From the UK Telegraph
By Ambrose Evans-Pritchard

The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point.

If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.

Austria's finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria's GDP.

"A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.

The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a "monetary Stalingrad" in the East.

Mr Pröll tried to drum up support for his rescue package from EU finance ministers in Brussels last week. The idea was scotched by Germany's Peer Steinbrück. Not our problem, he said. We'll see about that.

Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut.

Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.

"This is the largest run on a currency in history," said Mr Jen.

In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.

Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.

They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).

Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia.

Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.

Under a "Taylor Rule" analysis, the European Central Bank already needs to cut rates to zero and then purchase bonds and Pfandbriefe on a huge scale. It is constrained by geopolitics – a German-Dutch veto – and the Maastricht Treaty.

But I digress. It is East Europe that is blowing up right now. Erik Berglof, EBRD's chief economist, told me the region may need €400bn in help to cover loans and prop up the credit system.

Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.

The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan – and Turkey next – and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights.

Its $16bn rescue of Ukraine has unravelled. The country – facing a 12pc contraction in GDP after the collapse of steel prices – is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5pc in the fourth quarter. Protesters have smashed the treasury and stormed parliament.

"This is much worse than the East Asia crisis in the 1990s," said Lars Christensen, at Danske Bank.

"There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU."

Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4pc in the fourth quarter.

If Deutsche Bank is correct, the economy will have shrunk by nearly 9pc before the end of this year. This is the sort of level that stokes popular revolt.

The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc – big change), or rescue Austria from its Habsburg adventurism.

So we watch and wait as the lethal brush fires move closer.

If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?

by Jim Sinclair

Don't you think it is about time GLD and the other popular international gold exchange-traded gold funds told their owners exactly what kind of gold they claim to own?

Can you imagine a situation where a person buys a gold ETF to own "non-gold" but finds out that he in reality owns OTC derivatives on gold? That would be an investment in the same type of financial instrument (not gold) that one owns gold bullion to protect oneself against.

The failure to unearth the Madoff scandal earlier becomes incredible when one understands that the returns from the market that were claimed on the size of the hedge fund were logically impossible.

The same reasoning screams bloody murder when applied to the many gold EFTs in terms of what it is they really own.

This raises a major question: From where did all the gold claimed to be owned by all the gold ETFs come from?

Where did funds such as GLD get their additional 45 tons in the last month?

We certainly can forget about that gold coming from the Comex. Twelve deliveries would stand out like a sore thumb.

Record keeping eliminates all exchanges around the globe as the source of bullion in any size to all the gold ETFs.

The physical market is so tight that coin minting has all but closed down compared to what it was one year ago. It is hard to accept that the gold EFTs can buy what the mints can't.

A read of the original EFT prospectus removes any thought that the gold is leased but leaves one to invite probability.

That probability is that the claimed gold can be only OTC derivative long positions. If that is so, then the financial reliability of the paper stands on the foundation of the balance sheet of the granting counterparty to the OTC derivative. This is true regardless of whether the counterparty is a mine or a naked speculator.

I think people own an ETF of derivatives, not of gold.

If I am correct then there is no clearinghouse guarantee for the OTC derivative to function.

Like so many other surprises of the last two years, the gold ETF shareholder may actually have no gold at all.

A perfect Ponzi scheme would allow you to surrender shares for bullion. You need only think about it.

Financial Times UK

Investors are buying record amounts of gold bars and coins, shunning risky assets for the relative safety of bullion amid renewed fears about the health of the global financial system.

The US Mint sold 92,000 ounces of its popular American Eagle coin last month, almost four times that which it sold a year ago and more than it shipped during the whole of the first half of 2007.

Other countries’ mints have also reported strong sales. "Large purchases of coins are perhaps the ultimate sign of safe-haven gold buying," said John Reade, a precious metals strategist at UBS.

Inflows into gold-backed exchange traded funds surged in January, pushing their bullion holdings to an all-time high of 1,317 tonnes. Last month’s flows of 105 tonnes were above September’s previous record of 104 tonnes, and absorbed about half the world’s gold mine output for January, said Barclays Capital.

"We estimate that investment demand [into gold] could double in 2009 compared to 2007," said Mr Reade. "Purchases of physical gold have jumped over the past six months as investors’ fears about the current financial crisis ... have intensified."

The move into gold is being driven by the very rich, with bankers saying that some clients are hoarding gold in their vaults. UBS and Goldman Sachs said last week that investor hoarding would drive prices back above $1,000 an ounce. On Monday gold was trading at $892 an ounce.

Traders and analysts said jewellery demand, historically the backbone of gold consumption, had collapsed under the weight of the high prices. Sharp falls in demand in the key markets of India, Turkey and the Middle East have capped the potential of any price rally. But the lack of jewellery demand has not discouraged investors.

Jonathan Spall, director of commodities at Barclays Capital in London, said: "We have seen more new enquiries about investing in gold so far this year than during the whole 2008."

Philip Klapwijk, chairman of GFMS, the precious metal consultancy, said that investors were buying gold because of fears about the global financial system rather than looking for a quick gain.

"This is a new round of safe haven buying," Mr Klapwijk said.

GFMS estimated bullion coin demand last year reached its highest level in 21 years.

Nine points of logic and reason:

1. This article is totally correct in saying nothing whatsoever has been done about the basic problem which is the failure of the OTC derivative. As long as the basic problem is not addressed by true valuation and bankruptcy of the friends of Washington all attempts to whitewash the disaster will in a short time wash away.
2. The problem is how to value the failed OTC derivative properly because we can't use the "zero" word.
3. Because of #2 the US Treasury will guarantee a false value.
4. Since the majority of SIVs will never perform due to bankruptcy in the asset chain, the US government will have to guarantee these at 100% of whatever value they intend to raise money on.
5. Next, the US treasury will have to guarantee and/or provide 100% of the funds borrowed or raised to make this worthless unless guaranteed investment in a pile of miss-valued worthless SIV paper.
6. Yielding the plan as it is now conceived is a useless camouflage of bankruptcy to be paid in via guarantee by the US taxpayer.
7. We need no Bad Bank as we already have a really BAD one called the Federal Reserve. It is stuffed to its own bankruptcy level with all their financial pal's OTC derivatives, also called toxic paper.
8. The majority of dopes and all the financial media will praise this outstanding job of window dressing and whitewash painting as solid accomplishment at last.
9. The media will have done a solid job instructing you that Toxic Paper is the villain, not those that manufactured the toxic paper OTC derivatives and distributed them, now having been bailed out 100% at your personal expense
This is all a Devil's financial brew being moiled and boiled daily in hopes of keeping you all firmly intoxicated.

Geithner to Draw Private Funds to Address Toxic Debt

Feb. 9 (Bloomberg) -- Treasury Secretary Timothy Geithner is seeking to draw investors into the U.S. financial-rescue program, aiming to add private funding as a new component of proposals to address the toxic debt clogging banks' balance sheets.

Aides worked through the weekend to complete the package that Geithner will announce tomorrow in Washington, which was delayed by a day. Aspects of the plan that have been settled include a new round of injections of taxpayer funds into banks, targeted at those identified by regulators as most in need of new capital, people briefed on the matter said.

The toughest issue has been the one Geithner's predecessor failed to address: the illiquid assets that caused the credit crunch. A leading proposal is a so-called aggregator bank, featuring investors such as hedge funds and private equity, that may issue Federal Deposit Insurance Corp.-backed debt, the people said. It's unclear how big a role there'll be for guarantees of securities that stay on banks' balance sheets.

"We have to reach a point where investors and consumers have greater confidence in our financial system," Philadelphia Federal Reserve Bank President Charles Plosser said in an interview. "Without that, these institutions will not be able to attract new capital or be able to fully resume their important role in providing credit."

Stocks flucuated, with the Standard & Poor's 500 Stock Index rising 0.5 percent to 873.20 at 1:03 p.m. in New York. Treasuries slid, pushing 10-year note yields up to 3.05 percent from 2.99 percent.

Interview with Marc Gugerli by Oliver Disler.
Marc Gugerli is Fund Manager & Advisor of Gold 2000 Ltd and the Julius Baer Gold Equity Fund.

O. Disler: Mr. Gugerli you are a specialist for Gold and Gold mining stocks. Are you disappointed about the performance of the Gold price the recent months?

Marc Gugerli: No, I am not. Gold has outperformed all major asset classes like bonds and shares. The Gold price calculated in South African Rand, Australian and Canadian Dollar, British Pound, EURO, Swiss Franc and some other currencies Gold just recently reached new highs. Rather disappointing is the performance of gold mining shares.

O. Disler: We are facing one of the heaviest global financial crisis, why is Gold not trading much higher?

Marc Gugerli: Gold has primarily a function of conserving the value of purchasing power. Gold is money and goes hand in hand with the development of money supply long-term. In recent months a lot of money has been destroyed, although on opposite central banks are printing money.

The various problems and issues we have in financial markets, have been recognized much too late and most central banks (especially the ECB) are “behind the curve” reacting with adequate counter-measures. This is one of the reasons, why the gold price did not go up explosively.

O. Disler: What is the relation between the gold price and the supply of money precisely?

Marc Gugerli: Yes. Gold was, is and remains money. Gold supply and demand and the variation of paper money supply are two important parameters which have an impact on the price of gold. Before the financial crisis started in 2007, money supply was growing at a rate of roughly 10 % in most industrialized western countries. Nowadays it is a multiple of ten percent.

A lot of central banks try to get ahead of the curve by reducing interest rates and flooding the markets with new money. The gold price should reflect this already now and trade around its inflation adjusted top of approximately USD 2’000. Man wants to go against the curve.

This is my minimum target for the gold price! The inflation of gold (dilution) is about 1.6% (gold output) or 2’000 tons per year. The entire amount of gold ever mined in mankind history is estimated to be about 140’000 tons. Money supply growth is approximately 30% and exceeds even 100% in some specific cases. It is just a matter of time that Gold will rebalance this inequality.

O. Disler: Is Gold an alternative to treasury bonds, since the yields are so low?

Marc Gugerli: That is a great question. Treasury bills are the next big bubble (to burst). Investors and most asset managers have in average 20% cash and 30% invested in short-term treasuries. For a certain period this might be the right asset allocation.

Since the yields on cash and short-term treasuries are almost 0% in major currencies, Gold is getting more attractive as an investment. Now you have to ask yourself, if you rather want to be fully invested in classical assets only where the supply is exploding by the new money printed or at least add some Gold which can’t be copied, printed and is nobody’s liability?

O. Disler: How shall somebody invest into Gold? Do you suggest Gold coins as well?

Marc Gugerli: There are three possibilities, which are relatively safe:
1. You buy physical Gold and put it into a vault

2. You could buy the Gold ETF from Zurich Kantonalbank (ZKB) which is traded at the Swiss Stock Exchange, which is the only ETF available which is fully covered by physical Gold and if needed you can exercise and get the Gold delivered within 10 days. There are similar products available but as with bank metal depository accounts you run the risk that you have to wait a long time until you get your gold. Very important: Reduce to a maximum the failure of exercise, counterparty and depository risk.

3. It makes absolutely sense to purchase gold coins in respect of the designated use. Investors have to consider that gold coins trade at elevated premiums and are almost not available anymore in some regions, such as United States of America, Canada or Australian.

I suggest to have invested minimum 10% of total wealth in physical Gold. Consider this investment as an insurance which in worst case scenario protects the rest of your holdings and assets.

O. Disler: This is interesting, but again, why is the price of Gold not trading much higher?

Marc Gugerli: The majority of investors purchase Paper-(Gold)-Futures at the COMEX. The sellers or counterparties of those Gold-Futures are just a few very dominant players. Some of them have an in-official close link to the US government. So far most of the investors didn’t exercise the gold futures and have accepted cash instead of physical settlement.

This is about to change. I believe that the comex will default and the entire paper gold market will crash and gold could rise very quickly to 2000 until 3000 US Dollars. When this happens it will be too late to exercise or to try purchasing physical gold. It’s the same with a house insurance, which you need before the beds are burning!

O. Disler: What is your view about the price of Silver?

Marc Gugerli: The situation in the paper silver market is even worse. At the actual levels, Silver is extremely cheap and investors are divided if Silver is rather an industrial or still a precious metal or both. But having a look at the price development it is rather treated like other industrial metals as well. Silver is the Gold of the poor Man.

I believe that the price of Gold becomes extremely expensive and will be considered rather as “store of wealth” than money. What concerns Silver I can imagine that for example China or Mexico could accept Silver to be money and mean of payment (Silver Standard). I expect that Silver could outperform the price of Gold. Silver takes much more space to store and in most countries you have to pay VAT on Silver purchases. I suggest the Silver ETF of ZKB, which can be traded at the Swiss Stock Exchange.
O. Disler: What is your opinion about the US Dollar?

Marc Gugerli: The question is always compared to what? I believe that basically most industrial countries are trying to weaken their currencies with the goal to boost exports. To remain competitive other countries needs to do the same and start the money printing press and the devaluation carousel is launched.

Central banks are devaluating their currencies against limited available and tangible hard assets like land, commodities and precious metals like Gold or Silver. The ECB is far behind the curve and the printing machine runs slower than the one of the Federal Reserve. But all this can change very fast.

O. Disler: What is your opinion about the slogan too big to fail?

Marc Gugerli: You know, that in the United States everything has been undertaken to prevent a recession. Just little signs of a weakening economy and Greenspan started to pumb money into the system and reduced interest rates immediately. Economic problems have been suppressed artificially for years.

This is the reason why many thing became „to big to fail, safe and solve“. Since decades the formula is the same: There is a problem, money will be printed and debts increased and interest rates go down afterwards. This is the main reason for the actual financial and economic crisis but one day the bill MUST be settled.

O. Disler: What do you think about how or if the debts will be paid back?

Marc Gugerli: There are three possible outcomes:
1. They will really pay back. But in the actual situation this is impossible.
2. They will default and declare bancrupty. But this is not what they want - "too big to fail", examples are the automobile or banking industry
3. Or through inflation, you can bet on this.

O. Disler: Is there a risk of inflation, since economies are cooling off or are already in a recession?

Marc Gugerli: I believe the correct description what we have to expect in the very near future is inflationary recession or some other may call this stagflation. As I mentioned already, everything will be done to stop the deflation. I expect that we are getting back inflation especially in the food and energy sector. I expect that yachts and Porsches become rather cheaper.

O. Disler: What shall investors buy right now?

Marc Gugerli: This year several 1000 billion US Dollars rescue packages will be rolled-out. The biggest part of this fresh money will pour into infrastructure projects. Of course there will be companies which will benefit from this. During German “Weimarer” hyperinflation period some stocks of industrial companies perceived 70% of the purchasing power.

Cash and government bonds became worthless. Remember, in which asset classes are investors mainly invested those days? My top choices are companies in the commodity, food and energy sector.

O. Disler:What about gold mining shares?

Marc Gugerli: Good point! Have a look at industrial metals like nickel, zinc or crude oil. Some of them dropped more than 70% from last years peaks. The industrial metals mining companies share prices tumbled 50 to 70%. The price of Gold is trading only 10% below its highest level and as mentioned already reaching new highs calculated in many other currencies. But gold mining shares are still trading XX% below its peaks.

I consider this to be a miss-pricing and a big buying opportunity. Due to lower price for energy, production costs are falling substantially and Gold price close to its highest level means that profitability of gold mining companies will increase substantially. The Philadelphia Gold Index (XAU) is trading at an attractive level and could double easily. From a historical valuation point of view and compared with the price of Gold the XAU is very cheap and my favorite investment 2009.

O. Disler: Dear Mr. Gugerli, thanks for your time and the interesting interview!

from truth in options
As readers will recall, J.P. Morgan received the first large bail-out from the New York FED of $55 Billion, guaranteed by Bear Stearns' worthless assets, to prop up its own liquidity position and buy Bear Stearns stock.

J.P. Morgan also recently received another $25 Billion in TARP payments from the Treasury.

This article is about how J.P. Morgan's executives , instead of receiving easy to detect cash bonuses, received very large bonuses in the form of Stock Appreciation Rights (SARs) and Restricted Stock Units. These equity compensation securities are not easy to understand or value by other than experts in the field.

SARs are very similar to employee stock options and Restricted Stock Units are very similar to Restricted Stock.

These SARs were granted on January 20, 2009, the day that the J.P.Morgan stock reached its lowest in five years. The stock quickly rebounded as illustrated in the graph below. The arrow indicates the day and the price of the stock when the grant was made.

On January 22, 2008 we see a repetition of the grants of SARs with the stock hitting a low point followed by a substantial rebound in the next days.





Let's examine the size of the bonuses of the top 15 executives, at J.P. Morgan, that were granted on January, 20, 2009 and reported two days later.

See the link below:

http://www.secform4.com/insider-trading/19617.htm


Stock Appreciation Rights Granted

SARs Amounts Name of Exercise Value 2/4/09
Granted Grantee Price

700,000 Winters 19.49 $11,300,000
700,000 Black 19.49 $11,300,000
500,000 Staley 19.49 $8,100,000
300,000 Scharf 19.49 $4,890,000
250,000 Drew 19.49 $4,075,000
200,000 Miller 19.49 $3,260,000
200,000 Rauchenberger 19.49 $3,260,000
200,000 Smith 19.49 $3,260,000
200,000 Zubrow 19.49 $3,260,000
200,000 Bisignano 19.49 $3,260,000
200,000 Mandelbaum 19.49 $3,260,000
200,000 Cavanaugh 19.49 $3,260,000
200,000 Cutler 19.49 $3,260,000
200,000 Maclin 19.49 $3,260,000
100,000 Daley 19.49 $1,630,000
----------------------------------------------------------------------------------------
Total value (2/6/09) of SARs Granted = $81,405,000




Restricted Stock Units Granted

RSUs Amounts Name of Market Value SARS Value
Granted Grantee of stock 2/4/09

115,474 Staley 24.10 $2,782,923
102,644 Miller 24.10 $2,473,720
102,644 Scharf 24.10 $2,473,720
102,644 Smith 24.10 $2,473,720
102,644 Bisignano 24.10 $2,473,720
102,644 Cavanaugh 24.10 $2,473,720
102,644 Drew 24.10 $2,473,720
102,644 Maclin 24.10 $2,473,720
89,813 Zubrow 24.10 $2,164,493
89,813 Cutler 24.10 $2,164,493
59,662 Daley 24.10 $1,364,542
35,926 Rauchenberger 24.10 $865,816
--------------------------------------------------------------------------------------------------
Total value (2/6/09) of RSUs Granted = $30,500,000

Total value (2/6/09)of Grants to top 15 executives= $111,905,000



These totals are far more than the top executives of Merrill Lynch were to receive as their year end bonuses in cash and equity. The New York Attorney General is supposedly investigating Merrill's executives for criminal wrong doing.

Merrill CEO, Thain was granting himself just $10 million whereas at least three Morgan executives exceeded that in equity compensation alone.

An interesting question arises from an examination of the fact that for the past two years grants were made on or around January 20. It just happened that the stock dropped prior to the grant and moved upward immediately after the grants. Its hard to accept the idea that those executives just got very lucky for two years in a row. Yes, I am suggesting collusion in the manipulation of the stock to accommodate the grants of options etc.

Some refer to this as spring-loading the options grants.

Is J.P. Morgan immune from investigation?

Now what we find is that bankers' errand boy extraordinaire CEO, James Dimon, is popping off about the ridiculous idea that J.P. Morgan does not need further bail-out money after Morgan grabbed $55 Billion in the Bear Sterns deal and another $25 Billion of TARP money in banker welfare payments. See:

http://www.bloomberg.com/apps/news?pid=20601109&sid=azVLk.22AkLI


If they do not need the bail-outs, let Morgan and Goldman return the welfare payments.

Perhaps also an explanation is in order of why James Dimon is not prosecuted for violations of Title 18 Section 208 U.S.C. in his role as Director of the New York Federal Bank in approving the J.P. Morgan/Bear Stearns deal.

Neither J.P. Morgan, Goldman Sachs or any other bank will return the TARP monies because the actual values of the Preferred Stock and Warrant packages were 50% lower than what the taxpayers were forced to pay. And the actual values of those packages have dropped considerably in every case since the welfare payments to Goldman, Morgan , Bank of America etc. were made.

In the case of Bank of America and Merrill, the warrants purchased by the Treasury are down over 88% since the bail-out.

by Hugo Salinas Price

Some readers may ask themselves, “What has gold to do with protecting jobs? Gold hoarders are certainly not creating jobs, and hoarding more gold will not help at all.”

Gold has everything to do with the loss of jobs in the US, and gold has everything to do with recovering jobs for the US economy.

Let me go back to the 60's. During those years, the US and the world were on a Gold-and-Dollar Standard.

Back in the 60's, countries were very careful about maintaining a constant monetary balance between their exports and their imports. They all wanted to be in a situation where they would export more than they imported, so that they would have increasing balances of gold or dollars in their Treasuries.

To state this more correctly, they all wanted to export more than they imported, except the United States.

The US didn't care very much about maintaining a balance between exports and imports, because the US was able to pay for its deficit in trade (more imports than exports) by simply sending more dollars overseas.

Many economists warned about this trend, which was accompanied by a constant loss of gold during those years; some countries, notably France, refused to hold more and more dollars. The French asked for their gold – at $35 dollars an ounce – and this caused great disgust in Washington, D.C. and New York.

Nothing was done to stop the trend. In 1971, Henry Hazlitt, a good conservative economist, warned that the dollar would have to be devalued – that it would be necessary to raise the number of dollars which would be needed to obtain an ounce of gold – some months before the dam broke and the US was faced with the need to devalue, because the US stock of gold had become much too small.

What Mr. Hazlitt never imagined, was that instead of devaluing – which was the advice of economist Paul Samuelson, Nobel Prize winner, published the week before August 15, 1971 – Nixon followed the advice of Milton Friedman and simply “closed the gold window”. The US would henceforth not deliver any gold, at any price, to any foreign Central Bank who might wish to invoke the right to redeem its dollars for gold, according to the Bretton Woods Agreement of 1944.

Since that date, all world trade – or the better part of it – is carried on in dollars which are nothing more than fiat money. Since the rest of the world's currencies were tied to gold through the dollar, all the currencies of the world also became fiat money – fictitious money, backed by nothing. That includes the Euro, of course.

What happened after that fateful date has overturned all order and harmony in economic relationships between the nations of the world.

Countries around the world began to accumulate more and more dollars as credit expansion in the US went forward, implacably. Central Banks had to accumulate these dollars in their Reserves, whether they wanted to or not. (Not having sufficient dollars would force other countries to devalue and destroy savings. The US cannot run out of dollars, it manufactures them.)

With no loss of gold to restrain the US and force it to stop expanding credit, US imports surged and exports waned. The monetary difference was “paid” in dollars.

Free trade was extolled by the US; every country that wanted to be in the good graces of the US had to bow to “free trade”.

Free trade is a good thing – but not for a country that is providing the world's fiat money. This “free trade” was called “globalization”, meaning that the US could, and did, buy everything it wanted in the world, in any amount, at any time, by simply paying dollars for it.

There was no restraint to US credit expansion. It was a lovely time to be young and an American.

However, free trade means you buy where it's cheapest, and the cheapest place to buy, in recent decades, was China , South East Asia and India ; the oil required to fuel the US economy was cheap and bought with dollars which it cost nothing to produce.

Thousands upon thousands of products and floods of oil came across the oceans to the US, and also to Europe, which began to pay in Euros for some of its imports: Euros which also cost nothing to produce.

US manufacturers, facing this competition from Asia, decided to move their factories to Asia instead of waiting for certain bankruptcy by competing against much lower-cost production.

That was how the US was de-industrialized.

It happened because gold was eliminated as a limit on credit expansion and money creation.

Had Nixon not gone off gold in 1971, China would have taken generations to create its industrial base. It would have been necessary for China to accumulate capital slowly, because its exports to the US would have been limited by the need for the US to pay up with gold for the amount by which Chinese exports exceeded its imports from the US.

The Chinese would have had to buy as much from the US, as they sold to the US; and since they were so terribly poor, there was not much they could have bought from the US.

Their growth would have been slower, but they would not now be facing over 20 million unemployed, as their markets dry up.

The US would never have allowed China to drain US gold from the Treasury by selling more to the US, than the US sold to China. But since payment was in fiat dollars and not in gold, the destructive effect of huge Chinese imports was not considered important by policy makers. And so, the US sailed into unemployment and had a great time doing it. Only now, that the party is over, are the grim facts visible: no jobs! Manufacturing is decimated.

The fiat dollar – unanchored to gold – was the greatest strategic gift that the US could have made to China. Now, they have a huge industrial base and the US has Oh, so little!

The damage is done. How to recover the industrial base of the US ? Not by slogans such as “ Buy American ”, nor by protectionism.

What is required is to recover economic balance between the nations of the world so that they all can balance their exports with their imports. This is not done by protectionism, a false remedy to joblessness.

The world needs to return to gold as the international means of payment. All imbalances must be paid, monthly, in gold. No fiat money “payment” allowed!

If a nation does not have gold to export, it must do without or manufacture what it needs, itself: there you have the clue to restoring jobs in the US and in Europe. This is not “nationalism”, it is simply good economics.

The US has to limit its imports drastically, not by protectionism and tariffs, but by returning to the Gold Standard. Jobs will mushroom in the US beyond what anyone can dream as soon as its market must buy locally or not buy at all, for thousands upon thousands of articles. A return to gold, will achieve that aim very quickly, to be sure.

The Gold Standard is the friend and protector of the worker and of the investor, as well as the basis for harmonious relations between the nations of the world.

And by the way, the current financial disaster in the US is directly attributable to Nixon's decision to “close the gold window”, because a monetary system based on gold is an obstacle to the criminal credit expansion perpetrated by the bankers. Gold based money puts shackles on bankers, forcing them to be careful. A fiat money system enables financial criminality – it's as effective in restraining criminality in finance as tying up a dog with a string of sausages.