Moneyization: The global financial phenomenon of individuals
and businesses moving their funds to monies
in which they have the highest confidence, or money
which has a higher store of faith.
Or, Mr. Shaw Might Have Loved
the Federal Reserve
George Bernard Shaw might have loved the Federal Reserve.
A source of good material is highly valued by writers
and philosophers. Perhaps only the Pentagon could be
better, but they manage to keep most of what they do
to themselves. If the Pentagon assured the public the
sun would rise tomorrow, a wise person would buy a candle.
If the Federal Reserve released a study assuring all
that the sun would rise each day, stock in a candle
company would be a sure bet.
Probably no Chairman of the Federal Reserve has been
criticized as much by the Metal Mob as Chairman Greenspan.
Some of us will certainly miss him. During almost the
last six years of his reign, Gold has run from $250
to $450. We almost wish he had another six years. With
the same success, Chairman Greenspan could easily push
Gold to over $800 during a short number of years.
Before we weep, Chairman Greenspan's chair may be filled
with perhaps an equally misdirected economist. According
to Barron's, 11 April 2005, the next chairman could
be Ben S. Bernanke, a current Governor of the Federal
Reserve System. He has also been recently nominated
to be the next Chairman of the Council of Economic Advisors,
the group dedicated to economic wisdom at the White
House. No jokes about his first two initials are permitted!
The inspiration for this message is a speech recently
given, 10 March 2005 and updated on 14 April 2005, by
Governor Bernanke, "The Global Savings Glut and
the U.S. Current Account Deficit." Both are available
on the Federal Reserve's web site, www.federalreserve.gov.
Such events are valuable to investors for they provide
insights into the thinking of the individual. As not
yet Chairman, Bernanke still has some semblance of verbal
Around the world individuals enjoy the freedom to choose
in which national money to denominate their wealth.
Markets and technology have freed consumers from the
Westphalian shackles of national monies. In recent years,
consumers have flocked to the new Euro. At the same
time they have shunned the U.S. dollar. Moneyization
has been unleashed, and will not be put back into the
Your goal as an investor is to determine which national
money, or international money such as Gold, to use for
your wealth. Which national money will have a higher
wealth value in the future is an important question.
Which national monies will prosper? Which national monies
will survive? Which national monies will disappear?
Some will fall in each category, as not all national
monies will exist ten or even five years from now.
To make those decisions we turn to the economic policies
of the nation. The thinking of those that will formulate
and implement those policies for the individual nations
may help in making these decisions. For that reason,
what Governor Bernanke has to say is worth reviewing.
And some good news can be found
in that speech. Chairman Bernanke, should he rise to
that office, will be good for your Gold!
The current Chairman of the Federal Reserve has been
in office so long that we have become accustomed to
the Federal Reserve failing to accept the blame for
its policy errors. Perhaps that is the way the world
is the supposed to be. The Federal Reserve could be
the fourth monkey, with its head.... Perhaps the hope
that the next Chairman might be forthright is more than
should be expected. Hope and Federal Reserve excuses,
both spring eternal.
That title for Governor Bernanke's speech implies his
thinking. In short, the U.S.
current account deficit is not the consequence of policy
errors in the U.S. Rather, that deficit flows
directly from policy errors originating in other countries.
Foreign nations and peoples are saving too much money.
What is bothersome about such a conclusion is that
it absolves U.S. monetary and fiscal policy from being
If only foreign nations would embark on a debt financed
consumption binge like that of the U.S., the U.S. would
not have a current account deficit. Technically
that is true. Though to argue that other nations should
also act irresponsibly seems hardly to be a good foundation
for policy. Yet this argument is coming from an individual
giving advice to the U.S. government, and possibly the
next to lead the Federal Reserve. Misguided thinking
has been good for Gold thus far, and looks likely to
Quite simply, this view is a rationalization of the
monetary and fiscal policies of the U.S. Rather than
start with analysis leading to conclusion, this view
starts with a position and attempts to justify it backwards.
In short, this analysis sounds as if it is coming from
someone drumming up support for his candidacy for the
Chairmanship of the Federal Reserve. This view though
has a populist ring to it that may make it fashionable,
such as the silly idea of blaming the value of the Chinese
yuan for the U.S. trade deficit.
A global savings glut, according to Bernanke, is
causing the U.S. current account deficit. How? For
one, many countries around the world have aging populations.
They are saving money to pay for those retirement years.
Were that true, the money would be in pension plans
not in the currency reserve accounts of the central
Another reason for the global savings glut is that
many nations that were buffeted by the currency crises
of the 1990s, and now are more cautious. These nations
are building a protective buffer. Presumably the Koreans,
for example, are just not buying U.S. goods in order
to have a currency reserve. That position assumes the
U.S. produces something the Koreans want, rather than
the other way around. If only the Koreans would buy
GM cars and eat more soybeans. Now we have been enlightened,
those Korean consumers saving too much money are creating
the U.S. current account deficit. Utter
To be fair to the Governor, higher oil prices are mentioned
as part of the U.S. current account deficit. That position
has merit. Other points are made that have merit, including
the all-important one of the massive investment in housing
which is a nonproductive use of capital. However, that
Federal Reserve policies have been responsible for this
nonproductive use of capital, the greatest in history.
That role is ignored by Bernanke, and by most other
Federal Reserve officials. Again, the speech is recommended
reading. However, the general theme of pointing the
finger at someone else is bothersome, but supportive
of the future price of Gold.
That the low savings rate in the U.S. might be due
to Federal Reserve policies is, however, given limited
attention. Federal Reserve policies, acting as a
perceived guarantor of equity prices, allowed the U.S.
saving rate to plummet as the stock market soared. A
little crash subsequently developed. In recent years
the low interest rate policies have acted again as a
"guarantor" of higher housing prices. The
U.S. savings rate has again plummeted as consumers have
now really found the road to wealth, owning as many
houses as possible with as much leverage as can be obtained.
Thanks again to encouragement from the Federal Reserve.
What Governor Bernanke fails to do is follow the
money. Following the money, as is repeatedly the
case in the movies and currently in Canadian politics,
can get us to the root cause. From where did the central
banks of the world and investors get the money that
is causing this "savings glut?" That money
came from the excessive consumption by the U.S. due
to the politically motivated low interest rates that
exist. No mention of the role of the Federal Reserve
in fostering the excessive consumption that has lead
to the current account deficit and this imaginary "savings
In short, we have an individual stumping for the chairmanship
of the Federal Reserve. From this speech we can deduce
that this individual will do nothing but continue the
policies of the Federal Reserve, while blaming all on
someone else. The continuing collapse of the U.S. dollar
will not be the consequence of internal policies, but
will be blamed on the policy mistakes of foreign governments.
In particular, we can surely expect a study out of the
Federal Reserve that the collapsing U.S. dollar is due
to foolishness of foreign consumers not borrowing money
to spend. Sounds like the Federal Reserve will continue
in a way that assures higher Gold prices in the future.
This imaginary "savings glut" has helped
maintain the low interest rate environment in the U.S.,
as has been written so much before. However, this imaginary
"savings glut" may be starting to lose its
appetite for investing in U.S. debt securities. In the
first graph is portrayed the year-to-year change in
the ownership of U.S. government debt by official foreign
institutions that is held at the Federal Reserve. That
data is reported each week in the Federal Reserve reports.
Each bar on the graph shows how much the ownership
of U.S. debt by foreign official institutions has changed.
Clearly the year-to-year change is declining.
The size of their holdings is still rising, but at a
much slower rate. The reason for focusing at this time
on this series is the scale. The year-to-year change
is just slightly over $200 billion, and investors tend
to focus on round numbers. When
this series breaks below the $200 billion level, that
foreign investors are losing interest in U.S. government
debt will be obvious even to mouse clicking stock traders
at hedge funds.
The second chart looks at this data in another way.
Portrayed is the percentage of the last 50 weeks in
which the holdings of U.S. government debt have declined.
Recent the reading hit 26%, though fell in the latest
week. In 24% of the past fifty weeks, foreign official
institutions reduced their holdings of U.S. government
debt. That level of selling is, as apparent in the graph,
just one tick below the highest recorded in over a year.
In short, the process of foreign
investors moving away from buying U.S. debt has started.
Many are waiting for that proverbial bell to ring, marking
the moment when liquidation begins. That, to some, will
be the signal to sell the dollar and buy Gold. The ringing
of the bell will be too late. Markets discount the future
well in advance of the event. Did the bell ring at 5000
on the NASDAQ Composite? Investors need to own their
Gold and Silver before the bell rings.
As shown in the last chart, the Gold market provides
periodic opportunities for timely purchases. Investors
should use these periods of price weakness, created
when the deluded believe the dollar is going up, for
establishing positions or adding to positions. With
the liquidation of the U.S. debt by foreign investors
still in the early stages, investors have time to create
positions in Gold prior to it taking out the last high.
When $Gold moves through $450 on the way to $500, investors
will not be as able to create Gold positions at attractive
On the contrary, the rough times for the U.S. dollar
lie ahead. Liquidation of U.S. debt has only started,
and is not anywhere near an end. And despite Governor
Bernanke misguided views, the current account deficit
of the U.S. is due to Federal Reserve policies. Unfortunately,
those misguided policies have existed for so long that
the U.S. current account deficit is now structural.
Modest slippage in the dollar, as has been experienced,
does not alter a structural problem.
And as written in the April letter, floating the Chinese
yuan will not help. Floating
the Chinese yuan will likely only lead to the selling
of U.S. debt by those Asian nations which have a trade
surplus with China. No easy solutions exist.
As Mr. Shaw said, I believe, "To every complex
problem there is a simple solution, that is wrong."
However, Mr. Shaw never saw a current account deficit
as large as that of the U.S. Gold is the simple answer
today that is right, as $1,300 Gold appears almost to
be a policy goal of the Federal Reserve.
Ned W. Schmidt,CFA,CEBS
is publisher of THE VALUE VIEW GOLD REPORT. That report
now includes a weekly message, TRADING THOUGHTS, to
help investors identify timely points for buying Gold
and Silver. You can join him for the Gold Super Cycle
His monumental report, "$1,265 GOLD", which
has now been read in 12 countries, has 255 pages and
98 graphs, is available at www.amazon.com
or from the author. Ned welcomes your comments and questions.
His mission in life is to rescue investors from the
abyss of financial assets and the coming collapse of
the U.S. dollar. He can be contacted at email@example.com.