The triumph of politics

Richard Nixon

On August 15, 1971, President Richard Nixon declared that the United States would no longer honour its promise to exchange US dollars held by foreign central banks for gold at a fixed price of $35 an ounce. The innocuous term 'Nixon closed the gold window' that is now widely used to describe this act does not quite convey its significance. (Was something to be stopped from going out or from coming in through the window? Can the window be reopened again?) What Nixon did was cut the last remaining official link between the … [Read more...]

Please don’t call this capitalism!

Eurotower in Frankfurt

Surprise, surprise, the Euro Zone debt crisis is back. Or was it never gone? As yields on Spanish and Italian government bonds are heading higher once again, I am reminded of the old saying, you can't fool all of the people all of the time. Not even with a trillion euros. I previously described the relationship between banks and states as that of two drowning sailors who desperately cling to one another, and I still think it is an apt description of the charade that is being orchestrated in Europe and that is already … [Read more...]

ECB money injection not a reason for optimism

Euro banknotes

Are you feeling optimistic yet? Are you confident that policy-makers have things under control? - If so, you must believe that we can solve any economic problem by throwing freshly printed money at it. Even problems that are evidently the result of previous periods of 'easy money'- such as overstretched and weak banks. The ECB this week allotted another EUR529.5 billion of new money to Europe's banks. The banks get these funds for three years at 1 percent interest. That this is a gigantic subsidy for one specific industry … [Read more...]

My big fat Greek bailout

Parthenon

Greece was bailed out for the second time in four months. Or did it default? Well, a bit of both, I guess. All bondholders are equal. But some are more equal than others. If you are the ECB, your Greek bonds were exchanged, par for par, for new Greek bonds, and you can go on pretending that they are worth their principal amount. You won't have to report a loss for now. But if you are a 'private' entity - and that is a rather loosely used term these days as it includes the banking industry which is either now partially owned … [Read more...]

“When they stop buying bonds, the game is over.”

Floating currency symbols

I took the title for this blog from an interview that James Turk of the GoldMoney Foundation conducted with Eric Sprott, a Canadian fund manager. You can see it here. (I also recommend you have a look at this interview with Doug Casey.) I think the quote is a succinct summation of the role that the bond market, and in particular the market for government bonds, now plays in this crisis. As you know, I would not touch bonds with a barge pole, especially government bonds. After 40 years of unending fiat money expansion, the … [Read more...]

The nightmare after Christmas

Christmas motive

 The pathetic state of the global financial system was again on display this week. Stocks around the world go up when a major central bank pumps money into the financial system. They go down when the flow of money slows and when the intoxicating influence of the latest money injection wears off. Can anybody really take this seriously? On Tuesday, the prospect of another gigantic cash infusion from the ECB's printing press into Europe's banking sector, which is in large part terminally ill but institutionally protected from … [Read more...]

Last week in Europe – Some thoughts on the ongoing crisis

Euro banknotes

 Apologies to my readers that no new contributions have appeared on the Schlichter Files for two weeks, and in particular that I did not get around to responding to some of the questions and comments on my blog.  I hope to rectify this shortly. I was committed to a few speaking engagements in connection with my book Paper Money Collapse - The Folly of Elastic Money and the Coming Monetary Breakdown. Also, the brokerage firm CLSA was so kind to arrange a whole string of meetings with their clients in London and in Milan on … [Read more...]

The short of the century – The bubble in government bonds is finally bursting

Government bonds

"The government can always pay." This is a statement that has no basis in fact. Any rational analysis will quickly expose it to be a fallacy. Economic theory, economic history, and plain good old horse sense can demonstrate effortlessly that this statement is an illusion. Yet, it is today a widely held and deeply cherished illusion in the world of finance (and, incidentally, the world of politics). In fact, it has become one of the defining myths of the modern fiat money era. It has for decades provided portfolio managers … [Read more...]

Infinite stupidity

dollar notes falling from sky

"The unlimited resources" of the European Central Bank (ECB) is quickly becoming the new magic mantra in political commentary and financial market analysis, now that the bigger euro-dominos are beginning to wobble and everybody realizes that nobody has the firepower to bailout Italy, or to 'recapitalize' (i.e. bailout again) all the banks that lent to the country. So the chorus that demands that the printing press finally be put to good use is getting louder by the day. Robert Peston, the BBC economics expert, last week … [Read more...]

Unstoppable: Why this crisis will keep unfolding

Balls of euro banknotes

When the tectonic plates underneath society shift, confusion reigns, together with wishful thinking. It appears that financial markets have again managed to get themselves into a state of unrealistic expectation. The European summit this coming Sunday (or the follow-up summit on Wednesday) is now supposed to bring a "comprehensive plan" to solve the European debt crisis. Of course, nothing of the sort will happen, and for a simple reason: it is impossible. Those who cherish such fanciful hopes are naïve and will be … [Read more...]