Central banking is easy; the challenge is to stay in power

1a Thursday, August 23, 2007

Dear Friend of GATA and Gold:

Today's edition of The King Report by Bill King (M. Ramsey King Securities, Burr Ridge, Illinois, http://www.mramseyking.com/thekingreport.html), maybe the best daily letter about the financial markets, shows how easy central banking is:

"... In an orchestrated attempt to encourage troubled institutions to borrow at the Federal Reserve's discount window and remove the stigma of such action, the four largest U.S. banks on Wednesday borrowed $500 million each.

"After the market close, Bank of America bolstered Countrywide Financial Corp. by purchasing $2 billion of preferred stock. Bank of America has a sweetheart arbitrage on the Countrywide deal. Bank of America borrowed $500 million from the Fed at 5.75 percent and is reinvesting the proceeds in Countrywide convertibles with a strike price of $18 while the stock is trading at $26 in after-hours action, along with a 7.25-percent coupon.

"The big mystery is: Why did Warren Buffett pass on this or a similar deal, assuming that he had first crack at Countrywide, as reports indicated?

"Most investors and traders now will get jiggy on the financial stocks because of Bank of America's bailout of Countrywide. But most forget that the bailout of Texas banks in the late 1980s by New York money-center banks put the acquiring banks (Manufacturers Hanover, Chemical) in trouble. They were later consumed by bigger money-center banks. ..."

That is, in central banking, if you need money for ANYTHING, you just sit down and type some up and click it over to someone who is ready to do as you ask with it.

If it works for the Federal Reserve, Bank of America, and Countrywide, it can work for everyone else. For it is no more difficult for the Fed to conjure $2 billion for Bank of America and its friends to "invest" in Countrywide than it would be for the Fed to wire a few thousand dollars into your checking account, calling it, say, an advance on your next tax cut or a mortgage interest rebate awarded to you because some big, bad lender encouraged you to buy a McMansion with no money down in the expectation that you could flip it in a few months for enough profit to buy a regular house.

None of this would result in the "pushing on a string" that concerns some analysts lately. For you could promise to spend right away everything the Fed wired to you. Indeed, quick spending could be a condition of the wire.

Who needs Bernanke's helicopters? THE INFRASTRUCTURE FOR BAILING OUT EVERYONE IS ALREADY IN PLACE.

So why is everyone so worried?

In the United States central banking was INVENTED to debase the currency -- because J.P. Morgan (the banker, not the rapacious banking house named for him) got tired of having to rescue the U.S. financial system with a huge gold loan every 10 years or so, just as the country got tired of going through catastrophic deflations that often. In a modern economy the sovereign always can determine what money is, so, it was suggested to Congress in 1913, if the government needs money, why not just conjure up your own?

Who hasn't seen a chart of the value of the dollar in constant terms since the Federal Reserve was created in 1913? Our friends at Liberty Dollar helpfully provide one:

http://www.libertydollar.org/index.php

It establishes that currency debasement is the one thing central banking can do without fail.

If people only understood that currency debasement is central banking's very point, they might not complain as much.

Of course if they DID understand, people might rush for the exits from the fiat money system -- rush for gold and silver and anything else real and exchangeable and likely to hold value. But, in the end, in a fiat money system, debts ALWAYS can be inflated away. Indeed, for some time now in the United States and Western Europe there has been no other way to discharge them. Pensioners who still have their wits can see it happening to them already.

The ability of central banking to inflate its way out of debt isn't the issue anymore; the issue is whether the financial class of the West can retain its power while the West's unpayable debt, the basis of that power, is inflated away and dissolves. As money explodes all over the place to cover bailout after bailout, that would be a neat trick -- and only a trick is likely to accomplish it.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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