FINALLY. It seems that the world is waking up to the idea of putting to use the barbarous relic so despised by the financial gurus like Charlie Munger and Warren Buffett. A May 25 BLOOMBERG article by Brian Parkin and Jeffrey Donovan hinted at some type of debt-sharing plan: Not a Eurobond in a traditional sense but more of a collateralized debt obligation and a concept of a REDEMPTION FUND. The fund would take all sovereign debt more than the 60% of GDP level and deposit the excess paper in a central fund. The fund would be collateralized by the GOLD RESERVES of all the European nations–an amount more than 10,000 TONS OF GOLD. As the debt levels of the abusive nations recede–and taking back the maligned paper–the TROUBLED NATIONS COULD DRAW DOWN THE COLLATERAL.
Monday, the highly respected Ambrose Evans-Pritchard clarified the Bloomberg article and expounded on the collateralized GOLD as a sort of pawn shop. By collateralizing the EUROBONDS with GOLD, the German Constitutional Court would be satisfied for the BAILOUT would not be open-ended by have a lending ceiling based on some determined value of the GOLD HOARD and how much leverage is applied. Though the Germans will potentially absorb the credit exposure, at least it would be subject to some repayment though Europe’s GOLD.
This breaks the cycle of the PIIGS BELIEVING THAT THEY CAN CONTINUALLY GET SOMETHING FOR NOTHING. The idea of losing a nation’s GOLD RESERVES IS THE NECESSARY ELEMENT TO GET THE HEAVILY INDEBTED TO TRULY INCORPORATE THE NECESSARY STRUCTURAL CHANGES TO EASE THE IMPACT OF BUDGETARY MALFEASANCE. The added benefit to this scheme is that it would lower borrowing costs for the heavily indebted and allow them to run primary budget surpluses. It is of great significance that the SPD and Greens in Germany are behind the plan and it also has the blessing of the FIVE WISE MEN or council of experts. The WISE MEN argue that the rise in German borrowing costs would be very modest relative to “growth adrenaline of resuscitating monetary union.”
The question: What effect will such a plan have on GOLD PRICES? It seems that the result should be a positive for GOLD as some potential supply will be held off the market. Further down the line it may be GOLD NEGATIVE but that will depend on the ultimate success or failure of the concept. NOTES FROM UNDERGROUND has been advocating such a concept for the IMF, but if the ECB and EUROPEAN STABILITY MECHANISM utilize the concept in an attempt to resolve short-term solvency issues and ease the pressure of EUROPEAN DELEVERAGING … well, so be it. The idea may actually catch on and maybe the Chinese will ask for the keys to FORT KNOX as collateral for U.S. DEBT.
***Why the aforementioned idea of a REDEMPTION FUND HAS EVEN GREATER MERIT. In 1995, when the Mexican government found itself in severe economic stress brought on by poor national finances, Bob Rubin created a program by where the U.S. advanced $20-PLUS BILLION to the Mexican Treasury. The kicker was that the LOAN WAS SECURED BY MEXICAN OIL REVENUES THAT WERE PLACED IN ESCROW IN AN ACCOUNT AT THE NY FED. It was a program that proved tremendously successful as Mexico repaid the short-term loan in record time. When the family jewels are in the pawn shop and subject to seizure, a nation gets very serious in going about solving its problems. Creative financing may provide some needed respite from the continuing onslaught of austerity plans for the European peripheries.
The fact that it is the German opposition and the FIVE WISE MEN getting behind the REDEMPTION FUND gives it a possible chance. So while Europe drinks wine, eats cheese and catches some rays, this should not be perceived as some ODDBALL PLAN. Placing Europe’s GOLD in the German Pawn Shop may mean that the CREDITOR OF EUROPE BECOMES “ANGELA’S HEROES.” If the GOLD is as worthless as Charlie Munger believes, the REDEMPTION FUND SHOULD BE A NO-BRAINER. CUE THE RASTA-MON … REDEMPTION SONG
Tags: bailout, Charlie Munger, Eurobonds, Europe, Five Wise Men, Germany, gold reserves, IMF, Merkel, PIIGS, Warren Buffett
May 30, 2012 at 8:15 pm |
Yra,
Is the CAD.JPY pointing towards a major leg down in the S&P 500? It sure doesn’t look pretty and it doesn’t look finished. What are your thoughts?
Danny
May 30, 2012 at 10:14 pm |
I didn’t understand what you meant “Further down the line it may be GOLD NEGATIVE”
Are you saying if this plan doesn’t work it will be negative for gold?
Thanks again for your thoughts
May 30, 2012 at 10:27 pm |
If my calculations are correct a 10,000 ton horde of gold, at today’s price of 1563 is worth just over $500 billion. I don’t have a reliable way of calculating what “over 60% of GDP” for all of the indebted nations would amount to but I have to guess it is some multiple of this value of the gold. Might that mean that gold would rise to balance this number? Or will the union simply fix a price?
May 30, 2012 at 10:27 pm |
Armstrong warns not to go on a gold standard because all your debts will be due in gold including taxes so government(s) and banksters end up with all the gold.
Not to be acerbic but the fine print details will need a microscope such as, accounting, clearing house and court authority, storage, access, transfer, recovery, weasel wording, toothless penalties, drop dead dates…
May 31, 2012 at 1:31 am |
As for giving the keys to Fort Knox to the Chinese, we all know the vaults are empty, bar a note saying ” IOU love JPM”….
May 31, 2012 at 3:32 am |
Eric–ultimately if the plan were to work it would be a GOLD NEGATIVE–but that will be far down the line.If the plan doesn’t work the outcome will be disasterous for the european elite and the financial institutions that have provided the backing for the EU –the many possible outcomes of a EU break up are a book in itself–oh yes,THE ROTTEN HEART OF EUROPE.As traders and investors we learn to deal with things as they come–getting too far of ourselves is a dangerous road to travel.
May 31, 2012 at 5:09 am |
Danny–the CAD/YEN has been a very difficult trade since the highs hit in the first quarter.The CAD is still the best fundamental currency in the world[relative higher rates,low government debt but growing private sector debt,improving jobs situation and very little banking problems] but in the land of deleveraging even the strong get hit hard in the quest for safety—the key may well lie in the CAD/CHF as some get nervous about the swiss and foreign exchange controls—can the CAD ever be perceived as a safe haven currency?The lower oil prices are not a problem as it acts to slow the natural resource boom which is not a bad thing as to the desires of the BOC.But you are of course correct in seeing the cad/yen as an indicator of risk off and thus sps.–it is a crazy world we live in master jack