[DEBATE] : What if you'd been waiting in line at Northern Rock?

[Riaz K. Tayob]

Mike Kosares: What if you'd been waiting in line at Northern Rock?

Submitted by cpowell on 10:35PM ET Sunday, September 23, 2007. Section: 
Daily Dispatches

By Michael Kosares Centennial Precious Metals, Denver www.USAGold.com 
Sunday, September 23, 2007

Who is at risk in Alan Greenspan's "Age of Turbulence? (And we should 
not doubt for a minute that we do indeed live in an age of unprecedented 
turbulence.)

Is it the Federal Reserve?

No, the Fed suffers no ramifications for any of its actions or 
pronouncements.

Is it the commercial banks?

No, the Fed will bail them out no matter what it takes all the while 
proclaiming that it would never do such a thing.

Is it the hedge funds?

No, they will be bailed out by their counterparties, the major 
commercial banks, which will be bailed out by the Fed.

Is it the investor in the hedge funds?

No, he will be bailed out by the hedge funds when they reposition 
themselves to meet the criteria of the commercial banks (after they get 
their much-needed credit-line extension).

Is it the holder of the shaky mortgage drawn into this hapless affair by 
signing on the dotted line at a sucker rate of interest?

No, he will be bailed out through one government machination or another 
by the politicians who know that their cushy jobs in the Beltway depend 
on the good will of all those who believe that their fate hangs 
perilouslously close to that of their less fortunate brethren.

So who is truly at risk?

It is those of you who have worked hard, saved, invested judiciously, 
and find yourselves in a position where you don't really have to ask 
anything of anyone. In other words, the individual who has been able to 
build up a little in the way of ASSETS.

Yes, you, my friends -- for if they cannot get it from you, in the form 
of taxes and inflation, they cannot get it at all!

What is the way out? The way around it?

Buy the metal (or in the case of those who already own gold, own more 
and subtract your fate from the designs of the plotters and planners -- 
the wide swath of those looking for someone to pay the huge bill that is 
coming due.

How are investors going to react when they discover that there are not 
many truly safe havens?

What if you were one of those people waiting in line at at one of the 
branches of Northern Rock in Britain?

First, investing in any kind of currency-based asset -- like stocks, 
bonds, bank deposits, and money markets -- is all basically the same 
thing. Your stock adviser might tell you that it would be a good idea in 
these perilous times to diversify between stocks and bonds and then to 
ladder the risk in each category.

What your stock adviser isn't going to tell you is that since all these 
assets are denominated in the local currency, you aren't really 
diversified at all.

One of the first questions that popped into my mind when the photographs 
of the queues outside Northern Rock branches were published was: What 
are these people going to do once they do get their money out of 
Northern Rock? Deposit it in another risky bank or money-market fund? 
Buy British gilts? Take it across borders to a different but equally 
precarious banking system? Buy U.S. Treasuries? Or believe the 
CNBC-style hype and put it into the stock market?

Ownership of any of these things represents only a lateral transfer, not 
a diversification, from the problem represented so tellingly by Northern 
Rock.

Gold's opponents realized early that the only real escape was hard, 
yellow metal and that's why they tried to knock down the price and cut 
gold off as an avenue of escape. They now seem to understand that it 
isn't going to work. Not even all the propaganda in the world can 
diminish the fundamental truth that gold is an asset that is not 
simultaneously someone else's liability. That is what makes gold a sound 
alternative in the context of recent events. All the other assets 
mentioned above rely on someone else's performance or ability to pay. As 
Alan Greenspan put it long ago, gold is the only primary asset that does 
not require endorsement.

(I am not advocating 100-percent conversion of your assets to physical 
gold, only a sensible proportion to hedge against monetary crises, bank 
runs, etc.)

So the next question is: What happens if a good segment of the investing 
public comes to the realization about gold at about the same time?

I really don't want to think about it. Do we on the gold side of the 
fence really want gold to become a mainstream alternative? If you can 
truthfully answer "yes" to that question, you are one of the lucky few 
who has positioned himself for what appears to be coming down the road. 
 From this perspective it is more a negative than a positive that gold 
was featured favorably in The New York Times on Sunday. That's quite a 
statement from someone such as myself who has spent the past decade -- 
since 1997 when USAGold.com went up on the Internet -- taking on the 
mainstream press and its negative attitude toward gold.

My, how things change. I would much rather see gold sit in the 
background and act as a repository for those who truly understand its 
uses than to see the mainstream press admit those uses and promote them 
to the public.

Second, and this has more to do with future market effects than it does 
with a course of action for individual investors, what are the chances 
that the Fed's attempt to lower interest rates is going to be overcome 
by Treasury paper sellers trying to escape the falling dollar?

When Greenspan's attempt to raise interest rates collided with the 
interests of the export-driven economies to find a place for their 
dollar reserves, interest rates did not rise to the degree the Fed had 
hoped. This is what Alan Greenspan referred to as "the conundrum." Now 
we shall see if Ben Bernanke will find himself in the opposite position. 
(Bernanke's conundrum?)

We saw signs of what might happen along these lines earlier in the year 
when bond values fell mysteriously just as Congress was attempting to 
pressure China over yuan policy. Some thought China was selling 
Treasuries as a warning. In any case interest rates began to move up on 
their own once again, contrary to Fed policy.

Strangely, the Fed could find itself operating under an odd set of 
circumstances. By proving its ability to govern interest rates and 
monetary policy, it could very well destroy itself and the dollar -- the 
proverbial dragon eating its tail.

For several years now I have been talking about the Fed losing control 
of interest rates and monetary policy. This isn't just interesting (or 
boring) economic discussion. This goes to the heart of the current 
monetary order and how policy-makers are going to deal with the array of 
problems affecting all of us, not just the banks or the traders in New 
York.

If the Fed no longer has control of monetary policy, what good is it? 
What is its purpose? What is the economic function of the Federal 
Reserve? What is its social purpose?

Over the weekend the Financial Times published an editorial that 
addressed the problem. "A decline in the dollar," the FT said, "would be 
welcome if it was slow, but if foreign investors anticipate inflation 
and start to dump some of their $12,000 billion in U.S. debt, it could 
turn into a rout. In the worst case the Fed could lose control of 
monetary policy."

Obviously, the one function it will sustain is the one for which it was 
created: lender of last resort. Perhaps that will be enough, but it also 
could mean an inflationary spiral unlike anything we have ever seen as 
the Fed attempts to gun the monetary engines to compensate for 
foreign-based Treasury sales or lack of interest in financing the 
still-growing U.S. debt.

The response in most places will be the local central bank's gunning of 
the engines in its own right. Already there is a battle in Europe 
between the politicians and central bankers over fiscal responsibility 
and looseness or tightness in monetary policy.

It is interesting that Greenspan concentrates now on this same question 
of fiscal madness at the federal government. I look forward to reading 
his book to see if he has anything to offer in the way of solutions. For 
years I have advocated resurrecting the concept of a U.S. budget 
required by law to be balanced. Most state government operate quite 
effectively under that burden. Why can't the federal government? I also 
like Greenspan's response when asked by Newsweek magazine if he had a 
favorite in the presidential campaign: "Is one of the choices leaving 
the office open?"

At a time when America is preoccupied with the possibility of an 
economic breakdown, not one presidential candidate has been able to make 
anything close to an intelligent comment. That speaks volumes.

First comes perspective. Then proportion. Then peace of mind.

---

Michael Kosares is president and founder of Centennial Precious Metals 
in Denver and host of its Internet bulletin board, the USAGold.com Forum.