THE PROPOSED IRANIAN OIL BOURSE

by Krassimir Petrov, Ph.D.

Austrian Macro Economist/Investment Strategist

Commissioned by: J. Douglas Bowey and Associates

Abstract

The American Empire depends on the U.S. dollar. The proposed Iranian Oil Bourse

will accelerate the fall of the U.S. dollar and hence the fall of the American Empire.

I. Economics of Empires

A nation-state taxes its own citizens, while an empire taxes other nation-states. The history of empires, from Greek and Roman, to Ottoman and British, teaches that the economic foundation of every single empire is the taxation of other nations or of their subjects. The imperial ability to tax has always rested on a better and stronger economy, and as a consequence, a better and stronger military that peacefully or militarily enforced the tax. One part of those taxes went to improve the living standards of the empire and the other part went to reinforce the military dominance necessary to enforce those taxes.

Historically, taxing the subject state has been in various forms, usually gold and silver, where those were considered money, but also slaves, soldiers, crops, cattle, or other agricultural and natural resources, whatever economic goods the empire demanded and the subject-state could deliver. Historically, the taxation has always been direct: the subject state handed over the money (gold/silver) or the economic goods directly to the empire.

For the first time in history, in the twentieth century, America was able to tax the world indirectly—not by enforcing the direct payment of taxes like all of its predecessor empires did, but by distributing its own currency, the U.S. Dollar, to other nations in exchange for goods with the intended consequence of devaluing over time those dollars and paying back later each dollar with less economic goods. The difference between the value of the dollar during the initial purchase and the devalued dollar during the repayment was the U.S. imperial tax. Here is how this happened.

Early in the 20th century, the U.S. economy began to dominate the world economy. At the time the U.S. dollar was tied to gold, so that the dollar neither increased, nor decreased its value, but was always convertible into the same amount of gold. The Great Depression with its the preceding inflation from 1921 to 1929 substantially increased the amount of paper money in circulation without the correspondent increase in gold. This rendered the effective backing of the U.S. dollar by gold impossible. As a consequence, President Franklin Delano Roosevelt decoupled the dollar from gold in 1932. Up to this point, the U.S. may have well dominated the world economy, but from an economic point of view, it was not technically an empire. The fixed value of the dollar for gold did not allow the Americans to extract economic benefits from other countries by supplying them with gold-backed dollars.

Economically, the American Empire was born with the establishment of the Bretton Woods system in 1945. The dollar was made only partially convertible to gold—convertibility to gold was available to foreign governments only, but not to private institutions. At this time the US dollar was established as the international reserve currency. This was possible, because during WWII, the United States had supplied its allies with food and military provisions, accepting gold as payment, thus accumulating significant portion of the world’s gold.

Gold and Economic Freedom

by Alan Greenspan
[written in 1966]

This article originally appeared in a newsletter: The Objectivist published in 1966 and was reprinted in Ayn Rand’s Capitalism: The Unknown Ideal

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense - perhaps more clearly and subtly than many consistent defenders of laissez-faire - that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.

Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term “luxury good” implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

CRIPPLING “WEALTH”

by Dr. Kurt Richebächer

From the June 21, ‘05 Daily Reckoning

Let us start with a quote from Friedrich von Hayek: “The means of perception employed in statistics are not the same as those employed in economic theory.” American economists think far too much in statistical terms, regardless of underlying economic processes. While the statistics do, indeed, show general enrichment, in reality, there is none at all. The homeowner has zero gain in his comfort of living or income.

This perception of wealth has its true basis in nothing but the famous “greater fool theory”; that is, in the expectation that there will be a greater fool to buy the acquired house later at a higher price. Deluded by this wealth chimera, private households have run down their savings and piled up astronomic debts to be repaid with future earned income.

Where, then, are the economic benefits? The one obvious visible benefit is in the push to GDP growth from higher consumer spending, which also increases current incomes. Yes, but much of that spending on cars, furniture and houses is borrowed from the future. That is, the borrowing pulls future spending into the present, but, of course, at the expense of such spending in the future.

If you think it over, you realize that in reality, such a borrowing/spending bubble adds nothing to economic growth. It only distorts the time pattern of spending in relation to its long-term trend, as in the case of the consumer determined by the underlying rate of income growth.

The second problem is that such a bubble distorts and deforms the direction of demand and production in the economy. Consider these grossly disproportionate increases in U.S. domestic spending since 2000: consumer durables +30.8%, residential building +29.5%, nonresidential investment +5.8%, imports +23.5%, exports +5.8%.

Strikingly, all economies with housing bubbles have features in common that were, in the past, generally associated with ailing economies. These are collapsed savings; skyrocketing debts; chronic, large trade deficits; and booming residential investment, but weak business investment.

Mar 19 2008 11:51AM

Balancing a Portfolio with Commodities

With all of the volatility we’re seeing in 2008, this is one of those times when investors really value assets that are not correlated to the broader markets.

That explains much of the current interest in commodities – investors are looking for ways to protect themselves through diversification.

Investments in commodities are expected to exceed $200 billion this year, according to Barclays Capital. That compares to $178 billion in 2007.

Barclays surveyed 260 institutional investors at a conference last week and found that about a third of them plan to have more than 10 percent of their portfolios in commodities in the next three years, despite prices that are at or near record levels. That number is up from about 20 percent in 2007.

More than half of these institutional investors say portfolio diversification is their main interest in commodities.

The results of Barclays’ survey track with the news that CalPERS, the giant California public pension fund, may increase its commodities exposure to as much as $7.2 billion through 2010.

Several years ago, we wrote an article explaining the role that hard assets can play in portfolio diversification. Hard assets increased overall returns while lowering or maintaining volatility in several sample portfolios. And we recommended giving investment portfolios a proper weighting in hard assets and rebalancing at regular intervals.

That article cited a study by Ibbotson & Associates that found very low correlation between hard assets and four other asset classes from 1970 to 1998 – U.S. large-cap stocks, U.S. small-cap stocks, international stocks and Treasury bonds.

Table 1

We looked at the same asset classes for the past 10 years, and as you can see on Table 1 above, the story really hasn’t changed much.

As you read across the line for hard assets (as measured by the S&P GSCI Index), you can see that there is virtually no correlation with large-cap stocks (S&P 500 Index) and Treasury bonds (Merrill Lynch U.S. Government Index). And for small-cap stocks (Russell 2000 Index) and international stocks (MSCI EAFE Index), the correlation is very low.

By comparison, look at the high correlation between large-caps and international stocks – these two asset classes moved in the same direction 82 percent of the time during the past 10 years. International stocks and small-caps correlated 73 percent of the time, and large- and small-caps moved together 75 percent of the time. Thus, a portfolio split between these three asset classes offered relatively little diversification to protect investors from market risk.

For the 1970-1998 period, commodities had a compounded annual return of 8.6 percent, according to Ibbotson. This was 4 to 5 percentage points below the annualized return for all three of the equity asset classes.

Hard assets, however, turned in a much stronger performance – both in absolute and relative terms - for the latest 10 - year period, as you can see in Table 2 below.

Table 2

Commodities as an asset class have handily outperformed the other four asset classes during this latest 10-year period, posting a compound annual return of 11.4 percent. Large-cap U.S. stocks lagged hard assets by more than 7 percentage points on average; the difference was more than 6 percentage points for small-caps and nearly 5 percentage points for international stocks.

Bloomberg has an insightful interview with a Mr. Faber that has no faith in the U.S. economy.

Jim Rogers discusses the outrageous moves behind made by Bernanke and the Federal Reserve.

Feb 29 2008 3:16PM

Gold Near $1000

Courtesy of www.adenforecast.com 

Gold is soaring. It’s quickly closing in on the all important $1000 level but most people are looking elsewhere. The economy is the hot topic and everyone’s talking about recession. Opinions are running rampant, discussions are endless and this is making people nervous. The Fed is very nervous too. FED TO THE RESCUE, AGAIN. As signs became obvious that the economy was in serious trouble, the Fed hit the panic button. This followed steep drops in the Dow Industrials and sharp declines in several of the other world stock markets. Knowing the importance of these market signals and probably fearing a crash, the Fed abruptly slashed interest rates. As we’ve often said, when push comes to shove, the Fed will do whatever it has to do to keep the economy afloat and to avoid a recession.

That was clearly illustrated last month and if there was any doubt before, it’s now more obvious than ever that the Fed has been, and will continue to take the inflation path. This is not only true of the Fed but of all the world’s central banks. As you know, money has been pouring into the system for quite a while now. Credit is cheap and it keeps getting cheaper. Money is now also going to be given away to over 100 million people in the U.S. to the tune of about $150 billion. It’s even going to be given to people who don’t pay taxes, all in the hope that they’ll spend this money to help ward off a recession.

Gold Tops $1,000 on Bear Stearns Crisis

By STEVENSON JACOBS – 1 day ago

NEW YORK (AP) — Gold prices bolted above $1,000 again on Friday, hitting a new record after a liquidity crisis at Bear Stearns Cos. rattled Wall Street and fed buying of safe-haven investments.

Other commodities traded mostly lower, with crude oil, copper and agriculture futures falling.

Following weeks of flirting with the $1,000 mark, gold finally breached the milestone Thursday after the dollar plunged against rival currencies. The dollar hit a record low Friday against the euro, which bought as much as $1.5687. The greenback’s fall has been a major driver of gold because investors consider the metal a safe investment in times of economic turmoil and rising inflation.

Investors pushed gold higher Friday in reaction to a plan by the New York Federal Reserve and JPMorgan Chase & Co. to provide secured funding to Bear Stearns in a bid to keep the troubled investment firm from collapsing amid a global credit crisis.

“The fact that gold was able to power back over $1,000 was very much due to the bad credit-related news that continues to sweep Wall Street,” said James Steel, analyst with HSBC in New York. “The credit crisis keep morphing and the safe-haven buying keeps getting reinforced.”

Gold for April delivery gained $5.70 to settle at $999.50 on the New York Mercantile Exchange, after earlier rising as high as $1,009 — a new trading record. The metal rose above $1,001 in aftermarket trading.

Gold has gained nearly 20 percent this year amid the tumbling dollar, record-high crude prices and nervousness about the faltering U.S. economy. Analysts say the metal could go even higher if the Federal Reserve continues its interest rate-cutting campaign when it meets on Tuesday.

Lower interest rates can boost the economy but also tend to undermine the dollar, encouraging investors to buy hard assets like gold and silver. A weak greenback also makes dollar-denominated commodities like gold cheaper for overseas buyers.

Other precious metals traded mixed Friday. Silver for May delivery gained 23.5 cents to settle at $20.655 an ounce on the Nymex, while May copper fell 0.30 cent to settle at $3.820 a pound.

In energy markets, crude oil prices dipped modestly, closing lower for the first time in a week as the slide on Wall Street and U.S. economic worries led to profit-taking.

Light, sweet crude for April delivery fell 12 cents to settle at $110.21 on the Nymex, after rising earlier to just below its latest trading record of $111, set Thursday.

Other energy futures rose Friday. April heating oil futures rose 2.17 cents to settle at a record $3.1465 a gallon after earlier setting a new trading record of $3.222 a gallon. April gasoline futures rose 0.66 cent to settle at $2.6894 a gallon.

In agriculture markets, wheat, corn and soybean futures plunged amid expectations that the U.S. economic downturn will dampen demand.

Wheat for May delivery plummeted 52.5 cents to settle at $11.915 a bushel on the Chicago Board of Trade, while May soybeans lost 50 cents to settle at $13.5275 a bushel. May corn fell 10.25 cents to settle at $5.5925 a bushel on the CBOT.

Are you a commodities investor with friends that think you are “crazy” for investing in precious metals? Do these same friends advise you to indefinitely “buy and hold” a large amount of “well diversified” mutual funds for the “long term”? We are continually amazed at how few investors seem to open their eyes to changes all around them, including what is really happening in the financial markets.

The following chart illustrates what would have happened to the Dow Jones Industrial average if it had increased in value at the same percentage rate as gold has since the year 2000.

In the above chart the blue line represents the actual monthly price of the Dow Jones Industrial Average. The red line in the above chart represents the percentage gains of gold factored into the price of the Dow Jones since 2000. In other words, if the Down Jones had performed as well as gold actually has in percentage gains since 2000, the Dow Jones Industrial Average would now be worth approximately 37,000 points. This chart helps illustrate just how significantly better gold has outperformed the Dow Jones Industrial Average since roughly 2000. If an investor had “bought and held” the Dow Jones Index since the year 2000 their investment would barely have broken even after eight years. This is a very large period of time for such poor investment performance. When inflation is factored into the equation of the Dow Jones, the actual return is extremely poor.

But your friends are likely to point out that stocks outperform commodities in the long term. We recognize that from 1980 to 2000 the Dow Jones Industrial Average far outperformed gold in terms of investment performance but this is exactly our point. In our opinion investments are cyclical and not linear. In the 1970’s commodities had a major bull run that significantly outperformed stocks just as stocks outperformed commodities in the following decades. We do not concern ourselves with which investment class is the ultimate investment of all time but rather which investment class is undervalued relative to other investments at any given time.

Unfortunately it appears most investors have a very short term bias and put too much emphasis on their recent experiences instead of history. We believe most investors are bias towards one strategy of investing because that strategy is what worked for them in previous years. Sadly, most of these investors will not learn that their former method for investing may no longer be effective until it is too late.

We wonder what the mainstream media such as television networks, news papers, radio stations and social mood would be like if the Dow Jones Industrial Average were to consistently hit new highs, with a value as high as 37,000 points. Based on the Medias apparent bias on US stocks, likely encouraged by sponsors and advertising revenue, we believe the coverage would be extreme. Interestingly, gold and commodities in general have grown many hundreds of percent points since 2000 yet few members of the media have noticed this significant development in the markets. More coverage on these types of investments would help countless investors find out about such opportunities within a short time. Instead we believe most investors will find out about the mega commodities bull market when it is once again overvalued and at risk of a serious correction. As usual, the cycle will eventually turn and the naive public will likely come late to the party and be destined for failure.

In the big picture we are concerned with what is undervalued now and likely to increase in value in the future, rather than what has already increased in value and therefore should always increase in value. We believe the former is a much more realistic strategy for making money in the financial markets.

Michael Kilbach
March 14, 2008

Mar 14 2008 12:01PM

The Other Reason to Own Gold

Everybody knows that gold is an inflation hedge. That’s why most people buy it. They know from experience that the purchasing power of all national currencies is being constantly eroded by inflation. But they also know that their purchasing power is preserved by owning gold.

For example, the price of crude oil has been rising for decades when viewed in terms of dollars or any national currency. But when the cost of a barrel of crude oil is viewed in terms of ounces or grams of gold, its price is essentially unchanged. In other words, the dollar price of crude oil and the dollar price of gold are both rising more or less lockstep.By owning gold instead of US dollars, you can today purchase basically the same amount of crude oil as at any other time since 1945.

In other words, gold is an inflation hedge. But that is only one of gold’s advantages. There is also another valuable reason to own gold, and significantly, this other reason is becoming increasingly important.

Gold is also a catastrophe hedge. Gold enables us to protect our wealth from a financial meltdown because it does not have counterparty risk.

I wrote about counterparty risk last August in an article entitled “As Financial Tremors Reverberate, Focus on Counterparty Risk”. I recommend re-reading that article for a refresher course on the nature of counterparty risk and how it arises. It is I think important to recognize that the financial tremors are indeed reverberating, and are doing so with growing ferocity. http://www.kitco.com/ind/Turk/turk_aug102007.html

The monetary and financial system is rapidly spinning out of control. We are witnessing the unwinding of decades of reckless credit expansion. Borrowers – corporations, hedge funds, homeowners, etc. – who no longer have the financial capacity to repay their debts are defaulting on their obligations in increasing numbers. In that environment, the safety of one’s wealth becomes paramount, to protect against the catastrophe of default in all types of financial assets.

In short, promises are being broken, so in an environment in which financial assets are becoming increasingly doubted, one needs to own tangible assets. Own things instead of promises, and there is only one money that is not dependent upon someone’s promise and that’s gold. So buy gold; it is the best catastrophe hedge. But also buy gold because it remains the best inflation hedge.

For example, gold was $670 on August 10, 2007 when my article on counterparty risk was published, and crude oil was $71.50 per barrel. When viewed in terms of gold, crude oil was 3.3 goldgrams per barrel.

Gold today is $992, and crude oil is $109. So both prices have risen considerably in dollar terms, but the price of crude oil today is 3.4 goldgrams per barrel, essentially unchanged from last August. Gold performed as expected, being a nearly perfect hedge against inflation.

So when considering all of its advantages, gold provides what everyone wants – peace of mind knowing that the portion of your wealth placed in gold is safe.

by James Turk