Soothsayers, Naysayers and Ostriches
Darryl Robert Schoon
 Someday we’re
going to owe Chicken Little an apology
January 2013, US stock markets are at record highs, the volatility
index, the VIX, is as quiet as a dormant caldera and hope the US economy
is recovering is growing again as it has every January since 2010.
Dow, S&P close at five-year highs; VIX
plunges near 12 - CNBC, January 18, 2012
“It’s darkest before the dawn” is a saying often used to rally the
dispirited. The opposite sentiment, “it’s brightest before the night”,
instead cautions that unqualified optimism is just that—unqualified.
Today, hopes the global economy can overcome massive and historic levels
of debt are again on the rise. Those hopes, unfortunately, are as
unfounded as Mitt Romney’s presidential aspirations on November 6th.
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| John Exter (1910-2006) The Central Banker who made a fortune in Gold |
John Exter after graduating from college in 1932 pursued graduate
studies at Harvard University in economics. Exter wanted to understand
the causes of the Great Depression which had brought economic activity
in the US and around the world to a virtual halt during his youth.
As a banker and economist, Exter was to have a storied career. After
being at MIT during WWII, he joined the Board of Governors at the
Federal Reserve Bank as an economist. In 1950 Exter founded and became
governor of the Central Bank of Ceylon.
In 1953 he was division chief for the Middle East at the World Bank and
in 1954 he returned to the New York Federal Reserve Bank as
Vice-President of International Relations and Precious Metals
Operations. In 1959, Exter left the Federal Reserve to become
Vice-President at First National City Bank (now Citigroup) with special
responsibilities for foreign central banks and governments.
How Exter, an economist, a central banker and investment banker, was to
make a fortune in gold is told by W A Wijewardena, Deputy Governor of
the Central Bank of Ceylon, in John Exter – Central Banker For All Times an article published on
the first anniversary of Exter’s death at 95 on February 28, 2006.
… With a huge fortune made on the gold market by using his own
expertise on the foresight of irresponsible central banking and its
inevitable consequences, Exter took an early retirement in 1972 and
went into private consultancy work.
According to his own admission, the prospect for his fortune on gold
dawned on him after a friendly debate he had in 1962 with his one time
Harvard buddy and Nobel Laureate Paul Samuelson.
In that debate on why the dollar was becoming weak and USA was losing
gold, Exter gave his diagnosis which was based on his experience with
the Federal Reserve System. “Paul, it is very simple. The Fed is
printing too many dollars and they flow out of the country into
foreign central banks who demand gold” Exter is reported to have
said.
But, Paul Samuelson did not accept it and wanted to explain the malady
in terms of productivity differences between USA and other countries,
namely, Europe and Japan. Samuelson’s thesis was that the latter
category of countries had a higher productivity than USA and therefore
the dollar was becoming weaker.
Exter says that he countered Samuelson saying that Japan was in more
trouble than USA, because “the Bank of Japan was running its
printing press even faster than the rest of the central banks around
the world”
Exter had decided then and there that the irresponsible government
expenditure by the Kennedy administration could not keep the dollar
stable in the long run and one day, gold would become the preferred
asset by the world’s nations.
Hence, he says that he converted all his savings into gold based
assets and waited patiently. He was amply compensated in 1971 when the
US government was forced to sever dollar’s link with gold under the
gold exchange standard and allow the gold prices to be determined in
the free market
Overnight, gold prices doubled from $35 per ounce to $70 per
ounce. So did the gold based assets portfolio held by Exter. [At
today’s price of $1690 per ounce, the appreciation of Exter’s gold-based
portfolio would certainly be noteworthy.]
In 1971, Exter had been at the epicenter of US discussions on gold.
President Nixon who closed the gold window in August 1971 was heavily
influenced by the views of Milton Friedman who believed free-market
dynamics would better regulate paper currencies than the rigid
discipline of gold. Friedman was wrong.
Paul Volker, then Under-Secretary of the Treasury under Nixon, had asked
Exter’s advice on the matter. Exter recommended the US raise the price
of gold to accommodate the growing pressure on the US dollar. Volker
said that wasn’t politically possible. Exter then told Volker that
Volker had no choice but to close the gold window. Two weeks later,
Nixon did just that.
Exter later commented on the significance of that act:
The final link between the dollar and gold was broken. The dollar
became nothing more than a fiat currency and the Fed [and especially
the banks] were then free to continue monetary expansion at will. The
result... was a massive explosion of debt.
Gold Wars, Ferdinand Lips, Foundation for the Advancement of Monetary
Education, New York (2001)
Today, Exter is best known for what is called ‘Exter’s inverse pyramid’,
a model of what will happen during a deflationary collapse when
investors flee increasingly illiquid assets for those offering safety
and liquidity.
Exter's Inverse Pyramid
Ultimately, the fatal flaw in the bankers’ paradigm of paper money is
the hubris of central bankers themselves. Economists had convinced
themselves that by printing money, they could achieve full employment
(Keynes), that without gold, free market forces would stabilize
currencies (Friedman) and that by sufficiently expanding the money
supply a deflationary collapse in demand, i.e. depression, could be
prevented (Friedman) and/or safely offset by increased borrowing
(Keynes).
Both Keynsians on the left and Friedmanites on the right were convinced
that central bank stewardship of paper money was better done without the
constraint of gold. That somehow a house built on sand is preferable to
one built on rock—proving once again that if thought has no bounds
neither does thoughtlessness.
Exter, a friend of Ludwig von Mises, was an adherent of the Austrian
School of Economics, an economic discipline shunned by ‘house’
economists who much preferred the apparent opportunities afforded by
credit and debt. After a discussion of Exter’s Austrian views, Paul
Samuelson told him, “John, you may be right but you’re lonely”.
In a conversation I had with Exter’s daughter, Jane Exter Butler, about
her father, she commented that she wished her father had lived long
enough to see evidence of the economic collapse he had predicted. Exter
had passed away in 2006 two years before the collapse.
I replied that I was certain her father didn’t need any such
evidence. Exter knew with complete certainty he was right—as he still is
today.
John Exter: The Coming Depression and Gold
Exter’s understanding of macro economic factors allowed him to
accurately predict economic events. Exter was certain another depression
was coming and that it would be worse than what had happened in the
1930s. The following is excerpted from a 1981 interview with Exter:
I lived through the great depression. I remember it vividly. I know
what it did to people. I remember the 25% unemployment. So I’m very
unhappy when I have to say this depression is going to be worse.
A time will come when housing prices will weaken so much that many
people who bought houses recently will lose all their equity. Once
they lose their equity, they may say: “Why should I go on paying the
bank? Why don’t I just let them have it?” So I think you’re going to
have defaults on mortgage loans and foreclosures…
More foreclosures, of course, put more pressure on home values. Then
more defaults-and when people start to default on their debts,
troubles multiply. This is one reason why I think we cannot avoid a
banking collapse.
I think people have rather been seeing—in their heart of hearts—that a
depression is coming, or at least some sort of hard times…When your
income shrinks and you have a debt burden, the debt burden becomes
more and more onerous-and you get desperate to borrow…I expect the
government to respond to the deflation by trying desperately to
re-inflate. I expect huge budget deficits. So I expect the dollar
ultimately to become worthless.
The Federal Reserve has already defaulted-gone bust. When I was a
young man, the Fed had to redeem its liabilities in gold at $20.67 per
ounce. As a matter of practice, any of us could go to any bank in the
US and write a $100 check and take out five $20 gold pieces. To
maintain that obligation, the Fed had to avoid borrowing short term
and lending long term. But it didn’t. As a result it had its own
liquidity squeeze and defaulted on its IOUs-the paper dollars
circulating-are not promises to pay anything. They’re IOU nothings.
Paper is worthless as a store of value. The only thing that can give
the US dollar any value is its promise to pay something that is a good
store of value-primarily gold-to the holder. The government now has
welched on that promise, so these paper IOUs are not really worth
anymore than the paper they are printed on.
Sooner or later the public will catch on and the dollar will become
worthless…As the crisis intensifies; as the results of the liquidity
squeeze become apparent and illiquid debtors start to default; as the
depression and deflation set in; gold will once again emerge as the
supreme store of value.
…This is hard for me to say, for I am a banker: On the subject of
income, I’d definitely stay away from banks. Bank deposits are paper
IOUs. A bank owes you Federal Reserve notes. Even Federal Reserve
notes are not good. A bank is even worse because you have the added
risk that it will default on its promise to pay such notes. Remember:
gold never defaults.
"Helicopter Ben" Bernanke and "Kamakazi Shino" Abe are 2013 Co-Sponsors of Exter's Predicted Deflationary Collapse
In October 2011, Jay Taylor, an expert on gold stocks, interviewed
Exter’s son-in-law, Barry Downs. During the interview, Downs discussed
the signs Exter said to watch for, signs which would signal the approach
of the coming economic downturn.
In credit-based economies, aggregate debt levels must constantly grow
and when they don’t, it signals the economy is entering a dangerous
phase; and, if aggregate debt contract, i.e. shrink, that is a far more
dangerous sign. That signals a deflationary depression is beginning; and
in 2008, Downs noted that levels of aggregate debt began to shrink.
Note: Taylor’s interview with Barry Downs begins at the 20 minute mark
and ends at the 30 minute mark, see http://www.voiceamerica.com/episode/56715/pondering-the-possibilities-of-a-greater-deflationary-depression .
This is why the Fed, the Bank of Japan, the Bank of England and the
European Central Bank have thrown caution to the wind in a desperate and
last ditch attempt to save their ponzi-scheme of credit and debt that
has served them so well.
Exter told Barry Downs that once aggregate debt levels began shrinking,
nothing central bankers could do could reverse the process. A tidal wave
of deleveraging debt would sweep aside any and all attempts to inject
enough credit to reverse the process.
QE3 will be no more effective than QE1 nor will QE4 or QE5. No amount of
bond buying, no amount of credit can turn back the tsunami of defaulting
debt that has already begun to gather momentum. The tipping point has
been reached.
Excessive central bank credit has turned into such levels of debt that
no amount of credit can subsume it. This is why it’s called the end
game. Credit-based capitalism was headed towards this finale in 1694. In
2013, it arrived.
The Japanese central bank said it would aim to achieve a rate of 2
per cent inflation – up from its current goal of 1 per cent – “at the
earliest possible time” by shifting to the kind of limitless stimulus
embraced by the US Federal Reserve and the ECB. - Financial Times, January 21, 2013.
The End Game and the Better Times to Come
Ben Bernanke’s belated attempts to restore US employment levels and
economic growth through even more monetary easing is as futile as Lance
Armstrong’s attempts to salvage his tattered reputation.
No amount of optimism, no amount of denial and no amount of credit can
fix what central bankers themselves broke. Nothing lasts forever. Not
even the dream of bankers who attempted to live off the productivity,
ingenuity and labor of others merely by printing debt-based paper
coupons they could loan to others as money.
Remember: gold never
defaults - John Exter
It might be assumed by readers that my expectation of another depression
is evidence of a pessimistic outlook. Nothing could be farther from the
truth. After the coming collapse, I expect a far better world will
emerge; and, although the process will not be easy, it will be rewarding
beyond our greatest expectations.
John Exter, in his wisdom, firmly believed that when laws fail, human
beings working with moral consciousness could do wonders. - W A Wijewardena, Deputy Governor of the Central Bank of Ceylon
… the vulture feeds neither upon the pastures of the bull nor the stored
up wealth of the bear. The vulture feeds instead upon the blind
ignorance and denial of the ostrich. - Darryl Robert Schoon, Time of the Vulture: How to Survive the Crisis and Prosper in the
Process, 3rd ed. 2012
Buy gold, buy silver, have faith.
My current youtube video, The Cat,
Mouse & the Fiscal Cliff, presents capitalism and America's
fiscal dilemma in a hopefully more understandable context. Best wishes to
all in the coming New Year. The next Mayan long count calendar cycle is
about to begin and it's going to be far, far better than the last cycle.
Buy gold, buy silver, have faith.
Darryl Robert Schoon
www.survivethecrisis.com
www.drschoon.com
www.drschoon.com |
