Oil

The Indian consumer does not get any subsidy on petroleum products

 light-diesel-oil-250x250Vivek Kaul  

The Ministry of Petroleum and Natural Gas released the under-recovery numbers on the sale of diesel, cooking gas and kerosene, on February 3, 2014.
The under-recovery for cooking gas as on February 1, 2014, stood at Rs 655.96 per cylinder, whereas the under-recovery on diesel and kerosene stood at Rs 7.39 per litre and Rs 35.77 per litre.
The price that oil marketing companies charge dealers who sell diesel is referred to as the realised price or the depot price. If this realised price that is fixed by the government is lower than the import price, then there is an under-recovery. Having said that under-recoveries are different from losses and at best can be defined as notional losses. (For those interested in a detailed treatment of this point, can click here).
These under-recoveries are typically referred to as subsidies (both in the media as well as by politicians) that the government is providing to the citizens of this country. But the question is it fair to call this a subsidy? A criterion that the International Energy Agency uses for defining something as a subsidy is whether it “lowers the price paid by energy consumers.”
As A Citizens’ Guide to Energy Securityin India points out “consumer subsidies, as the name implies, support the consumption of energy, by lowering prices at which energy products are sold.” That is clearly not the case in India. As Surya P Sethi writes in an article titled Analysing the Parikh Committee Report on Pricing of Petroleum Products“It is clear that Indian consumers are paying the highest price for lower quality petrol and more for lower quality diesel when compared to the US and Japan – the two most vociferous proponents of removing fuel subsidies. Also, Japan and the UK and, indeed, several other countries tax diesel at a lower rate.”
A large portion of the price that consumers pay for buying petrol, cooking gas and diesel is passed onto the state governments and the central government in the form of various taxes. Excise duty collected by the central government and the sales tax collected by the state governments are the two major taxes. (In 2012-2013, the central government collected Rs 62,920 crore as excise duty. On the other hand state governments collected Rs 1,10,875 crore as sales tax.) Hence, the oil marketing companies (OMCs i.e. IOC, BP and HP) are not being adequately compensated for selling petroleum products (this does not include petrol), despite the high price. The government, in turn, compensates them for these under-recoveries.
Let’s throw in some numbers here. Data from the Petroleum Planning & Analysis Cell, a part of the Ministry of Petroleum and Natural Gas, shows that in 2012-2013 that the various state governments and the central government collected Rs 2,43,939 crore as taxes on the sale of various petroleum products. A small part of this income was also in the form of dividends.
Against this, the total under-recoveries on the sale of diesel, cooking gas and kerosene came in at Rs 1,61,029 crore. As is well known the central government did not pay this entire amount to the OMCs from its own pocket. It got the upstream oil companies like Oil India Ltd and ONGC to contribute towards the same as well.
The broader point is that the governments collected Rs 2,43,939 crore as taxes even though under-recoveries were at Rs 1,61,029 crore. This is a difference of more than Rs 80,000 crore here. In 2011-2012 this difference was more than Rs 90,000 crore. So the question is who is subsidising whom? It is clear that the end consumer is not being subsidised.
As the article titled The Political Economy of Oil Prices in India points out “The total contribution of the oil sector to the exchequer has been higher than the sum of under recoveries of the OMCs and direct subsidies on petroleum products for all the years since fiscal 2004…Even the sum of duties (customs and excise) and (sales) taxes on petroleum products, which is only a fraction of the total contribution of the oil sector to the exchequer, has exceeded the sum of under recoveries of the OMCs and direct subsidies in all the years since 2004-05. The inescapable conclusion…is that there is a negative net subsidy on petroleum products in India. Another way of saying the same thing is that the government extracts a net positive tax revenue from petroleum products in India. The oft-repeated assertion that petroleum products are subsidized in India is simply not true.”
Over the years, the governments in India, both at the state and the central level, have been spending more than they have been earning. Tax revenues from petroleum products remain a major source of income for the governments. While the expenditure of the governments has gone up dramatically, their income clearly hasn’t. And that is what they should be trying to address, instead of trying to tell us time and again that petroleum products are being subsidised. They clearly are not.

 The article originally appeared on www.firstbiz.com on February 5, 2014

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Why Moily’s idea of buying oil from Iran won’t work

M-Veerappa-Moily_0Vivek Kaul
India is thinking of importing more oil from Iran than it currently does. In a letter to the Prime Minister Manmohan Singh, oil minister Veerapa Moily, suggested that “An additional import of 11 million tonnes during 2013/14 would result in reduction in forex outflow by $8.47 billion (considering the international price of crude oil at $105 per barrel).” (As reported by Reuters).
This is because Iran accepts payments in rupees and not dollars as is the case with most of the other oil exporters. This will help India save precious foreign exchange.
While theoretically this idea makes immense sense, it is not really a solution that India will be able to execute. The United States and the European Union have placed sanctions on Iran over its nuclear programme. As Reuters reports “U.S. and EU sanctions placed on Iran over its nuclear programme have reduced its oil exports more than half from pre-sanction levels of about 2.2 million barrels per day (bpd). In the first half of 2013, imports of Iranian oil from its four biggest buyers – China, India, Japan and South Korea – fell more than a fifth from a year ago to around 960,000 bpd.”
India’s oil imports from Iran have declined by 46% to 185,700 barrels per day during the first seven months of the year, in comparison to the same period last year. And this is because of the sanctions.
Oil is bought and sold internationally in dollars. This started sometime after the Second World War. President Franklin D Roosevelt realised that a regular supply of oil was very important for the well being of America or what came to be known as the great “American dream”.
After the end of the Second World War Roosevelt travelled quietly to USS Quincy, a ship anchored in the Red Sea. Here he was met by King Ibn Sa’ud of Saudi Arabia, a country, which was by then home to the biggest oil reserves in the world.
The obsession of the Untied States with the automobile had led to a swift decline in domestic reserves, even though America was the biggest producer of oil in the world at that point of time. The country needed to secure another source of assured supply of oil. So in return for access to oil reserves of Saudi Arabia, King Ibn Sa’ud was promised full American military support to the ruling clan of Sa’ud. This oil was sold in dollars.
This was one of the major reasons behind the dollar becoming the international reserve currency. Every country in the world needed oil. And for countries that did not produce enough of their own oil they needed dollars they could use to buy oil from other countries.
This continued till the 1970s. In the seventies, after the end of the gold standard, the dollar started to lose value rapidly against other currencies and against gold. This meant that the purchasing power of the OPEC countries which sold oil in dollars and then used those dollars to import goods they did not produce, came down dramatically.
As William Greider writes in Secrets of the Temple: How the Federal Reserve Runs the Country “The dollar had already lost one-third of its value in only half a dozen years and seemed headed toward even steeper decline… Oil trades worldwide in dollars and if the U.S. was going to permit a free fall in the dollar’s value, that meant the oil-producing nations would received less and less real value for their commodity.”
One impact of this was OPEC countries raising the price of oil. Another impact was that some of the OPEC countries wanted to price oil in several currencies rather than just the American dollar. Jahangir Amuzegar, who was an economist by training, and had been a minister in the government of Iran, as well as a negotiator for OPEC, outlined some of these proposals in a 1978 article. In this article he outlined several currency combinations that could be used to price oil. Iraq, Qatar, United Arab Emirates and Venezuela were in support of this plan.
The idea was not to be dependent on one currency, but a number of currencies and hence iron out any fluctuations in the value of one currency. Moving to a basket of currencies at that point of time clearly made sense for OPEC as far as future revenues were concerned.
As per estimates of the US department of treasury, Saudi Arabia, the largest member of OPEC, would have been better off if it had priced oil in a basket of currencies instead of the dollar, in all but 18 months since 1973.
So what was stopping Saudi Arabia and OPEC from moving to pricing oil in a basket of currencies rather than the dollar? As David E Spiro writes in The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets: “The Saudis, however, had the greatest proportion of dollar-denominated reserves in OPEC. This means that their reserves were diminished by the depreciation of the dollar (compared to the basket of their imports). But it also meant that they had the most to lose if a shift by OPEC to a basket of currencies threatened international confidence in the dollar. Having agreed to invest so much in dollars, the Saudis now shared a stake in maintaining the dollar as an international reserve currency. On the one hand dollars constituted 90% of Saudi government revenues in 1979, and those revenues were subject to the same fluctuations as the dollar. On the other hand, the Saudi investments were, roughly at same time 83% dollar denominated. The choice was whether to stabilise current revenues threatening the worth of all the past revenues (since invested in dollar assets).”
Also, as mentioned earlier, Roosevelt had stuck a deal with the ruling clan of Al Sa’uds. It is important to remember that the American security guarantee made by President Roosevelt after the Second World War was extended not to the people of Saudia Arabia nor to the government of Saudi Arabia but to the ruling clan of Al Sa’uds. So they had an intrest in selling oil in dollars and keeping the dollar going as an international reserve currency.
Also other than being the largest producer of oil Saudi Arabia also had the largest reserves among all OPEC countries. It had 39% of the proven OPEC reserves. Within OPEC it had the almost unquestioned support of what were known as the sheikhdom states of Bahrain, Kuwait, United Arab Emirates and Qatar. These countries faced threats from other OPEC members like Iraq and Iran. For many years, Iraq had been eyeing Kuwait. It had tried to annex Kuwait in 1961 (and then again in the early 1990s).
Hence, the support of Saudi Arabia, the largest nation in the region, was important for them. If we added the reserves and production of the sheikdom countries which supported Saudi Arabia, they were together responsible for 50% of OPEC’s production and owned nearly 61% of its proven reserves. So, when Saudi Arabia made the decision that OPEC oil would be continued to be priced in dollars, there wasn’t much option for the other OPEC members but to follow what the largest member had decided.
What this brief history of oil tells us is that for dollar to continue being an international reserve currency, it is very important that oil continues to be sold in dollars. Other countries need to earn these dollars whereas the United States has the exorbitant privelege of simply printing them and spending them.
Iran has been trying to challenge this hegemoney of the dollar for a while now. It has been trying to move the buying and selling of oil away from the US dollar. In late 2007, Iran claimed to have moved all of its oil sales to non dollar currencies, with most of it being sold in euros and a small part in yen. There were no independent reports confirming the same.
The United States and Iran have been at each other’s throats since the 1979 revolution in Iran which overthrew the King. Lately there has been tension because of Iran’s nuclear programme.
Mahmoud Ahmadinejad, who was the President of Iran till around a month back, has called the dollar “a worthless piece of paper”. News reports suggest that Iran has started accepting renminbi from China and rubles from Russia in lieu of the oil that it exports to these countries.
In fact in a November 2007, summit of OPEC, Iran had suggested that OPEC oil should be sold in a basket of currencies rather than the American dollar. But it did not get the support of other members except Venezuela. Hugo Chavez, the late President of Venezuela, was known to be a vocal critic of the United States. 
On February 17,2008, Iran set up the Iranian Oil Bourse, for the trading of petroleum, petrochemicals and natural gas, in currencies other than dollar, primarily the euro and the Iranian rial. But the exchange since inception has not traded in oil but products made out of oil which are used as a feedstock in pharmaceutical and plastic industries.
Reports in the Iranian press suggested that the bourse started trading oil in non dollar currencies from March 20,2012. India wanted to pay for Iranian oil, either in gold or in rupees. If India paid in rupees, Iran could use those rupees to import goods from India.
This move to pay for oil in rupees or gold was a clear attempt to undermine the dollar in the buying and selling of oil, something that keeps the dollar at the heart of the international financial system. Hence, great pressure was applied by America on India to stop its oil imports from Iran and source its needs from some other producer.
India’s oil imports from Iran in April 2012 fell by 34.2% to 269,000 barrels per day from 409,000 barrels per day in March 2012. The government of India asked the Indian oil refiners to cut Iranian oil imports and they obliged.
What this tells us in a very clear way is that even though the US dollar may not be in the best of shape, but any attempts to mess around with its international ‘currency’ status will not be taken lying down. And for dollar to maintain its international currency status it is important that oil continues to be bought and sold in dollars.
So if the United States could pressurise India into cutting down its oil purchases from Iran in March 2012, it can do the same in September 2013. Any move away from dollar , which in turn will undermine access to “easy money” which has been so important to what is now called the American way of life.
Also it is best to remember that financially America might be in a mess, but by and large it still remains the only superpower in the world. In 2010, the United States spent $698billion on defence. This was 43% of the global total.
The article originally appeared on www.firstpost.com on September 2, 2013 
(Vivek Kaul is a writer. He tweets @kaul_vivek) 
 

Six reasons why the PM’s prediction of growth will be right for a change

Manmohan-Singh_0Vivek Kaul
Over the last few days a whole host of stock brokerages and financial institutions have downgraded India’s expected rate of economic growth for 2013-14 (i.e. the period between April 1, 2013 and March 31, 2014). Even Prime Minister Manmohan Singh conceded a few days back that the projected growth of 6.5% might be difficult to achieve. “We had targeted 6.5% growth at the time the budget was presented. But it looks as if it will be lower than that,” he said.
Politicians are typically the last ones to concede that things are going wrong. And when they do come around to admitting it, then that is the time one can really believe what they are saying.
So to cut a long story short, for a change, Manmohan Singh’s statement made a few days back might very well come out to be true by the end of this financial year.
Attempts are being made by the government to revive the economy (or at least that is what they would like us to believe), but they are unlikely to lead to any immediate improvement. Analysts at Nomura led by economist Sonal Varma give out some likely reasons for the same in a recent report titled India: turbulent times ahead. “We are downgrading our GDP(gross domestic product) growth forecasts to 5.0% year on year in FY14 (from 5.6%),” write the Nomura analysts. 
Lets look at some of the reasons:
a) The government’s current reform zeal isn’t going last for long. Elections in five states are to be held in December 2013/January 2014. These states are Delhi, Mizoram, Madhya Pradesh, Rajasthan and Chattisgarh. The Congress is not in power in three out of the five states. Also, the party is likely to face a tough time in Delhi. Given these things it is highly unlikely that the party will continue with the “so-called” reform process that it has initiated in the recent past.
One of the lasting beliefs in Indian politics is that economic reform is injurious to electoral reforms. Or as the Nomura authors put it “The window for reforms is fast closing…(It) will close after September…Given the negative consequence of past government inaction(on the reform front), this is a case of too little, too late (to revive growth).”
Also, as the elections approach it is likely that prices of petrol, diesel and cooking gas will not be raised in line with the international price of oil. This happened before the recently held Karnataka assembly elections as well. Hence, the fiscal deficit of the government is likely to continue to go up. “We are concerned with the government’s ability to stick to its budgeted fiscal deficit target,” write the Nomura analysts. Fiscal deficit is the difference between what a government earns and what it spends.
When a government spends more, it has to borrow more in order to finance that spending. Hence, it “crowds-out” other borrowers, leaving a lesser amount of money for them to borrow. This pushes up interest rates. At higher interest rates people and businesses are less likely to borrow and spend. This impacts economic growth negatively.
b) New investments have dried down: Investments made by companies to expand their current businesses or launch new ones have dried down. “New investment projects announced have fallen from a peak of Rs 2300000 crore in the first quarter of 2009 to Rs 300000 crore in the second quarter of 2013…Investments are long-term decisions and there is a lag between an investment’s announcement and its execution,” write the Nomura authors. Hence, even if a company starts with an investment now, its impact on economic growth will not be felt immediately.
What adds to India’s woes is the fact that sectors like power generation & distribution, infrastructure developers & operators, construction, telecom services etc, which drove the last round of investments between 2004 and 2007 are deep in debt, and in no position to continue investing.
The political uncertainty that prevails will also lead companies to postpone long term capital expenditure decisions till there is hopefully more certainty next year after the Lok Sabha elections in May 2014. As the Nomura analysts write “Given this political uncertainty and an already dismal starting position, we believe that corporates will choose the prudent option of delaying long-term capex decisions until there is more political certainty.”
In fact this trend was visible in the poor results of the heavy engineering and construction major Larsen and Toubro, for the three month period ending June 30, 2013.
c) Banks have become cautious while lending. Even if a company may be ready to invest they might find it difficult to get the loans required to get the project going. This is primarily because the non performing loans and restructured loans of banks have risen to around 10% of their total loans. This figure was at a level of around 4% four years back. As the Nomura authors write “This worsening credit quality has impelled banks to become more risk averse when lending.”
d) Consumer demand will continue to remain sluggish. Car sales have now fallen nine months in a row. High interest rates are often offered as a reason for the falling sales. But as this writer has pointed out in the past, in case of car loans, even a cut of interest rates by 100 basis points brings down the EMI only by around Rs 200.
Hence, people are not buying cars primarily because they are insecure about their jobs and businesses. As the Nomura analysts point out “The job market remains moribund. India does not have good employment data, but given continued job losses in banking and financial services, slowing job growth in the IT sector and sluggish manufacturing sector employment, we do not see a sustainable consumption recovery without an improvement in employment prospects.” Weak consumer demand translates into lower profits for businesses and low economic growth.
One of the main reasons for weak consumer demand has been the fact that till very recently the government did not pass on the increase in the price of oil to the end consumers in the form of a higher price for diesel, petrol or cooking gas. But that has changed now. “Consumers used to be insulated from rising fuel and energy costs (diesel, petrol, LPG cylinder, electricity), but now they are forced to bear a higher burden of adjustment, thereby reducing their disposable income,” the Nomura analysts point out. Add to that a very high food inflation of nearly 10% and you know why the Indian consumer is not spending as much as he was in the past.
e) Indian imports will continue to remain high. The government and the Reserve Bank of India have gone hammer and tongs after gold imports. Through various measures they have managed to bring down gold imports to 31.5 tonnes for the month of June 2013. Hence, gold imports are down by nearly 81% from the 141 tonnes that the country imported in May 2013.
The government’s hatred for gold is primarily because India’s foreign exchange reserves are at very low levels when compared to its imports. Indians foreign exchange reserves are now down to a little over six months of imports, a level last seen in the 1990s. By making it difficult to buy gold, the government hopes to preserve precious foreign exchange reserves. The trouble is that such an alarming fall in gold imports has led the intelligence agencies to believe that a lot of gold is now being smuggled into the country.
The government may be clamping down on gold imports but there are other imports it really doesn’t have much control on. “The commodity intensity of imports is high,” write Nomura analysts as India imports coal, oil, gas, fertilizer and edible oil. And there is no way that the government can clamp down on the import of these commodities, which are an everyday necessity.
When these commodities are imported they need to paid for in dollars. Hence, rupees are sold and dollars are bought. This leads to a surfeit of rupees in the market and a shortage of dollars, and pushes down the value of rupee against the dollar further.
A weaker rupee will lead to Indian oil companies having to pay more for the oil they import. If this increase is not passed onto end consumers (given the upcoming state elections), then it will add to the fiscal deficit of the government.
f) RBI can’t manage the impossible trinity: The RBI currently faces the trilemma of ensuring that the rupee does not go beyond 60 to a dollar, allowing free capital movement and at the same time run an independent monetary policy. This is not possible. Expectations were that the RBI will cut the repo rate in its next monetary policy to help revive economic growth. Repo rate is the interest rate at which the RBI lends to banks.
But at lower interest rates chances are foreign investors will pull out money from the Indian bond market. When they do that they will be paid in rupees. These rupees will be sold and dollars will be bought. When this happens there will be a surfeit of rupees in the market and which will weaken the value of the rupee further against the dollar. This will create problems for the government which will have to bear a higher oil bill. Businesses which have borrowed in dollars will have to pay more in rupees in order to buy the dollars they will need to repay their loans. Imports will become costlier and that will add to inflation, impacting economic growth further.
Given these reasons it is unlikely that India will return to high economic growth rates of 8-9% any time soon. Manmohan Singh might be finally proved right on something.

The article originally appeared on www.firstpost.com on July 23, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek) 
 

Gold will rise against USD; it may hit a ‘new high by 2013-end’

nick barisheffNick Barisheff is the founder, President and CEO of Bullion Management Group Inc. (BMG) and the author of$10,000 Gold: Why Gold’s Inevitable Rise Is the Investor’s Safe Haven (www.10000goldthebook.com). Widely recognised as an international bullion expert, Barisheff speaks to Vivek Kaul in a free wheeling interview on the future of gold and why the current fall in its price is going to go away soon. As he puts it “I would not be surprised to see gold hit new highs before year end.”
Excerpts:
Has your book $10,000 Gold released at an inappropriate time, given that gold price has taken a big beating in the recent past?
I began collecting notes and research for the book soon after I decided to go into the precious metals business in 1998. Although the material was updated many times over the years, the core long-term trends, that I feel are responsible for gold’s rising price, are still in place today as they were in the late 1990s when gold was trading below $300 an ounce (1 troy ounce equals 31.1 grams). The book will be just as relevant in two years as it is today for this reason. It is about long-term, irreversible trends. Those simply won’t change until there is a complete purging of debt as the trends I follow are all trends that result in greater debt as debt is directly related to the price of gold.
What do you think are the reasons behind the recent fall in the price of gold? How soon do you expect it to start going up again?
Estimates put the sales on the COMEX on Friday April 12th, and Monday April 15th between 125 and 400 tonnes. The most telling evidence that this was a deliberate paper gold attack at the highest levels was the size and speed of the sales that then triggered sell stops and margin calls. (This article provides additional details: http://news.goldseek.com/GoldSeek/1368648060.php)
In contrast to the lows in paper gold, unprecedented buying of physical gold was triggered. If this were truly a natural correction or the indication that gold bull had turned into a bear, then the physical market would be panic selling not panic buying. Over the long term, these artificial declines in the price of paper gold are good for gold as it lets a lot of big players enter the markets. I do not expect this “correction” to extend over a long period of time as it is artificial. However, it is possible this was coordinated to correspond with gold’s slow summer season. I would not be surprised to see gold hit new highs before year end.
One of the major myths about gold is that it is not a good inflation hedge. You suggest that its a great inflation hedge. Can you explain that through some numbers?
The best way to see how gold works to maintain purchasing power and is therefore a good hedge against inflation is to think in terms of ounces rather than the more relative dollars or euros. As I mention in the book, it took 66 ounces of gold to buy a compact car in 1971. Today it would take about 10 ounces. We can see the same ratio with houses and even the DOW. (the Dow Jones Industrial Average, one of America’s premier stock market indices) Today you can buy 3 average size houses for the same amount of gold you would have needed to buy 1 house in 1971 even though the prices of houses have risen significantly in dollar terms since then. That’s how gold serves as a hedge against inflation and maintains its purchasing power. One of the best books on how gold maintains its purchasing power over long periods is the Golden Constant.
Gold bugs have been suggesting people to hold gold because they expect very high inflation to come in given all the money that is being printed by central banks all over the world. But inflation hasn’t set in as yet. What is your view on that?
To begin with, real inflation is running at a much higher level than official figures indicate. I’ve explained this in detail in the book. If we use the original basket of goods used to measure inflation before the Clinton government began understating inflation through substitution and other deceptive metrics, it is running at about 10 percent. (For a more detailed description please see: http://www.shadowstats.com/article/no-438-public-comment-on-inflation-measurement)
Can you elaborate on that?
As I mentioned above, real inflation has set in, but it’s hidden through doctored government inflation reports. Anyone who eats, heats their home, drives a car or sends their children to college knows this, but governments need to hide this fact because, for each official point in inflation they would have to pay out hundreds of billions in indexed pensions. As well, the method they are currently using to keep the bond market strong is through low or negative real interest rates. I have discussed in several recent articles, the methods governments use to secretly rob pensioners and savers through these low interest rates using a program called “financial repression”. Richard Russell, the famous newsletter writer, once stated that gold will preserve wealth equally well in an inflationary or deflationary environment as it is the ultimate store of wealth. This is also confirmed by the data in the Golden Constant.
So where will all this money printing that is happening ultimately lead us to?
All world fiat currencies eventually end in hyperinflation followed by complete collapse. Throughout all of history there has not been a single example that did not follow this pattern. The U.S. dollar will fail for the same reasons the others failed, because politicians cannot resist the urge to print unlimited amounts of unbacked currency. This eventually appears as inflation brought about through currency debasement. The main reason this positively affects the gold price is because gold is not rising in value, currencies are losing purchasing power against gold. Therefore, gold can rise in price as high as currencies can fall. As Voltaire said, “Paper money eventually returns to its intrinsic value—zero.”
What is the link that the oil, ageing population and population growth have with the price of gold?
As I write on Page 71 of my book “Ultimately, we are most concerned with one measure when it comes to the price of gold: government debt. How will decreasing oil supplies impact gold? They will impact gold in the same way as the other irreversible trends: the rising population, the aging population and outsourcing. All create the need for more debt to compensate for slowing growth, and increased government debt equals more currency, lower purchasing power and a higher gold price.”
Can you elaborate on that?
The debt based model depends on perpetual growth as it, like a spinning top will collapse if it stops moving. When natural economic growth does not come through productivity, manufacturing of the production of natural resources, then the government must fuel growth through debt creation. Dr. Chris Martenson does an excellent job of demonstrating how much of the growth of the past century, growth that led to a population explosion, was due to cheap land-based oil. The trends described in your question along with the huge interest payments necessary to finance the debt are costing the government many more dollars to grow the GDP. In 2012, it cost the U.S. government $2.47 to grow the GDP by $1.
And that is a problem?
Stimulus works while the major portion of the population is working. Right now baby boomers in the US are retiring at a rate of 10,000 a day. Despite the claims of energy independence because of shale oil in the United States, the world’s growth has been fueled by cheap land-based oil, located mainly in the Middle East. Oil sands and shale oil are extremely expensive to produce by comparison and are therefore inflationary. Apart from money printing creating inflation, the rising price of oil will also be inflationary as it is used for virtually everything. The trends described in the book all impact growth negatively, they reduce taxation revenues, cause inflation and require ever greater government expenditure leading to ever increasing government debt. Therefore, this creates a need of more currency debasement, which naturally causes the value of gold to appear stronger against currencies.
Anything else that you would like to tell our readers regarding this?
We can also add that over the past three thousand years the most effective solution to runaway inflation brought about through currency creation is the re-establishment of some type of relationship between currencies and gold. It doesn’t need to be a 1:1 relationship, but whatever percentage it is, it will cause gold to trade much higher. We are in uncharted territory here. Several reputable analysts are calling for $10,000 gold for this reason, such as Société Générale’s Edward Alberts and the man Barrons labeled “Mr. Gold” because of his proven understanding of the gold market—Jim Sinclair, who stated he expected gold to eventually trade at $50,000 an ounce. Again, this is easier to understand why currency debasement will result in rising gold prices when we realise gold is not rising in value, currencies are losing value against gold.
You suggest in your book that the Chinese government is buying gold big time, though there is very little evidence available for the same. Can you get into that in some detail?
China leads the world in gold production. All of that domestic production remains in China. We know that China and India purchased 2000 tonnes of the 2,700 tonnes of global production in 2012. This includes the public as well as official purchases and unofficial purchases by sovereign wealth funds. In the past, we know the Chinese government purchased its gold in a circumspect, but secretive manner. They accumulated through sovereign wealth funds that can bypass the red tape and the transparency required of official central banks. It is safe to assume they are still doing this. In 2009, China announced its official gold purchases after the fact. In 2009 the world thought China had 454 tonnes, the same as it held at the time of the country’s last official announcement in 2003. In 2009, they announced they had 1,054 tonnes.
Why are they being so secretive?
Of course, China is not interested in having the world know how much gold they have at this point because it is trying to accumulate as much as it can. I believe China hopes their yuan will replace the U.S. dollar as the next world reserve currency. If the Chinese follow the pattern of announcing every 6 years, we may be in for a major surprise in 2015, especially since Ji Xiaonan, who chairs the supervisory board for the Chinese State Council’s biggest state-owned companies stated in 2009 that China planned to add 10,000 tonnes to their gold reserves before 2019.
Gold has always been seen as an anti-dollar. People who have no confidence in the paper dollars being printed by the Federal Reserve buy gold. To what extent do you think the US will go to protect the dollar and discredit gold?
The U.S. government is highly motivated to maintain its reserve currency status and to maintain pricing of oil in US dollars. The US is the world’s largest debtor nation and the only reason the United States has been able to run up such a large debt is because it had the world’s reserve currency thanks at first to the Bretton Wood’s agreement in 1944. When they broke the peg with gold in 1971, the dollar’s status came under scrutiny, but there were no other currencies challenging it at the time. In 1973 the Americans secured their position as world’s reserve currency when OPEC agreed to denominate oil in U.S. dollars alone. This is now being challenged as China has entered into trade agreements with Japan, Australia, Brazil, Korea, and numerous others to bypass the US dollar and settle trade with each other’s currencies. This is a direct threat to the US dollars reserve status.
The interview originally appeared on www.firstpost.com on May 24, 2013.
(Vivek Kaul is a writer. He tweets @kaul_vivek)