Keynes and Copernicus: the debasement of money overthrows the social order and governments » The Cobden Centre
Keynes and Copernicus: the debasement of money overthrows the social order and governments
The United States Senate moves toward the confirmation of Janet Yellen, now posited for next January 6th, as chair of the Federal Reserve System. Let us in this moment of recess reflect on eerily similar observations by two of history’s most transformational figures: John Maynard Keynes and Nicolas Copernicus.
One of Keynes’s most often-cited observations, from his 1919 The Economic Consequences of the Peace, chapter VI, contains an indictment of policies very like those which the Federal Reserve System has been implementing for the past dozen, and more, years. These policies in slow motion are, in the opinion of this columnist, at the root of the very political, social, and cultural dysphoria — uneasiness or generalized dissatisfaction — predicted by Keynes:
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
An almost identical point was made almost four centuries before Keynes by iconic savant and polymath Nicolas Copernicus.
Copernicus commenced a study composed for the Prussian and Polish governments around 1525,On the Minting of Money, with these words:
ALTHOUGH THERE ARE COUNTLESS MALADIES that are forever causing the decline of kingdoms, princedoms, and republics, the following four (in my judgment) are the most serious: civil discord, a high death rate, sterility of the soil, and the debasement of coinage. The first three are so obvious that everybody recognizes the damage they cause; but the fourth one, which has to do with money, is noticed by only a few very thoughtful people, since it does not operate all at once and at a single blow, but gradually overthrows governments, and in a hidden, insidious way.
This does not imply plagiarism by Keynes. The coincidence between Keynes’s “[To debauch the currency] engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose” and Copernicus’s “[The debasement of coinage] … is noticed by only a few very thoughtful people, since it does not operate all at once and at a single blow, but gradually overthrows governments, and in a hidden, insidious way” is, however, striking.
Keynes, like Copernicus a paradigm-shifter, was himself extraordinarily erudite. It is not impossible the young Keynes came across Copernicus’s work (which reportedly was first actually published in 1826). The question as to whether Copernicus’s Essay may have inspired Keynes’s observation must be left to authentic scholars such as Lord Skidelsky.
The similarity may be merely that of “great minds working alike.” This columnist has found but one direct reference by Keynes to Copernicus.
Keynes (whose thinking was mostly, although not exclusively, opposed to the gold standard) was fascinated by one of Copernicus’s most accomplished scientific successors, Sir Isaac Newton. Newton, also, achieved iconic status, both for his contributions to physics and, as Master of the Mint of Great Britain, as the architect of the modern classical gold standard. Newton’s gold standard was designed along Copernican principles of close correlation toward nominal and intrinsic value. It served the world very well for almost 200 years.
Keynes was to have addressed the Royal Society of London’s gathering to celebrate the tercentenary of Newton’s birth, an event delayed by the war. Keynes died a few months before he could present his remarks. Maynard’s remarks, Newton, the Man, were presented by his brother Geoffrey (and thus might even be characterized as Keynes’s last words). A brief excerpt:
Why do I call [Newton] a magician? Because he looked on the whole universe and all that is in it as a riddle, as a secret which could be read by applying pure thought to certain evidence, certain mystic clues which God had laid about the world to allow a sort of philosopher’s treasure hunt to the esoteric brotherhood.
[H]e became one of the greatest and most efficient of our civil servants. He was a very successful investor of funds, surmounting the crisis of the South Sea Bubble, and died a rich man. He possessed in exceptional degree almost every kind of intellectual aptitude – lawyer, historian, theologian, not less than mathematician, physicist, astronomer.
As one broods over these queer collections [of Newton’s alchemical writings, which Keynes collected], it seems easier to understand – with an understanding which is not, I hope, distorted in the other direction – this strange spirit, who was tempted by the Devil to believe at the time when within these walls he was solving so much, that he could reach all the secrets of God and Nature by the pure power of mind Copernicus and Faustus in one.
As for Copernicus, On the Minting of Money has been translated into English several times yet those translations remained difficult to obtain for students of the monetary arts and sciences. It has remained mostly the property of elite historians. Scant and intriguing references were limited to all-too-brief articles such as “Treatise On the Minting of Coin and Copernicus views on economics” by Leszek Zygner of Nicolaus Copernicus University.
The full text of Copernicus’s fascinating and invaluable essay remained elusive, that is, until last month.
Laissez Faire Books published a meticulous and fresh English translation from the Latin, with prefatory remarks, bibliography, and invaluable critical apparatus by classicist Prof. Gerald Malsbary. (The volume was co-edited by this columnist and by his fellow Forbes.com columnist Charles Kadlec, with a foreword by Reagan Gold Commissioner Lewis E. Lehrman, whose eponymous Institute this columnist professionally serves).
From Prof. Malsbary’s Prefatory Remarks to Copernicus’s Essay on Money:
NICOLAS COPERNICUS the astronomer embodies the modern scientific ideal: the revolutionary revealer of a new, verifiable scientific theory that shocks our conventional perceptions. However, it is not very widely known, outside of Eastern Europe at least, that Copernicus also spent about twenty years working on economic theory. His treatise On the Minting of Money (Monetae Cudendae Ratio), was first printed in 1826, three hundred years after its composition in 1525–1526. At the time, the semi-autonomous ecclesiastical region between Poland and Prussia where he lived (Varmia) was undergoing a political and economic metamorphosis, and his judgment and expertise (a fruit of the best late Scholastic and Humanist learning) was summoned by the Prussian and Polish governments to help stabilize an inflated currency. Was his insight into monetary matters as revolutionary as his astronomy?
Keynes: “The process [of debauching the currency] engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” Copernicus: “[The debasement of coinage] … is noticed by only a few very thoughtful people, since it does not operate all at once and at a single blow, but gradually overthrows governments, and in a hidden, insidious way.”
Malsbary: “Was [Copernicus’s] insight into monetary matters as revolutionary as his astronomy?” In a word, yes.
Madame Yellen? Whether one follows Keynes or Copernicus … it is time to return to the principle of meticulous monetary integrity — as exemplified by the classical gold standard — to restore legitimacy both to to the social order and to government.
This article was previously published at Forbes.com.
The New New Great Game: Geography, Energy, The Dollar and Gold (pdf link)
Sir Halford Mackinder’s 1904 speach in which he outlined his “Heartland Theory” was a founding moment for geo-politics. He argued that control of the Eurasian landmass (Europe, Asia and the Middle East), which contained the bulk of the world’s population and natural resources, was the major geo-political prize.
As time passed, energy (first crude oil then natural gas), became increasingly integral to this concept and its strategic significance cannot be overstated.
Remarkably, Mackinder’s theory has remained equally valid, if not more so, in the modern era – although key “pivot areas” for exercising control have evolved. In addition to Central Asia and Trans-Caucasus in Mackinder’s day, the oil producing nations of the Middle East took on increasing importance in the “New Great Game”.
The geo-political confrontation between the US on one hand and China (in increasingly close cooperation with Russia) on the other, is evolving rapidly. We see a “New New Great Game” (NNGG) emerging and have “tweaked” the Heartland Theory to include.
An additional geographic “pivot”, the South and East China Seas, due to their importance in terms of world trade, oil and gas reserves and numerous territorial claims.
A monetary “pivot”, the dollar-based system of world trade and its reserve status. China is taking the lead role in pushing ahead with its strategy of dismantling the dollar’s supremacy.
Geo-political tension in each of the pivot areas is escalating. For example Central Asia and Trans-Caucasus (Ukraine), Middle East (Iran) and South and East China Seas (Senkaku Islands). The rising powers, China and Russia, are adopting more aggressive geo-political tactics towards US/EU/NATO/Japanese interests. The more “dovish” US policy towards Iran, following the recent nuclear deal, is threatening to destabilise the decades-long status quo in diplomatic relations with Israel and Saudi Arabia.
Just about every aspect of the escalating geo-political tension has an energy element, either directly or indirectly. Viewed from a “Mackinderian” perspective, the strategic value of the energy sector is immense. It begs the question whether, after five years of underperformance, the equity market is under-pricing energy assets, including those deeply out-of-favour integrated oil and gas stocks? Probably, in our view.
We believe that the significance of the monetary pivot in the NNGG is under-estimated as China accelerates preparations to undermine the dollar’s role in world trade. The other aspect of China’s strategy is its diversification into “hard assets” and, as far as we can tell, China is attempting to “corner” the market for physical gold. Its strategic significance is lost on most Western investors. We present some insights into today’s gold market which might shock Western investors – similarities with the run-up to the major lows in the gold price more than a decade ago – and China’s understanding of modern gold market mechanics.
The threats to the existing US-centric order are substantial and the geo-political sands are shifting. The US will respond and has the largest economy and military (with vast ocean-going naval advantage), most powerful investment banks and deepest financial markets and significant (albeit declining) political/diplomatic influence. In terms of boxing metaphors, we wonder whether the Ali versus Foreman fight in Kinshasa in 1974 (knockout in the eighth) or the Leonard versus Hagler fight at Caesar’s Palace in 1987 (points victory where the argument as to who actually won continues) will be the parallel.
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From an anonymous source prior to the major lows in the gold price more than a decade ago.
“Someone once said, ‘no one wants gold, that’s why the US$ price keeps falling.’ Many thinking ones laugh at such foolish chatter. They know that the price of gold is dropping precisely because ‘too many people are buying it’! Think now, if you are a person of ‘great worth’ is it not better for you to acquire gold over years, at better prices? If you are one of ‘small worth’, can you not follow in the footsteps of giants? The real money is selling ALL FORMS of paper gold and buying physical! Why? Because any form of paper gold is losing value much, much faster than metal. Some paper will disappear all together in a fire of epic proportions! The massive trading continues at LBMA, but something is now missing…We have reached production costs…The great mistake by the BIS was in underestimating the Asians. Some big traders said they would buy it all below $365+/- and they did. That’s what forced LBMA to go on a spree of paper selling! Now, it’s a mess.”
The gold price is approaching production cost again.
We have the physical versus paper demarcation again (most commentators are clueless on this – the paper market is still determining the screen price, but it will probably die once and for all this time around – the question is at what level?).
The Asians are being underestimated again when the price is declining (although not by the BIS – China is buying physical gold in unprecedented volumes – at least 70-75% of world mining production this year).
But accelerating developments in the monetary sphere is only one element of…
The “New New Great Game”
Mackinder’s “Heartland Theory”
The traditional “Great Game” obviously dates back to the geo-political rivalry between Great Britain and Russia for supremacy in the central Asian region during the nineteenth and early part of the last century. In his famous speech, “The Geographical Pivot of History”, to the Royal Geographical Society in 1904, Sir Halford Mackinder outlined his “Heartland Theory. ” According to Wikipedia.
“This is often considered a, if not the, founding moment of geo-politics…”
Briefly, this posited that the major geo-political prize is Eurasia (the “World Island”), i.e. the European, Asian and Middle Eastern land mass, which contained the bulk of the world’s population and its natural resources. Mackinder argued that control of the “pivot area“ of central Asia was the key to controlling Eurasia.
This is taken from his paper published in the April 1904 edition of the “The Geographical Journal.”
He also emphasised the important difference between sea power and land power. From Zurich-based ISN’s 2009 “Geopolitics and US Middle Eastern Policy: Mackinder and Brzezinski.”
“Mackinder’s theory was a counter-argument to notions that maritime supremacy was sufficient for a power such as Great Britain to safeguard its hegemony. He claimed that, with the emergence of new transportation routes [e.g. Trans-Siberian railway] and technology, a power that could control the centre (and the abundant resources) of the Eurasian landmass…would ultimately be able to attack the colonies of a sea power everywhere on the continent. “
The Trans-Siberian Railway.
In the wake of World War One, Mackinder argued the case for preventing a convergence of interests between Russia and new “pivot” states of Eastern Europe (Austria, Hungary, Czechoslovakia and Poland). This led to his famous dictum.
“Who rules East Europe commands the Heartland;
Who rules the Heartland commands the World Island;
Who rules the World Island commands the World.”
It’s important to emphasise that the pivot area does evolve/fluctuate with changes in geo-political reality. Indeed, Mackinder included the Baltic states in one of his revisions.
As the world industrialised and became increasingly dependent on crude oil (and later, natural gas), energy resources became ever more integral to the Great Game. With such a large proportion of the world’s oil and gas reserves found on the Eurasian land mass, this was easily accommodated within Mackinder’s theory.
The period just before World War One, with the British Navy’s switch from coal to oil and the adoption of the automobile, set the stage for this. Indeed, in 1913, the British government acquired a 51% controlling interest in the Anglo-Persian Oil Company, the forerunner of BP.
Remarkably, the validity of Mackinder’s theory has stood the test of time, even though most people are unfamiliar with it. The following quote is from the Reagan Administration’s “National Security Strategy of the United States” published in January 1988.
“The first historical dimension of our strategy is relatively simple, clear-cut, and immensely sensible. It is the conviction that the United States’ most basic national security interests would be endangered if a hostile state or group of states were to dominate the Eurasian land mass – that area of the globe often referred to as the world’s heartland.”
Right now, it’s obvious that US national security interests are threatened by a combination of China and Russia.
This was the influential globalist (and former National Security Advisor), Zbigniew Brzezinski, writing in his famous 1997 book, “The Grand Chessboard.”
“Ever since the continents started interacting politically some 500 years ago, Eurasia has been the centre of world power… For America, the chief geopolitical prize is Eurasia – and America’s global primacy is directly dependent on how long and how effectively its preponderance on the Eurasian continent is sustained.”
In the “New Great Game”, (NGG) of the modern era, the major rivalry is between US/NATO on one side and China, Russia, other members of the Shanghai Cooperation Organisation and the likes of Iran, on the other.
The “pivot states” in the NGG are.
- The key nations in Central Asia and the Trans-Caucasus: especially those with substantial energy resources and/or pipelines (e.g. Azerbaijan, Ukraine, Turkmenistan, Uzbekistan etc). Here is a chart showing the major gas pipelines
And the major oil pipelines:
- The major OPEC nations of the Middle East: here we borrow part of US geo-strategist, Nicholas Spykman’s, “Rimland” theory. Spykman, the “godfather of containment” was both a disciple and critic of Mackinder. He believed that the “Rimland”, European coast, Arabian-Middle Eastern desert and Asiatic Monsoon region was more important for controlling the Heartland.
This was Brzezinksi on the Central Asian Republics, or “Eurasian Balkans” as he terms them in his book. This was in 1997, when China’s economic and military might was still a distant prospect.
“They are of importance from the standpoint of security and historical ambitions to at least three of their most important and more powerful neighbours, namely Russia, Turkey and Iran, with China also signalling an increasing political interest in the region. But the Eurasian Balkans are infinitely more important as a potential economic prize; an enormous concentration of natural gas and oil reserves is located in the region, in addition to important minerals including gold.”
It’s a reminder of the strategic importance of energy and gold and puts the US-supported “Color revolutions” into sharper focus – Ukraine (Orange, 2004), Georgia (Rose, 2003) and Kyrgyzstan (Tulip, 2005).
Tweaking the Heartland Theory
We agree with the modern interpretation of the NGG, but we see TWO additional elements which make the current situation a “New New Great Game.”
… continue reading below (pdf link)
The ongoing debacle of Italy’s Banca Monte dei Paschi (BMPS) took a turn for the worst today. The bank’s largest shareholders (MPS Foundation) approved (read – forced through) a delay in a EUR 3 billion capital raise, which the bank needs to avoid nationalization, until May. The delay (which will cost the bank EUR 120 million in interest) allows MPS more time to liquidate their 33.5% holding before their stake is massively diluted. Management is ‘considering’ resignation and is “very annoyed,” but the city Mayor is going Nationalist with his delay-supporting comments that “we cannot let the third biggest bank in this country fall prey to foreign interests.” So Europe is recovering but they can’t even raise a day’s worth of POMO to save the oldest bank in the world?
Italy’s third-biggest bank Monte dei Paschi di Siena was forced to delay a vital 3 billion euro ($4.1 billion) share sale to raise capital until mid-2014 because of shareholder opposition, plunging its turnaround plan into uncertainty.
The bank’s chairman and its chief executive may now resign after their plan to launch the cash call in January was defeated at an extraordinary shareholder meeting on Saturday due to the vote of Monte Paschi’s top shareholder.
The world’s oldest bank needs to tap investors for cash to pay back 4.1 billion euros in state aid it received earlier this year and avert nationalization
Simple game theory really – why would the largest shareholder “guarantee” losses now when it can try and liquidate more of its exposure over time?
But the cash-strapped Monte dei Paschi foundation – whose stake in the bank is big enough to veto any unwanted decision – forced a postponement until at least mid-May to win more time to sell down its 33.5 percent holding and repay its own debts.
Antonella Mansi, a feisty 39-year-old businesswoman recently appointed head of the Monte dei Paschi foundation, said her insistence on a cash call delay did not amount to a no-confidence vote in the bank’s management.
But she said that carrying out the capital increase in January would massively dilute the foundation’s holding, leaving it with virtually nothing to sell to reimburse debts of 340 million euros.
“We have a precise duty to ensure (the foundation’s) survival. You can’t ask us to let it collapse,” she said.
Management is “very annoyed”…
Chairman Alessandro Profumo, a strong-willed and internationally respected banker who was formerly the chief of UniCredit, said he and CEO Fabrizio Viola would decide in January whether to step down.
“These are decisions one takes in cold blood and in the right place,” Profumo said at the meeting.
“What I have on my mind is a 3 billion euro cash call because we need to pay back 4 billion euros to taxpayers. Today this is uncertain and at risk,” he told a press conference.
Viola, sitting at his side, told reporters he would do everything “so that the ship does not sink”, but that he could not take responsibility for mistakes made by others.
Of course, there is risk either way…
“It’s important to carry out the capital increase as early as possible,” said Roberto Lottici, fund manager at Ifigest. “The risk is that the bank finds itself rushing into a cash call later at a lower price than what it could achieve now.”
“It’s hard to think that the third largest Italian bank can’t find a pool of banks able to support the cash call after May 2014,” said Antonella Mansi, the president of the MPS foundation, at the shareholders’ meeting.
and given the number of jobs involved… local officials are now reacting in favor of the delay (hoping for domestic savior)…
But in Siena, where the bank is known as “Daddy Monte” and is the biggest employer, fears that the cash call might sever the umbilical cord between the lender and the city run high.
Siena mayor Bruno Valentini, whose city council is the top stakeholder in the Monte dei Paschi foundation, said on Friday a postponement might help keep the bank in Italian hands.
“We cannot let the third biggest bank in this country fall prey to foreign interests,” he said. “Monte dei Paschi is not just an issue in Siena, it is a big national issue.”
So, even after all the lqiuidty provision; yields and spreads on European debt back near record lows; calls from US asset managers that Europe is recovering and will be the growth engine; and hopes that Europe’s AQR stress test (and resolution mechanism) will be the gold standard for confidence in their banking system… they still can’t find a group of greater fools to pony up EUR3 billion in real (not rehypothecated) money to save the world’s oldest bank – that’s a day’s worth of Fed POMO!!!!
On an odd side note, we did note a major surge in ECB margin calls this week…
What 7 days without power is like 3:58
Tens of thousands still in the dark in Ontario 3:36
The little generator that could2:11
- NB Power warns of outages into new year as storm threatens
- Latest storm updates
- Montreal vows to clear city streets by New Year’s Eve
- NB Power pushes restoration date back to New Year’s Eve
- CBC Weather Centre
- Ice storm’s beauty, ruin captured in stunning photos
- Insurance and the ice storm: Are you covered?
- Ice storm aftermath: Staying safe during power outages
About 30,000 customers in Ontario and New Brunswick remain in the dark one week after a major ice storm blanketed Central and Atlantic Canada, and warming temperatures have caused new power outages in Toronto.
Toronto Hydro CEO Anthony Haines said early Saturday that melting ice falling from trees and other structures has led to fresh damage. At about 1 a.m. ET the number of customers without power had dropped below 20,000 for the first time, but by 8 a.m. it was back up to around 23,000. The number is hovering at 18,000 as of mid-afternoon Saturday.
- Ice storm aftermath: Staying safe during power outages
- Insurance and the ice storm: Are you covered?
- Get the latest forecast information at CBC Weather Centre
“Over the morning hours we’ve been moving backwards, but I’m sure our crews will attend to those and we’ll start moving in the right direction again over the next couple of hours,” he told CBC News Network.
Calling it a “story of ups and downs,” Haines pointed out that the current tally — 18,000 — is about the same number that crews have been bringing power to each day.
The falling ice caused at least one injury when a Hamilton worker was struck in the head, Toronto Mayor Rob Ford said. Officials couldn’t provide an update on the worker’s condition.
“This is Day 7 and there’s light at the end of the tunnel,” said Ford in an interview with CBC News midday Saturday. “What that day is, I can not tell you…We’re trying our best.”
In response to the backlash the mayor and other officials have received from people still without power, Ford said “it tears my heart out.”
“We have crews from Ottawa, we have crews from Windsor,” he said. “I share their frustration…it’s all hands on deck [and] we are moving as fast as we can.”
Haines said computer simulations have shown three days, but that there are variables at work like the new outages and the arrival of more crews. The provincial utility, Hydro One, said the outages outside Toronto are largely over, which has allowed it to send crews in to help the city.
“I’m hopeful certainly by the early part of next week the vast majority of customers will be back,” Haines said.
Working around the clock
Haines, who noted that the average Toronto Hydro customer is equivalent to 2½ people, said he sympathizes with people.
“What we can do is work around the clock and we can bring extra resources in from far and wide … we will not stop until the power is on for everybody,” he said.
Haines and Toronto Community Housing CEO Gene Jones (who is still dealing with outages in about 80 housing units) said they will perform a postmortem after the outages are over to see what they might do better next time.
Haines stressed the enormous scope of the damage:
- Forty per cent of the city’s power lines, which would cross Canada twice, have been affected by the storm.
- Thirty-thousand pieces of equipment have been installed back into the grid and about 47,000 metres of cable have gone back up into the air.
- The City of Toronto says about 20 per cent of the city’s tree canopy has been damaged and it could take seven weeks to clean up all the fallen limbs, Haines said.
Amid the rising anger and frustration of those still in the dark, utility companies are pleading for patience, saying crews are working around the clock and nothing else can be done to speed up the process.
That’s little consolation for people who have been in the dark for a week, including Carmen Andronesu, who is one of more than 1,000 residents who live in a condo complex in Toronto’s north end.
“No matter how much you try calling here and there, it’s like you cannot find help from anywhere,” she said.
Wynne promises help for food spoilage
In a morning news conference, Ontario Premier Kathleen Wynne said the concern she’s heard most around the province is spoiled food. She said she’s looking at providing help and would offer details over the next couple of days when a plan had been confirmed.
“We’ve reached out to food suppliers to try to come up with a way of compensating people and getting some extra food — or food vouchers, something to folks, so that’s what we’re working out over the next couple of days,” she said.
Ford said Toronto won’t be looking into any sort of compensation until the power has been restored.
“I can’t give any numbers or any assurances that we can reimburse anyone,” Ford said.
11,000 without power in N.B.
About 11,000 customers in New Brunswick are also struggling through a long power outage, mostly in St. Stephen and the Saint John area.
Some people won’t have their power restored until the new year, according to a tweet from NB Power on Saturday. Gaetan Thomas, the utility’s CEO, said extra crews are being brought in from Quebec tonight, which means more than 200 crews will be working in the province to restore electricity.
Thomas said another large storm, forecast for tomorrow, will also hinder their efforts as it brings freezing rain and snow.
In the rural southern New Brunswick community of Titusville, people without power have been heading to the generator-powered general store to buy kerosene, propane, candles and water.
Owner Mark Carline said the storm and outage has caused him to reflect.
“I think we were all reminded and humbled by the fact that at any given time we could be set back to this state, where we’re scrambling [to get] the basic necessities.”
In Quebec, the outages are almost over: Hydro-Québec tweeted late Friday night that they were “almost there” with only about 400 customers left who needed power restored.
Why The Turkish Government May Be The Casualty Of A $119 Billion PetroDollar “Loophole” | Zero Hedge
It was in October 2012 when we explained how Iran evades the Western blockade (ostensibly with the implicit nod of none other than the US), and when we first defined the concept of PetroGold in the context of the Turkey-Dubai-Iran crude-for-gold triangle. For those who need a quick refresher, here it is:
In recent months there has been a lot of incorrect speculation that because Iran has been shut off from the petrodollar, SWIFT-mediated regime, its economy will implode as the country has no access to the all important greenback and can thus not conduct international trade – the driving factor behind the international sanctions that seek to topple the local government as Iran dies an economic death. And while there have been bouts of substantial inflation, which so far the local government appears to have managed to put a lid on by curbing gray market speculation, Iran continues to more or less operate on its merry ways with international trade most certainly taking place, especially with China, Russia and India as main trading partners. “How is this possible” those who support the Western-led embargo of all Iranian trade will ask? Simple – gold. Because while Iran may have no access to dollars, it has ample access to gold. This in itself is not new – we have reported in the past that Iran has imported substantial amounts of gold from Turkey, despite the Turkish government’s stern denials. Today, courtesy of Reuters, we learn precisely what the 21st century equivalent of the Great Silk Road looks like, and just how effective Iran has been as a lab rat in escaping the great petrodollar experiment, from which conventional wisdom tells us there is no escape. Presenting: petrogold.
One year later, following Iran’s unperturbed ability to exist in a world without US dollars, the blockade of Iran is a thing of the past, and the west has engaged in a full-blown detente with the country, much to the fury of both Israel and Saudi Arabia, in exchange for the symbolic gesture that Iran will limit its nuclear enrichment, lowering and in many cases outright eliminating Iran sanctions, which proved completely futile.
So a happy ending for Iran, if only for now thanks to the fact that despite all the status quo‘s lies gold is and always has been money and can substitute for dollars.
However, one country that has seen better days, whose government may be on the edge of collapse due to an unprecedented corruption scandal precisely for enabling said PetroGold scheme, and which has been in the news on a daily basis recently, is Turkey. As Turkey’s Today’s Zaman explains in “Iran’s Turkish Gold Rush“, the political crisis Turkey finds itself in may be nothing but a consequence of the PetroGold scheme conceived over a year ago, and in which Turkey played a crucial role.
Here is how the Turkey-Dubai-Iran PetroGold triangle, or as the Zaman calls it, “gas for gold“, may soon result in the toppling of yet another government, simply because it showed that existence outside of the clutches of the ‘Petrodollar’ is perfectly possible…
* * *
From Iran’s Turkish Gold Rush, highlights ours:
Turkey’s Islamist government is being rocked by the most sweeping corruption scandal of its tenure. Roughly two dozen figures, including well-connected business tycoons and the sons of top government ministers, have been charged with a wide range of financial crimes. The charges ballooned into a full-blown crisis on Dec. 25 when three ministers implicated in the scandal resigned, with one making a dramatic call for Prime Minister Recep Tayyip Erdogan to step down as well. An exhausted-looking Erdogan subsequently appeared on television in the evening to announce a cabinet reshuffle that replaced a total of 10 ministers.
The drama surrounding two personalities are particularly eye-popping: Police reportedly discovered shoeboxes containing $4.5 million in the home of Süleyman Aslan, the CEO of state-owned Halkbank, and also arrested Reza Zarrab, an Iranian businessman who primarily deals in the gold trade, and who allegedly oversaw deals worth almost $10 billion last year alone.
The gold trade has long been at the center of controversial financial ties between Halkbank and Iran. Research conducted in May 2013 by the Foundation for Defense of Democracies and Roubini Global Economics revealed the bank exploited a “golden loophole” in the US-led financial sanctions regime designed to curb Iran’s nuclear ambitions. Here’s how it worked: The Turks exported some $13 billion of gold to Tehran directly, or through the UAE, between March 2012 and July 2013. In return, the Turks received Iranian natural gas and oil. But because sanctions prevented Iran from getting paid in dollars or euros, the Turks allowed Tehran to buy gold with their Turkish lira — and that gold found its way back to Iranian coffers.
This “gas-for-gold” scheme allowed the Iranians to replenish their dwindling foreign exchange reserves, which had been hit hard by the international sanctions placed on their banking system. It was puzzling that Ankara allowed this to continue: The Turks — NATO allies who have assured Washington that they oppose Iran’s military-nuclear program — brazenly conducted these massive gold transactions even after the Obama administration tightened sanctions on Iran’s precious metals trade in July 2012.
Turkey, however, chose to exploit a loophole that technically permitted the transfer of billions of dollars of gold to so-called “private” entities in Iran. Iranian Ambassador to Turkey Ali Reza Bikdeli recently praised Halkbank for its “smart management decisions in recent years [that] have played an important role in Iranian-Turkish relations.” Halkbank insists that its role in these transactions was entirely legal.
The US Congress and President Obama closed this “golden loophole” in January 2013. At the time, the Obama administration could have taken action against state-owned Halkbank, which processed these sanctions-busting transactions, using the sanctions already in place to cut the bank off from the US financial system. Instead, the administration lobbied to make sure the legislation that closed this loophole did not take effect for six months — effectively ensuring that the gold transactions continued apace until July 1. That helped Iran accrue billions of dollars more in gold, further undermining the sanctions regime.
In defending its decision not to enforce its own sanctions, the Obama administration insisted that Turkey only transferred gold to private Iranian citizens. The administration argued that, as a result, this wasn’t an explicit violation of its executive order.
It’s possible that the Obama administration didn’t have compelling evidence of the role of the Iranian government in the gold trade. However, the president may have also simply sought to protect his relationship with Ankara and didn’t want to get into a diplomatic spat with Erdogan, who he considers a key regional ally.
If the administration didn’t feel that the sanctions in place at the time were sufficient to take action against Halkbank, after all, it could have easily shut down the gold trade by amending its executive order. But at the time, Turkey was also playing a pivotal role in US policy in Syria, which included efforts to strengthen the more moderate opposition factions fighting President Bashar Assad’s regime.
It’s also possible, however, that the Obama administration’s decision had less to do with Turkey, and more to do with coaxing Iran into signing a nuclear deal. In the one-year period between July 2012, when the executive order was issued, and July 2013, when the “golden loophole” was closed, the Obama administration’s non-enforcement of its own sanctions reportedly provided Iran with $6 billion worth of gold. That windfall may have been an American olive branch to Iran — extended via Turkey — to persuade its leaders to continue backchannel negotiations with the United States, which reportedly began as early as July 2012. It could also have been a significant sweetener to the interim nuclear deal eventually reached at Geneva, which provided Iran with another $7 billion in sanctions relief.
Indeed, why else would the administration have allowed the Turkish gold trade to continue for an extra six months, when Congress made clear its intent to shut it down?
This brings us back to the current corruption drama in Turkey. The ruling Justice and Development Party (AKP) has been claiming that it is a victim of a vast conspiracy, blaming everyone from Washington to Israel to US-based Islamic cleric Fethullah Gulen for its woes. Some Turkish media have pointed a finger at David Cohen, the Treasury Department’s undersecretary for terrorism and financial intelligence, who happened to be in Turkey as the news began to break. Erdogan even raised the possibility of expelling the US ambassador to Ankara, Francis Ricciardone.
But if the charges stand against the panoply of well-connected figures fingered, the AKP will have only itself to blame. While the gas-for-gold scheme may have been technically legal before Congress finally shut it down in July, it appears to have exposed the Turkish political elite to a vast Iranian underworld. According to Today’s Zaman, suspicious transactions between Iran and Turkey could exceed $119 billion — nine times the total of gas-for-gold transactions reported.
Even if the Turkish-Iranian gold trade represents only a small part of the wider corruption probe, the ongoing investigation could provide a window into some nagging questions about the relationship between Ankara and Tehran. Perhaps we will finally learn why the Turkish government allowed Iran to stock up on gold while it was defiantly pursuing its illicit nuclear program — and whether the Obama administration could have done more to prevent it.
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Bottom line: dare to mess with the Petrodollar and the wrath of the US government will hunt you down… sooner or later.
Marc Faber has 3 very contrarian predictions for 2014 that we are sure will have the yammering yay-bobs screaming. While “everyone thinks stocks can continue to rise,” Faber sees “the US market as expensive,” and will return very little over the next few years. Furthermore, he adds, while “some stocks are not terribly expensive; but just like in the year 2000, [social media] stocks are grossly over-valued,” and a short basket in the most egregious will return at least 30% next year. Lastly, Faber exclaims, “given all the money printing that is going on globally… physical gold is a good insurance.”
Click image for interview (no embed)
In an interview with Talking Numbers’ Brian Sullivan, Faber offers what he thinks is next for the world in 2014:
1. The market will decline from current levels
Faber says: “My sense is that at the present time, the US market is relatively expensive compared to foreign markets, especially to European markets and to emerging markets. On a cyclically-adjusted P/E [price-to-earnings] basis, it is actually going to return very little over the next seven to 10 years.
2. Best shorts for 2014: Facebook, Tesla, Twitter, Netflix, and Veeva Systems
Faber says: “If you look at the entire market, some stocks are not terribly expensive and some stocks are very expensive. It’s like in year 2000, not every stock was overpriced. At that time, the NASDAQ was grossly overvalued but, say, resource shares and so-called ‘old economy’ companies were relatively inexpensive or absolutely cheap. In the present instance, I think that stocks like Facebook, Tesla, Twitter, Netflix, [and] Veeva Systems are grossly overvalued and that the basket of shorts in these stocks will return you at least 30% next year.”
3. Best longs for 2014: Gold, gold shares, and Vietnamese stocks
Faber says: “Given all the money printing that is going on globally – and not just in the US – and given that the total credit as a percent of the advanced economies is now 30% higher than in 2007 before the crisis hit, I think that gold is a good insurance.”
“I’d rather buy something that is reasonably priced. And, I think gold shares are very inexpensive. So a basket of gold shares I think next year could easily appreciate 30%.”
“I think the Vietnamese stock market, which this year was up 22% [and] which is not bad for an emerging market, will continue to go up.”
With 72% of those polled believing “big Government” is more of a problem now than 4 years ago, it is hardly surprising that Ron Paul blasts “the failure of government is all around us” in this brief FOX news interview. Perhaps it is the fact that “Obamacare has been such a trasparent failure of big government,” along with Keynesian economics, and the NSA debacles; that more and more of even the most liberal are realizing just what America has become. “It’s really great news that people are starting to recognize this,” Paul adds, because there is no way to replace the status quo “until people give up on what we have.”