The LBMA (London Bullion Market Association) recently released a survey of the total daily trading volume of unallocated (paper) gold. That survey revealed a trading flow of such magnitude that it compares to every ounce of gold that has ever been mined in all of history changing hands in just three months, or about 250 times faster than gold miners are actually pulling metal out of the ground. Equally stunning were the net sales during the survey period. The rate at which the banking system created “paper gold” was 11 times faster than real gold was being mined.
What is the point you are trying to make?
The point is that gold is being used by the global money market as a hard currency. But it is being treated by the marketplace as both a commodity that gets consumed and also as a fiat currency that can be credited at will. It is neither, and gold’s global traders are in for a rude awakening when they find out that ounce-denominated credits will not be exchangeable for a price anywhere near a physical ounce of gold in extremis—ironically failing at the very stage where they were expected to perform.
So what are you predicting?
But don’t get me wrong. It is not a short squeeze that I am predicting. In a short squeeze, the paper price runs up until it draws out enough real supply to cover all of the paper. But this paper will not be covered by physical gold in the end. It will be cash settled, and it will be cash settled at a price much lower than the price of a real ounce of gold, like a check written by an overstretched counterparty. It is a tough job to make my case for the future of the $PoG in just a few paragraphs. The $PoG will fall and then some short time later we will find that the market has changed out of necessity into a physical-only market at a much higher price. If you were holding paper you will be sad. If you were holding the real thing you’ll be very happy
Why is the gold price so flat these days?
Today’s surprisingly stabilized $PoG tells me that someone is throwing money into the fire to delay the inevitable. Where do I see the $PoG going over the next couple of years? Maybe to $500 or less, but you won’t be able to get any physical at that price. I think that today’s price of $1,575 is still a fantastic bargain for physical gold.
Franklin Roosevelt had confiscated all the gold that Americans had in 1933. Do you see something similar happening in the days to come?
Not at all! The purpose of the confiscation was to stop the bank run epidemic at that time. There’s no need to do it again. The dollar is no longer defined as a fixed weight of gold, so the reason for the last confiscation—and subsequent devaluation—no longer exists. Gold that’s still in the ground is a different story, however. Gold mines will likely be considered strategically important national assets after the revaluation, and will therefore fall under tight government control.
The irony of the entire situation is that a currency like “dollar” which is being printed big time has become the safe haven. How safe do you think is the safe haven?
Indeed, everyone seems to be piling into the dollar. Especially on the short end of the curve, helping drive interest rates ridiculously low. The dollar is as safe as a bomb shelter that’s rigged to blow up once everyone is “safely” inside. You can go check it out if you want to (sure, from the outside it might look like shelter), but you don’t want to be in there when it blows up. You’ve got to realize that it is both economically and politically undesirable for any currency to appreciate against its peer currencies due to its use as a safe haven. Remember the Swiss franc? As soon as it started rising due to safe haven use they started printing it back down. The dollar is no different except that it’s got a whole world full of paper obligations denominated in it. So when it blows, the fireworks will be something to behold.
What will change the confidence that people have in the dollar? Will there be some catastrophic event?
That’s the $55,000 question. It is impossible to predict the exact pin that will pop the bubble in a world full of pins, but I have an idea that it will be one of two things. I think the two most likely proximate triggers to a catastrophic loss of confidence are a major failure in the London gold market, or the U.S. government’s response to an unexpected budget crisis due to consumer price inflation. Most people who expect a catastrophic loss of confidence in the dollar seem to think it will begin in the financial markets, like a stock market crash or a Treasury auction failure or something like that. But I think it is more likely to come from where, as I like to say, the rubber meets the road. And here I’m talking about what connects the monetary world to the physical world: prices. I think these “worlds” are connected in two ways. The first is the general price level of goods and services and the second is the price of gold. If one of these two connections is broken by a failure to deliver the real-world items at the financial-system prices, then we suddenly have a real problem with the monetary side. So I think it will be a relatively quick and catastrophic event, but maybe not as dramatic as a major stock market crash. It will be confusing to most of the pundits as to what it really means, so it will take a little while for reality to sink in.
The Romans debased the denarius by almost 100% over a period of 500 years. The dollar on the other hand has lost more than 95% of its purchasing power since the Federal Reserve of United States was established in 1913, nearly 100 years back. Do you think the Federal Reserve has been responsible for the dollar losing almost all of its purchasing power in hundred years?
Yes, inflation was a lot slower in Roman times because it entailed the physical melting and reissuing of coins of a certain face value with less metal content than previous issues. This was a physical process so it occurred on a much longer time scale. The dollar, on the other hand, has lost nearly 97% of its purchasing power in roughly a hundred years. Do I think the Federal Reserve is responsible for this? Well, given that the lending/borrowing dynamic causes expansion of the money supply, I think the government and the people of the world share in the responsibility. But just because the dollar has lost 97% of its purchasing power doesn’t mean that any individual lost that much. How many people do you think are still holding onto dollars today that they earned a hundred years ago? How long would you hold dollars today? As long as the prices of things you want to buy don’t change during the time you are holding the currency, what have you lost? So imagine that you simply use currency for earning, borrowing and spending, but not for saving. Will it matter how much it falls over a hundred years? Your earning and spending will happen within a month or so, and prices won’t change much in a month. Also, your borrowing will be made easier on you as your currency depreciates. And your gold savings will rise. So with the proper use of money, there is no need for alarm if the currency is slowly falling at, say, 2% or 3% per year.
Do you see America repaying all the debt that they have taken from the rest of the world? Or will they just inflate it away by printing more and more dollars?
The debts that exist today can never be repaid in real terms. And as I mentioned before, they are all denominated in symbolic words like dollars, euro, yen, yuan and rupees. The debt of the U.S. Treasury, most of all, will of course be inflated away.
What are your views about the crisis in Europe? Will the euro hold?
Contrary to most of what we read in the Anglo-American press, I don’t think the euro currency is at risk from the sovereign debt crisis in Europe. They are two different things, the debt crisis and the euro. The euro currency faces none of the usual devaluation risks. Trade between the Eurozone and the rest of the world is balanced and the ECB has plenty of reserves. So aside from devaluation risk, which the euro doesn’t face, the only other risk is if the people decide to abandon the euro. Procedurally this would be so difficult for any country to do on a whim that I can confidently say it is virtually impossible aside from the most extreme situations like a revolutionary war or something like that. And I don’t see that happening. I think the euro survives come what may.
What does FOFOA stand for?
I remain anonymous because my blog is not about me. It is a tribute to “Another” and “Friend of Another” or “FOA” who wrote about this subject from 1997 through 2001. So FOFOA could stand for Friend of FOA or Follower of FOA or Fan of FOA. I never really stated what it stands for, so you can decide for yourself. 😉 Sincerely, FOFOA.
(The interview was originally published in the Daily News and Analysis(DNA) on July 2,2012)
(Interviewer Kaul is a writer and can be reached at [email protected])
Financial Crisis
…And That's How Government Sachs Rules the World
Bruce Wiseman is a man who wears many hats. He writes detective fiction under the pseudonym of John Truman Wolfe (www.johntrumanwolfe.com). He runs a market research, survey and positioning company (www.ontargetresearch.com). He has managed money for many Hollywood stars through the investment firm Wiseman & Burke. And if all this wasn’t enough he has recently written a bestselling book on the financial crisis titled Crisis by Design, The Untold Story of the Global Financial Coup. In this interview he speaks to Vivek Kaul on how the investment Goldman Sachs rules the world.
You talk about an incestuous link between Goldman Sachs and the American government. Could you explain that to our readers?
The Rolling Stone magazine recently published an article called “The Great American Bubble Machine,” a masterful exposé by Matt Taibbi revealing Goldman’s greed and corruption in the creation of several investment “bubbles” that have made the firm and its partners—the term filthy rich comes to mind—but which have been devastating to Americans and to the U.S. economy. I have no problem with people making money—barrels of the stuff. Boatloads. But this needs to be done with some sense of ethics, some sense of morals, some sense of responsibility toward one’s fellow man.
Could you elaborate on that?
The all too coincidental participation of Goldman executives in the creation of the financial crisis is something that Machiavelli himself would be proud of. Taibbi laid bare the army of Goldman alumni that have turned up at critical decision points in the universe of credit, investment and finance. His orientation was such that he omitted a few that I will tell you about. My focus has been exposing the actual cause of the worldwide financial crisis. And our paths have crossed at a few key junctures. Junctures that bring to mind the great Gordon Gekko—Michael Douglas’s character in Oliver Stone’s Wall Street. Douglas shares the philosophy of the successful investment banker:“Greed is good. Greed is right. Greed works. Greed clarifies and cuts through and captures the essence of the evolutionary spirit.” Yeah, baby.
Could you give us an example?
I could start this part of the story with Henry Fowler, who, after serving as the 35thSecretary of the Treasury, in 1969 became a partner at Goldman after leaving office. But that’s not how things worked in the nineties and beyond. Oh no. The current sequence is very different. Pictures of Robert Rubin always remind me of the cartoon character Droopy. He seems to be in a perpetual state of sad worry. More to the point of our story, having served 26 years with Goldman Sachs, ascending to the position of co-chairman, Rubin came to Washington with the Clinton administration as the Assistant to the President for Economic Policy. Bill must have dug the Wall Street touch, because in January of 1995, he appointed Rubin the 70th United States Secretary of the Treasury. This could be called the start of what the New York Times has referred to as the modern era of “Government Sachs.”
Government Sachs?
Allow me to explain. The hallmark of Rubin’s years in Washington was deregulation—specifically, deregulation of the financial industry. Turn the financial industry loose. Let the big dogs eat. Let them earn. They have Porsche payments to make. Working with Greenspan, he kept interest rates implausibly low and ensured that regulatory safeguards were gunned down like victims in an L.A. drive-by shooting. The Glass-Steagall Act is a prime example. A piece of the Great Depression-era legislation that kept investment banks and commercial banks from committing fiscal incest, it was repealed—charged with being out of touch with the global financial structure. What it was out of touch with was an agenda to open the floodgates to unbridled speculation by banks that set the industry up for a financial Hiroshima.
Would you like to add to that?
When Rubin was co-chairman of Goldman, the firm underwrote billions of dollars in bonds for the Mexican government. When the Mexican peso tanked a few years later, Rubin, as Secretary of the Treasury, arranged a multibillion-dollar taxpayer bailout, which, according to reports, saved Goldman a cool $4 billion. Even today, Goldman’s former co-chairman is advising Obama behind the scenes and his acolyte Timothy Geithner is in charge of the U.S. Treasury.
But Geithner never worked for Goldman Sachs…
Geithner worked for Rubin at Treasury during the Clinton administration and was a Rubin favorite. He then snagged the powerful presidency of the New York Federal Reserve Bank. It was Rubin who got Geithner the gig at the New York Fed and it was Rubin who hooked him up with Obama, who appointed him as his Secretary of the Treasury. In addition to Rubin, another former Goldman chairman,the controversial Jon Corzine, has been a top economic advisor to the current American President Barack Obama.
That’s quite a link…
Yup. And there is more to come. Given that Goldman employees gave more money to Obama ($994,000) than any other commercial enterprise in the United States, and that the White House is awash in Goldmanites. Even with the White House under control, Geithner beefed up his Goldman staff at Treasury. He named yet another Goldmanite as his chief of staff. Mark Patterson was selected to help him run the government’s financial circus. Patterson gave up his plum position as the vice president for Government Relations at Goldman—meaning he was the investment bank’s chief lobbyist—to become the number two man at Treasury.
What about Henry Hank Paulson, the Treasury Secretary of the United States, when the financial crisis broke out?
Before the news of the financial crisis began to go mainline in 2007, a new Goldman CEO descended from his throne on Wall Street to come to Washington and help his government manage the nation’s financial affairs. We love you, Hank. Viewed from the board rooms of Wall Street, Henry Paulson’s blitzkrieg of the nation’s capital was nothing short of stunning: a George Patton(a famous American World War II General) in pinstripes—except Patton was fighting a real enemy, not one that he himself had created. At first, he used PR spin to calm the multitudes. As the crisis began to unravel, in August 2007 Paulson assured the American people that the subprime mortgage problems were nothing to be concerned about, that they would remain contained due to the strong global economy. The stock market peaked two months later followed by a crash that wiped out trillions. In a television interview on Meet the Press on August 10, 2008, Paulson stated that he would not be putting any capital into Fannie Mae or Freddie Mac. Three weeks later, he took them over and committed $200 billion in bailout funds. When I was growing up, we’d call this kind of guy a “bullshit artist.”
Can you get into a little more detail?
Perhaps nothing so demonstrated this scam as the government bailout of American International Group (AIG), the country’s largest insurance company. On September 16,2008, Paulson coughed up $85 billion of your tax dollars to take control of AIG. The $85 billion loan got the government 80 percent ownership of the insurance giant. Just what I always wanted from my government, a bankrupt insurance company. It turns out the $85 billion wasn’t enough. AIG has continued to hemorrhage losses and Uncle has now poured a total of $182 billion into the insurance company. Sticky constitutional issues aside, many have found it more than curious that when the government granted the loan, AIG turned right around and paid it out to the investment banks to which it owed money. The bank that got the largest payout was . . . of course, Goldman Sachs—a cool $13 billion. The money simply passed from your paycheck to the U.S. Treasury, from the Treasury to AIG and from AIG to Goldman (and other banks). Paulson made sure the transfers would occur without any objection from AIG or unseemly negotiations with the banks. To do this, he tapped Goldman Sachs board member Ed Liddy to be the new CEO of AIG. The good-hearted Mr. Liddy took the gig for a dollar a year in salary from AIG. But he held on to his $3 million in Goldman stock.
That was one round about transaction…
Yup. Goldman made billions from AIG earlier as well. AIG didn’t know this. Neither did Goldman’s clients. You see, despite the fact that they had collected enormous fees selling financial products that were “insured” by AIG, Goldman simultaneously sold AIG short. You get this? On the one hand, they sold financial instruments to their clients, which carried high investment ratings because AIG insured the buyer against loss. At the same time, they made investment “bets” for their own account against AIG. Estimates are that they made $4.7 billion betting against AIG while selling the AIG-guaranteed products to their clients.
Anything else that you would want to point out?
Paulson pushed the Troubled Asset Relief Program (TARP) through the House and Senate—winding up with a cool $700billion to “save” the banks. Congress’s actions remind me of a bad Godzilla movie, with masses of panicked Japanese citizens fleeing the fire-breathing monster, which is lumbering through the city toppling buildings and devouring cars. The legislation drafted by our elected officials sounds like something issued to Stalin by the Politburo. They granted Paulson complete dictatorial powers over the bailout money. The TARP read in part: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”
But where does Goldman fit in here?
Calling the multibillion-dollar bailout a “stimulus” program is but a cruel joke. This was nothing more complicated than a coup—a transfer of hundreds of billions of dollars from American taxpayers into the Armani-clad arms of major Wall Street banks. You won’t be surprised to learn, I’m sure, that Goldman Sachs got a cool $10 billion of TARP funds. And if you followed the billions pouring from your paychecks to Wall Street, you might remember that Bank of America at first received $25 billion. Then, in the midst of the chaos, they agreed to purchase Merrill Lynch. As it turned out, however, Merrill’s losses were $15 billion more than Bank of America had expected. This was due in part to $4 billion in bonuses paid out by Merrill’s CEO, John Thain, who pushed the bonuses through his books just before the Bank of America deal closed. Bank of America was taken by surprise by the losses and the purchase of Merrill Lynch started to go shaky, to which Comrade Paulson coughed up another $20 billion of your tax dollars. You guys are so cool bailing out these banks. I mean it. It brings tears to my eyes. Oh, I should mention that John Thain, the guy who pushed through the last-minute billions in bonuses, had been the president and co-chief operating officer at Goldman Sachs before becoming the president of Merrill Lynch.
So Goldman Sachs is everywhere?
Yup. Pretty much. Joshua Bolten, was the Chief of Staff of former President George Bush. Bolten had become Chief of Staff in April of 2006 and is credited with persuading the President to recruit Paulson as the Treasury Secretary. No surprise, since Bolten had been the executive director, Legal & Government Affairs for Goldman Sachs International before joining the Bush 2000 presidential campaign. The president of the World Bank is Robert Zoellick. Prior to joining the World Bank, Zoellick served as vice chairman, international, of the Goldman Sachs Group. Incest doesn’t begin to say it. From the White House to Treasury, from the New York Fed to AIG, from the Commodity Futures Trading Commission to the New York Stock Exchange, Goldman is there.
You talk about 19 men controlling the financial affairs of the whole world. Who are these people?
They are the Board of Directors of the Bank for International Settlements. They are listed on the Bank’s website, but Helicopter Ben Bernanke and Tim Geithner are on the Board, as was Greenspan. And it is the newly created Financial Stability Board, operating as an arm of the Bank for International Settlements, that now structures and dictates the rules and regulations to be carried out by the central banks of the world. And given the fact that central banks essentially operate independently of their national congresses or parliaments, the FSB now controls the monetary policy of the planet. It is now, for all practical purposes, the Politburo of international finance.
Where is Goldman Sachs in this?
Who is the chairman of this little known entity based in Basel, Switzerland? Mario Draghi. Draghi was a partner at Goldman Sachs until, like Henry Paulson, he left Goldman in 2006. Paulson took over the U.S. Treasury and Draghi became the governor of the Bank of Italy (Italy’s central bank) and in April of this year, chairman of the Financial Stability Board. Draghi is also a member of the board of directors of the Bank for International Settlements. In fact, the BIS board reads like a Goldman reunion committee. Mark Carney had a 13-year career with Goldman Sachs, where he became the managing director of Investment Banking before becoming the governor of the Bank of Canada and a member of the BIS board. William Dudley, president of the New York Fed and former partner at Goldman Sachs, is also a member of the board, along with Draghi.
So they are there everywhere…
Yup. Gary Gensler the current head of the Commodities and Futures Trading Commission in the United States spent 18 years at Goldman Sachs. In May of 2007, the granddaddy of stock markets, the New York Stock Exchange (NYSE), bought Euronext (a pan-European stock exchange with subsidiaries in Belgium, France, Netherlands, Portugal and the United Kingdom), which, now branded as NYSE Euronext, operates the largest securities exchange on the planet. To run the show, the newly combined entity brought in Duncan Niederauer and appointed him chief executive officer. Niederauer had been a partner and managing director at Goldman Sachs before joining NYSE Euronext. And there you have it. Complete financial control of U.S. financial policy and markets, from the White House and Treasury to the New York Fed, the New York Stock Exchange and the Commodity Futures Trading Commission (Control of the World Bank along with the most powerful member of the International Monetary Fund (the US Treasury Secretary Timothy Geithner), and at the top of the fiscal food chain, the Bank for International Settlements and its Financial Stability Board.
(The interview was originally published in the Daily News and Analysis(DNA) on June 25,2012. http://www.dnaindia.com/money/interview_how-government-sachs-rules-the-world_1706239)
(Interviewer Kaul is a writer and can be reached at [email protected])