Oh, and one more thing...(about gold)

Something Congressman Paul didn't mention.

It is hypothesised by some (Google GATA) that in the nineties in an effort to keep gold prices down and disguise the inflationary effect of the Federal Reserve Banks increasing the money supply the US Treasury lent out a lot of the US Treasury's (your's and mine) gold to large banks. The banks borrowed the gold, paying 7% interest on the amount they borrowed, but the amount they borrowed was figured at the old standard price of $35 per ounce. Since the banks sold the gold for around $300 per ounce they were actually paying less than 1% interest on the proceeds. (7% X (35/300)). The bank reinvested the proceeds of the gold sales and surely earned a nice profit. Even if the banks bought nothing but US Treasury bonds paying 4 or 4.5 percent interest it was a safe and easy profit. But now the price of gold has risen, and the suspicion is that the banks still owe the treasury (you and me) the gold. Now, lets just speculate, when the banks borrowed the gold did they record the loan at the $300 per ounce they sold it for, or the $35 per ounce they were paying the interest on? Times up. Ummm, my guess is the $35.

So say Morgan Stanley borrowed a million ounces of gold and sold it but they recorded the obligation to pay back $35,000,000 - not a lot of money for those guys. But now to pay back the loan they've got to go buy a million ounces at $550 per ounce or $550,000,000. Wow, that would really hurt. But wait it gets worse- I just used the million oz for easy arithmetic.

The US Treasury is supposed to own 160 million ounces of gold. If 20% was loaned out, a conservative estimate, that's 32 million ounces the banks owe the treasury. Lets see, if the banks are in the hole for $515 million for every million ounces of gold and they've borrowed 32 million then they'll incur losses of $16 billion buying the gold back to repay the treasury. What a pickle they've gotten themselves into.

Now, I guess the banks did the "prudent" thing; when they sold the gold; they probably bought futures contracts to have somebody agree to sell them that amount of gold in the future for the same price the bank was selling the gold that day. Problem is, in the futures market you don't have to own the gold you promise to deliver later. Whoever agreed to sell the banks 30 million ounces of gold doesn't have that much gold.

Annual gold production is 2000 tons; that's 64 million ounces. So whoever promised the banks to deliver the 30 million ounces would have to go out and buy half a year's total output. Problem is the total gold demand (for jewelry and manufacturing etc.) already outstrips production 2 to 1. Trying to buy the gold for the banks to repay to the treasury (you and me) will set off a bidding war that'll drive the price of gold to new historic highs. And when the price of gold starts going up, more and more people want to buy it as an investment driving the price up even further.

The government can't let the banks off the hook by saying the banks don't have to pay back the gold. Maybe they could try to let the banks pay off the loan by paying a negotiated price including interest for the gold instead of replacing it. The government would have to pretend they had decided to invest the wealth of the nation in loans to the banks instead of holding onto all that nasty old gold. The German National bank tried to float an idea like that about a year ago. (They must have lent out or sold all their gold too, and now can't get it back) Anyway the idea got so much criticism they dropped that idea. The problem is in announcing that the Treasury is selling it's gold to the banks would make people nervous about what the Treasury actually has to back up the money in their pockets.

Well, we should be nervous. Even if the Treasury still owned the 260 million ounces of gold, with 9 trillion dollars (M3) floating around out there that comes to about $34,615 in circulation for every ounce of gold in the treasury.People would probably decide gold was pretty darn cheap at under $600 dollars an ounce, and that they'd rather invest whatever they had to invest in gold than leave it in dollars.

Either making the banks come across with the gold they borrowed, or trying to let them off the hook and admitting the dollar had fallen in so far in value relative to gold that the borrowing can't be repaid is going to cause a great demand for gold - and as noted above, there's already more demand than producers can meet.

And on the macroeconomic side it only going to get worse. The federal deficit and personal and corporate borrowing can't be paid off if people are still going to have food on the table and a roof over their heads (and gas to drive to work) The Federal Reserve will have to keep creating more and more money driving the value of the dollar down further and further and making gold more and more attractive as an alternative.

Anyway that's what I think, and I'm not going to bore you with more on this topic. (Unless I see that scumbag Paul Wolfowitz trying to steal the World Bank's gold reserves to help the US Treasury hide its gold deficits. I mean there must be some reason Bush gave him that job)