Central Bank Theatertags: economics, Wendy McElroy, central banking, Gold
As the curtain rose on the economic stage, it revealed politicians and central bankers hand-in-hand, ready to act out a farce.
A June 23rd article in Bloomberg constituted the first review. It opened, “Germany has decided its gold is safe in American hands.” The gold in question is the massive German reserve that is allegedly stored at the Federal Reserve Bank of New York (NY Fed). On January 16, 2013 Germany’s central bank, the Bundesbank – or BuBa to its critics -- announced an intention to repatriate a sizable portion of its gold from the NY Fed by 2020. But, now, the government's budget spokesman Norbert Barthle declared, “The Americans are taking good care of our gold. Objectively, there’s absolutely no reason for mistrust.”
Objectively, there's no reason for trust. The repatriation was requested precisely because popular opposition leaders are convinced the NY vaults are either deficient or empty. The German people agree with the opposition and they loudly demanded to see the proof. Moreover, the German government itself has displayed a deep distrust of America. For example, Germany recently declined to renew its contract with the telecom giant Verizon. Tobias Plate, a spokesman for the German Interior Ministry, explained, "There are indications that Verizon is legally required to provide certain things to the NSA." Specifically, the government suspects Verizon will monitor the communications of top officials in the same manner that Chancellor Angela Merkel was “intercepted” by the NSA.
The abysmal history of gold repatriation should be another source for skepticism. In a June 16 article entitled “Is the world’s biggest gold vault empty?,” the UK financial magazine Moneyweek explained, “When the German government recently asked to see around 1,536 tonnes of German gold stored in that vault, which amounts to roughly half of Berlin’s reserves, Der Spiegel reports that the Federal Reserve refused to allow German inspectors to view them.” The reason cited? Inspection was not “in the interest of security and of the control process.”
The article continued, “[T]he US agreed that 674 tonnes would be repatriated over eight years. That’s an annual run rate of about 84 tonnes a year.” It should have been repatriated upon demand. It should have been no problem. The US is supposedly the world's largest holder of gold with over 8,000 tons of its own; the German gold has supposedly been stored untouched. There was a problem. Despite the passage of over 18 months, the US only managed to repatriate five tonnes of gold back to Germany.
Normal logic should lead German officials to scream “foul play!” Instead, government logic led them to proclaim confidence in the NY Fed. The reasons for doing so are both political and economic.
Political Payoff For 'Trusting' The Yanks
Merkel does not trust the US. The German Parliament continues to investigate the NSA's monitoring of its officials despite US Requests to drop the matter. And there is a growing call to grant asylum to whistle blower Edward Snowden. Nevertheless, political benefits accrue to acting as though America's promises were not as paper thin as its dollars.
1) Merkel and her government can avoid the public embarrassment at being duped by America...again. Merkel has been Chancellor of Germany since 2005. She has presided over the European Council and chaired the G8. During several financial crises, including the bailout of Greece, Merkel earned the nickname “the decider” due to the financial power Germany wields. What nickname would Merkel 'earn' if she were exposed as the victim of a scam that makes Nigerian ones pale in comparison. After the public embarrassment, of course, would come a public rage that could end her shaky coalition government.
2) The Bloomberg article cited above is entitled “German Gold Stays in New York in Rebuff to Euro Doubters.” The Euro-Doubters and -Critics are adamant opponents of the European Union and of Merkel who considers the EU to be her legacy. Rebuffing the Critics must be deeply satisfying to “Mutti” (Mom), another of Merkel's nicknames.
3) The statement of blind trust will go a long way toward healing a political rift between the two nations. When Germany demanded its gold back, the Fed reacted with fury. It finally agreed to repatriate the gold over a seven year period – a promise on which it spectacularly reneged, delivering a small fraction of what was promised for the first delivery.
Economic Reasons For Not Demanding Gold Back
Peter Boehringer, leader of the “Repatriate our Gold” movement, quickly refuted the Bloomberg article by posting at length in its commentary thread. Blasting the piece for its uncritical approach to the “statements of politicians and BuBa-bankers.” He summarized his critique; the piece was “a 'non-news' article with a wrong headline, strange interviewees, old news, and with a clearly apologetic ideological approach: the main purpose seems to be NOT to give space to the myriad of unanswered and extremely relevant questions BuBa and the Fed have been refusing to answer for decades.” Boehringer vowed to continue the public repatriation campaign.
Nevertheless, the German government and BuBa needs to appear to trust America because the entire system of international finances is a house of cards. If one card is pulled out, then the entire structure collapses. Every central bank will lie, cheat and falsify records in order to prop up a system upon which their continued and misallocating existence depends.
They need to protect a scam practice called “gold leasing.” In extremely simplistic terms, this is how it works. Central banks lease gold to bullion banks (e.g. Goldman Sachs, JP Morgan) at a tiny rate of return; the gold is supposed to come back at an agreed upon date. Meanwhile, the bullion banks sell the physical gold at market rates and use the money to buy Treasury bonds which give a much higher rate of return than is being paid to lease. The central banks continue to list the gold on their balance sheets as an asset. This means the amount of gold is artificially inflated and the price of every real ounce is suppressed.
Meanwhile, the bullion banks hedge the risk of having to return gold at a disadvantageous price by buying futures contracts. When the lease time expires, the bullion banks can return the gold or its cash equivalent and pocket a neat profit. Or the period of lease may be extended to become a de facto permanent loan. This is the basic structure of what is called the gold carry trade. (There are other expressions of the trade such as gold swaps between central banks, which further inflate the amount of real gold available.)
Governments like the system because it props up the price of bonds and allows them to inflate the currency while keeping interest rates low. If the credit-fueled boom lasts, everyone makes money...as long as “everyone” is defined as governments and banks. But the bubble depends on maintaining the lie of how much physical gold the banks are holding.
The myth that German gold is safe in American vaults is part of suppressing gold prices because discovery of the gold's absence could cause other vaults to be inspected and the general dearth of physical gold to be revealed. Then public opinion might force a government and central bank to demand gold back. A bullion bank would have to buy the physical gold it needs to return at what might be ruinous prices; big banks could fail. One question too many could topple the scam.
And, so, the German government and BuBa “trust” the NY Fed with their nonexistent gold even when they do not trust America in the slightest. Those who wish to understand Germany's real attitude should stop listening to politicians and start watching their actions. For example, in March, Merkel struck a deal with China to make Frankfurt a clearing and settling hub for Chinese currency in Europe. This is widely viewed as a step back from the U.S. Dollar. Germany is in a position to know.
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