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Banks and Government Dr David Evans November 2011

David Evans

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The Gold Symposium Keynote Presentation 14 & 15 November 2011 Luna Park

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Page 1: David Evans

Banks and Government

Dr David Evans

November 2011

Page 2: David Evans

1. Manufacturing

Money

Page 3: David Evans

Where Does Our Money Come

From?

• Ever noticed that here is a lot more

money around than there was, say,

20 years ago?

• So someone is manufacturing it

(literally making money).

Page 4: David Evans

Taboo Topic:

Money Manufacture

• Public conversation is at kindergarten level,

because hardly anyone knows how money

is manufactured.

• Vaguely referred to by

euphemisms in public

(economy is ―overheating‖)

Page 5: David Evans

Money Manufacture Dominates

the Economic Landscape

• Interest rates

• Bubbles

• Debt crisis

• Money manufacture

is power:

determines which

elites get to run

society

Page 6: David Evans

What if You Could Manufacture

Money?

• No ―work‖ – producing goods or services

that others want.

• Freedom! Material wealth! Buy almost

anyone to do almost anything!

Page 7: David Evans

Good News

• Legally manufacture of money is limited to

banks and governments.

• Manufacture by commercial banks:

$

-$

(nothing)

• Only governments (central banks) can

grossly exploit the manufacturing power:

$

(nothing)

Page 8: David Evans

Bad News

• Some paper shufflers capture

much of value from money

manufacture.

• Wealthy, without working hard.

• Historically, fiat currencies lead

to corruption and unfairness.

• Fiat currencies usually die after

25 – 50 years. It’s now 40 years

since 1971…

Page 9: David Evans

The Origins of Banking

• Goldsmiths took gold

deposits, issued receipts.

• The receipts circulated as

money, more convenient

than the metal.

• Goldsmiths learned they

could issue more ―receipts‖

than they had gold.

Page 10: David Evans

More Receipts than Gold

• Lent out these extra receipts and charged

interest on them (to cover risk of non

repayment, and profit).

• Typically safe to lend out 10 times as

many receipts as gold deposits.

Goldsmith Depositer Borrowers

Page 11: David Evans

Classical Gold Standard

• Base money = gold

• Bank money = receipts (cash, bank notes)

• Bank money is created out of nothing, yet

can buy stuff the same as gold.

• Amplifies the base money by 10.

• 90% of ―money‖ is created by banks, by

lending.

• Depositor’s money is NOT lent out; they

have access to their money at all times.

Page 12: David Evans

Modern Base Money

• Transitioned from gold 1913 – 1971.

• Two forms:

1. Physical cash – Manufactured by a printing

press or coin press.

2. Money in an account at the central bank –

Manufactured by increasing the account

balance on a computer (―monetization‖).

• Manufacture unconstrained.

• Moderated in practice only by desire not to

raise inflationary expectations.

Page 13: David Evans

Modern Bank Money (1) • One form:

1. Money in an account at a private bank –

Manufactured by increasing the account

balance, on a computer.

• Manufacture is constrained by Basel

Accord, since 1988, a formula based on

– Equity capital of bank

– Size and riskiness of existing loans

– Depositor’s funds.

• 90 – 95% of all money is bank money.

• Most purchases move it between accounts.

Page 14: David Evans

Modern Bank Money (2)

• A loan is made:

$ -$

(nothing)

Bank money Matching liability

• And repaid:

(nothing)

• Bank debt = Bank money.

• Nearly all modern money is debt.

Page 15: David Evans

Today’s Money System

• The current system is a fiat base amplified

by a fractional reserve system.

• Both parts create something-for-nothing:

1. Base money, created by the central bank.

2. Bank money, created by private banks.

Cute but irrelevant

• Each part is somewhat

unstable historically.

• What could possibly go

wrong?

Page 16: David Evans

2. Our Debt Crisis

Page 17: David Evans

Monetary Experiment Starts 1982

• Novel money system started in 1971, with

the switch to fiat base money.

• Only constrained by the sensible behavior

of banks and governments.

• 1970s stagflation dealt with the inflationary

consequences of the 1960s.

• Reset in 1980 by 20% interest rates.

Page 18: David Evans

How Governments and Banks

Blew It

• Central banks kept

interest rates as low as

possible (keep CPI low)

• Changed banking rules to

make money

manufacture ever easier.

• Responded to every

crisis by bailing everyone

out with new money.

No one took away the punchbowl .

Page 19: David Evans

The Debt-To-GDP Ratio

• ―Amount of money‖ = (total) debt

• ―Size of economy‖ = GDP

• ―Size of bubble‖ = debt-To-GDP ratio

• This is the financial story of our times…

Page 20: David Evans

Bubble

Starts

1987

Crash

Tech Crash ->

Housing Bubble

GFC

Change to Fiat Base

Money (Nixon)

235%, 1929 crash

Clinton

Strategy

Starts

The longer view: 1870 – Q3 2009

Gold peaks at 850 USD/oz

Volcker 20% interest rates

235%, 1987 crash

Page 21: David Evans

The Bubble Began To End in 2008

• World is running low on borrowing capacity:

1. Not enough income to service more debt – Debt = 400% of GDP

– Interest rate = 4%

– So interest repayments are 16% of GDP

2. World running low on unencumbered

collateral.

• Money manufacture in the private sector

stalled in 2008 Global Financial Crisis.

Page 22: David Evans

Governments Prolonged the Bubble • Governments took up slack of money

manufacture in 2008:

– Borrowing

– A little printing (―monetization‖)

– Lowered interest rates.

• Late 2011: Many governments running out of

capacity to borrow more.

• Now realizing private sector is debt-saturated,

no return to pre-2007 ―normal‖.

• Only option left for manufacturing money is

government ―printing‖.

Page 23: David Evans

What Now? • Last year’s debt has to be repaid with

interest, so every year the stock of money

must increase or there will be widespread

business and bank failures (a la 1930).

• World at a fork:

Print and

inflate

Widespread failures

and deflation

or

Page 24: David Evans

The Dismal Arithmetic

• 1994 – 2007: Extra debt added 1 – 2 % to

GDP, each year.

• 15 - 25% of growth was borrowed from the

future.

• To return the debt-to-GDP ratio to normal,

must pay back that borrowed GDP growth

15 – 25% fall in GDP

• Double depression!!

Page 25: David Evans

Philosophical View : Essence

• Money is a promise – of similar purchasing

power anytime in the future.

• Work is motivated by those promises.

• Too much money = Too many promises.

• Promises cannot all be kept: not all debts

can be repaid in dollars near current value.

• So there are going to be many losers.

• The political system, not usual economic

rules, will determine who the losers will be.

Page 26: David Evans

Politicians Will Choose Inflation

• Keynesian fog will be used to excuse this

choice, to ―reduce the people’s debt burden‖.

• Basic democratic calculus:

– Lenders: Few

– Borrowers: Many (vote, might riot).

– Powerful business interests: Don’t want to fail.

Page 27: David Evans

Inflation is coming…

• The political system won’t

allow failures of big banks

and corporations. TBTF.

• Bernanke vows he won’t

allow deflation, like 1930s.

• Establishment economists

already suggesting running

mild inflation (6%) for a few

years. (Rogoff, Mankiw)

• Government spending more

than tax receipts.

Page 28: David Evans

Winners

• Borrowers, the profligate.

• People without savings.

• Banks that would be bust if their assets

were marked to market (most big banks).

• Businesses that would be bust if they had

to pay back loans at original value.

• Owners of real assets not tied to wages –

especially commodities, but not houses.

• Gold and silver.

Page 29: David Evans

Losers

• Lenders.

• Savers.

• People on fixed incomes.

• Retirees, pensioners.

• Most industrial companies.

• The Economy (suboptimal allocation of

capital, friction costs of inflation).

• Everyone in the economy.

Page 30: David Evans

Even the MSM Are Noticing… ―It was probably always going to turn out like this. That is,

with both the United States and Europe monetising their

debt and sending the world’s owners of capital scurrying

into gold – effectively producing a de facto return to the

gold standard.‖

―There was no way the debt-funded golden decades

following the end of Bretton Woods in 1972 could be

paid back via global deflation and depression. It was

always going to be done through inflation.‖

Alan Kohler, 7 Nov 2011

Page 31: David Evans

3. Gold

(and Silver)

Page 32: David Evans

Gold: • Enforces honesty.

• An anti-cheating device.

• A reliable store of purchasing power.

• Gold is the foremost non-government

currency, evolved in the marketplace over

5,000 years. Fiat currencies come and go.

• Might return to the monetary system.

• They can’t print it.

• And who hates gold?

Page 33: David Evans

A Bet On Gold is a Bet Against

Government and Banking

The monetary elite and governments:

– Prefer dishonest money

– Enjoy first use of the new money

– Profit by funneling new money to favored

sectors when it suits

– Print to cover debts

– Bash gold

– Will not give up their power easily.

Page 34: David Evans

A Bet on Gold is a Bet on

Political Interference

• Without political interference,

the current debt bubble

would collapse in a massive

deflation.

• A bet on gold is a bet that

central banks will interfere to

manufacture more money,

and deliberately increase

inflation.

Bob Prechter

(Analyst)

Page 35: David Evans

Gold in a Bubble?

• Long-term value of currency is determined

by its relative growth rates:

– Aboveground gold: 1% pa growth

– Fiat Currencies: 10%+ for last three decades

• Huge catch-up ahead for gold.

• Gold will basically go up forever against

fiat. $1m /oz is only a matter of time.

10+%

p.a.

Amount

1% p.a.

Page 36: David Evans

Gold Bubble? No end in sight!

• Reasons for gold are currently intensifying.

• 1970s : Took 20% interest rates to end the

gold bubble (and inflation).

• No one can afford 20% interest rates

today.

Wikipedia: ―Volcker's Fed elicited the strongest political attacks and

most widespread protests in the history of the Federal Reserve‖

Page 37: David Evans

Gold Bubble? • By historical standards, gold price is low.

• Imagine it is 1850…

• I might do it for $20,000 /oz.

• Gold mining today is mechanized yet marginal.

Page 38: David Evans

Gold as an investment??

• Gold is a currency.

• Most of the time, gold is a lousy investment.

• Gold becomes a good investment only

when the other currencies are failing,

inflating, profligate, corrupt, ….

• This is one of those times.

Timing is everything

Page 39: David Evans

4. The Next 17

Years

Page 40: David Evans

The Economy

• High but tolerable inflation, a more intense

version of the 1970s, goes on longer.

• Debt strangles the world economy.

Moribund industries and zombie banks.

• Governments keep interest rates low, to

keep interest payments down.

• People save in gold, but pay taxes and

daily commerce in national currencies. A

dual currency system will develop.

Page 41: David Evans

Precedents? Not really.

• The inevitable reversion to the mean debt

level of 150% is a double-depression.

• Depression debt started at 235%, up to 15

years to revert to 150% via deflation.

• 1970s, 6 years of 10% inflation, mild.

Page 42: David Evans

How Long?

• Shrinking total debt levels from 375% of

GDP to 150% is a reduction of 60%.

• How much inflation is required?

– Three years to get started 2014.

– 12% inflation high but tolerable, like 1970s.

– 14 years of 12% inflation (6% after interest),

reduces original debts to 42% of original real

value 2028.

Page 43: David Evans

Inflation Ends ~2028

• To end the inflation, governments must

make a credible commitment to halting the

rapid growth in the stock of money. They

must:

– Cut spending severely so they can run

surpluses severe trimming of welfare and

business subsidies.

– Raise interest rates rapidly, to 15 - 20%.

Page 44: David Evans

Gold Price (1)

• Gold price will rise right up until the

interest rates rise rapidly.

• Until then…relax (ok, it will be volatile).

• Gold price has been rising fairly steadily

at about 21% per year for the last 10

years, so assume it continues...

Page 45: David Evans

Gold Price (2)

• Nominal prices in USD/ oz:

– 1980: $ 850 ($3,300 in today’s money)

– 2001: $ 260 Start growth of 21% p.a.

– 2011: $ 1,750

– 2015: $ 3,800

– 2020: $ 10,000 ($4,600 in today’s money)

– 2025: $ 25,000

– 2028: $ 50,000 ($8,400 in today’s money)

• USD worth 17c in 2028 (14 y @ 12%).

Page 46: David Evans

Risks 1. Inflation slips out of control into

hyperinflation. Schedule

accelerates.

2. Governments cut back spending

now, because Ron Paul and

Tea Party types overpowered

the ruling establishment. Less

inflation required.

3. A derivatives blow up??

4. Run on London ―physical‖ gold.

Gold price up very far and fast.

Page 47: David Evans

5. GoldNerds

Page 48: David Evans

What Do I Do?

• Moved investments from banks to 100% gold.

• ASX gold stocks, for security and leverage.

• Direct exposure to gold price via long-dated

options (not ETFs). Traded gold futures.

• Started GoldNerds.

We sell spreadsheets

comparing all 250

ASX gold stocks,

every two weeks.

www.goldnerds.com

Page 49: David Evans

Leverage of Gold Stocks

• Typical gold producer today:

– $1,000 /oz cash cost

– $ 500 /oz corporate, on-going capex

– Sell for $1750 Profit $ 250 /oz.

• Real value of gold doubles to $3,500.

Costs same Profit $2,000 /oz.

– Gold price: × 2

– Gold company profit: ×8

Page 50: David Evans

Sector — Huge Upside

• The combined value of all the world's

gold miners < Exxon.

• Almost no superannuation (401k) money

goes into this sector.

• AUD will fall when world economy

stagnates. Boosts profits of Aussie Miners.

Page 51: David Evans

GoldNerds v1: Spreadsheet

• Prototype product.

• $399/yr. Updated every 2 weeks.

• Proves investors want something like this.

Page 52: David Evans

GoldNerds v3: Special Program

• Vastly more detail on deposits,

production, and finances.

• Under development for past three years,

ready early 2012.

Page 53: David Evans

6. Pushback from

the Establishment

Page 54: David Evans

Experience from a Different Fight

• Worked for the Australian Dept of Climate

Change 1999 – 2005, part time 2008 -

2010, modelling carbon in Australia’s

biosphere for Kyoto accounting purposes.

• Early ring side seat in climate fight.

• Was alarmist, now skeptical.

• joannenova.com.au

Page 55: David Evans

Establishment Strategy

― First they ignore you, then they ridicule

you, then they fight you, then you win.‖

Gandhi

• Climate skepticism: ―ignore‖ ―ridicule‖ in

2008, when we started gaining in polls.

• Sound money: at ―ignore‖. Starting to move

to ―ridicule‖, as we gain public support.

Page 56: David Evans

Soon They Will Ridicule Us

• Main weapon will be to call us names:

– ―extremist‖

– ―nut‖

– ―conspiracy theorist‖

– Every version of ―stupid‖ and ―ignorant‖.

• In news and current affairs, newspapers,

popular tv shows, websites, movies,…

Page 57: David Evans

And Smear Us

• Result: All our opponents will be very

confident they are right and we are kooks.

• Leaders like Eric Sprott will be vituperated.

(Eric will learn to ignore it.)

• Above all they want to shut us up, by any

means short of violence.

• Our opponents often have their income or

position on the line fight dirty and hard.

Page 58: David Evans

How powerful is their

propaganda?

• Please accept my apologies in advance, I

know this sensitive topic for some.

• I am a scientist and engineer, six

university degrees, PhD from Stanford.

• I will now demonstrate how powerful the

MSM is (or not) by pointing out some

facts. Compare the following with what

you ―know‖…

Page 59: David Evans

Did You Know?

• Skeptics agree that:

1. Global warming is occurring*.

2. Carbon dioxide is a greenhouse gas and

levels are rising.

3. Every molecule of carbon dioxide we emit

causes some global warming.

* Warming trend since 1680 of 0.5°C per century.

Within trend, pattern of 25 – 30 years of

alternating warming and mild cooling. Last

warming phase 1976 – 2001.

Page 60: David Evans

Did You Know?

• Skeptics agree that doubling the carbon

dioxide level will, of itself, raise the global

temperature by about 1.1°C.

• The central disagreement is over what

happens next:

– Alarmists: Water vapor amplifies the 1.1°C to

3.3°C (dangerous!).

– Skeptics: Earth reacts to 1.1°C by reducing its

impact, to maybe 0.7°C (no action needed).

• There is no evidence for amplification; it is

purely theoretical, in their climate models.

Page 61: David Evans

How Do You Go?

• Hardly anyone knows that. Yet every

skeptic scientist has been saying it over

and over for 20+ years!

• Establishment prepares the public in

advance, so when they hear skeptics they

simply ignore them.

• Distract with trivia, ignore their points,

misrepresent them.

• The same reality-distortion tactics will by

used against us in the sound-money fight!

Page 62: David Evans

The forbidden data…

Climate Models:

Emissions cut

savagely from

1988.

Reality

Their air temperature predictions always way too high, clueless about carbon.

Page 63: David Evans

Seen this in the MSM?

We only started measuring the oceans properly in 2003 … and they aren’t warming.

Page 64: David Evans

Absolutely forbidden.

The hotspot that causes the amplification in their models is not there in reality.

Page 65: David Evans

And they quote you temperatures

measured like this…

Page 66: David Evans

or this…

Volunteers surveyed most of the US land thermometers, found 89% were too close to

artificial heating sources.

Page 67: David Evans

or this…

Over half of the worldwide land thermometers are at airports, near warm tarmac and

copping jet-blast.

Page 68: David Evans

But NOT temperatures measured

like this…

• Satellites say the warmest year was 1998,

and the temperature flattened from 2001.

• Land thermometers say the warmest year

was 2010, and the temperature is still rising.

Page 69: David Evans

Lessons for Sound-Money Fight

• They can prevent even the most obvious,

relevant data getting through to the public.

• Sound-money advocates are currently

naive, like the skeptics were:

―We’ll just point out the evidence to the public

and they’ll see.‖

Nope.

Page 70: David Evans

Establishment Tactics

• ―Trust us, we are the experts. All experts

agree with us.‖

• ―Anyone who disagrees with us is a fool or

nut or just politically motivated.‖

• Never debate, simply denigrate opponents.

• Bluff. The public will never find out.

Welcome to

your future,

Eric Sprott!

My wife was

called a smelt

rat and a paid

mercenary in

Parliament.

Page 71: David Evans

Climate Skeptics are winning

• Western public about 50% skeptical, was

20% in 2008.

• Governments backing off. Now only

Europe, Australia, and NZ serious about

reducing emissions.

• Climate scientists now making major

modifications to their models.

• The climate is not warming up the way the

alarmists said it would.

Page 72: David Evans

Array of Forces Establishment:

• UN

• Western governments

• Mainstream media

• Banks

• NGO’s

• Leftists

• Government scientists

• PR firms

• Academia.

Skeptics:

• Internet

• Talkback

radio

• Scientists

• Amateurs.

Vs.

Similar to the

Sound Money

Fight!

Page 73: David Evans

How Skeptics Won

• Internet trumps MSM, it just takes a while.

• Precedent: Printing press broke church’s

monopoly on ―truth‖.

• Bonus: Climate issues have opened the

eyes of many citizens to the ways of the

MSM and government, which will make it

easier for us in the sound money fight.

Page 74: David Evans

Investing in Gold Stocks?

goldnerds.com

Thank you.

Page 75: David Evans

6. Other

Page 76: David Evans

The Future of ―Capitalism‖

• Capitalism (as generally understood) :

1. Free markets – The most efficient way of

setting prices and thus allocating resources.

2. Property rights – Secure, easily transferred,

provides basis for lending, etc.

3. Manufacturing money out of nothing – Good

for bankers and government.

• Most pathologies of modern economies

traceable to way we manufacture money.

Not intrinsic to capitalism, could remove it

or rein it in.

Page 77: David Evans

Economic Classes

• Society is evolving a three class system:

1. Producers

• Produce goods and services. Most people.

2. Welfare Recipients

• Entitled to goods and services taken from producers.

3. Paper Aristocracy

• Manufacturing money for your own direct benefit is

forbidden, but they obtain goods and services by

exploiting side effects of money manufacture.

• Small, powerful, wealthy, prefers low visibility.

• Wealth growing as money manufacture rages on.

Page 78: David Evans

Special Situation in the USA • The European paper aristocracy

―conquered‖ all other countries long ago.

• The American Revolution was mainly about

whose money to use.

• The US was free of the paper aristocracy

for most of 1776 – 1913. The biggest

economic miracle in human history, free of

the predations of any aristocracy.

• The US Constitution was designed to

prevent takeover by the paper aristocracy,

but has failed because it was subverted.

Page 79: David Evans

The US Dollar

• The USD is the world’s reserve and trading

currency.

• The single biggest export of the USA for the

last few decades has been US dollars.

• The rest of the world has been sending the

USA real goods and services for years, and

receiving paper money in return.

• Ships travel to US full, return half empty

• This privilege is ending. US living standards

will fall, but US manufacturing will revive.

Page 80: David Evans

Manufacturing New Money

Devalues Existing Money

• Prices = ratio of money supply to the

goods and services for sale.

• Typical bubble year in the West:

– 10% increase in money supply

– 2% more goods and services

– 8% higher prices, mainly in asset prices

– 2.5% increase in CPI

– 3.5% wage growth.

• Not sustainable.

Page 81: David Evans

The Clinton Strategy

• Clinton’s Problem: Government spending

initiatives constrained by bond market.

• Solution: Surreptitiously:

1. Lower Long Term Interest Rates.

2. Lower the CPI.

3. Suppress the Gold Price.

• Result: Lower short and long term interest

rates extended a long bubble into the

biggest, deepest, longest bubble ever.

Page 82: David Evans

Free Markets Are Now Broken

• Each part of the Clinton strategy had to be

clandestine, designed to mislead the

public and to interfere with the normal

operation of markets.

• Free markets find and set prices most

efficiently, free of political influence.

• Long bonds, short bonds, stocks, housing,

gold and silver, agricultural, oil?,…

• There are no free markets anymore, just

interventions.

Page 83: David Evans

Inflation

• Manufacturing new money (inflation) is a

tax that transfers wealth from existing

dollars to the recipients of the new money.

• The people with the new money get to

spend their new money before prices are

bid up by the new money.

• Saving in our money system is almost

pointless. Inflation and taxation usually

take it all, and more.

Page 84: David Evans

Asset Bubbles (1)

• In our casino economy, it is more rational

to buy assets that (we hope) will

appreciate faster than the growth in the

money supply.

• Better still, buy the assets with borrowed

(newly manufactured) money.

• New money mainly bids up asset prices –

which are not tied to wage growth, which

is in turn is tied to CPI which

underestimates money supply growth.

Page 85: David Evans

Thomas Jefferson

― If the American people ever allow private

banks to control the issue of their currency, first

by inflation and then by deflation, the banks

and corporations that will grow up around them

will deprive the people of all property until their

children wake up homeless on the continent

their fathers conquered.‖

This is coming to pass as the

bubble in the US pops.

Presumably we will follow.

Page 86: David Evans

Manufacturing Money

sciencespeak.com

available at