The Big Reset : Book Review

The central theme of this book is — major governments & central banks around the world have been waging a war on “gold” to keep its price low. The reason being, they want everyone to believe in their fiat currency, so that they can print away the money to solve their temporary problems.

The author strongly believes that by 2020, no amount of “managing gold price” tactics will work. Dollar will lose its supremacy and gold prices will skyrocket to represent its true value.

The book is organized as a set of 86 questions/topics spanning six different sections. The author answers each question with no more than a page of explanation,that can be quickly grasped. In this post, I will briefly summarize the answers for each of 86 questions.

THE HISTORY OF MONEY

• What is the origin of money ?

  • A simple closed community never needed money. However when societies grew, the demand arose for a complex trading system. Desired products like cattle and dried meat were used more and more frequently as a method of payment. Bartering is still the most elementary system of trade and shows up whenever crisis situations arise.

• How did gold become money ?

  • Typical Characteristics of anything to act as money are : easily divisible, portable, imperishable and scarce. Gold and Silver fit the bill and more over, they were enormously desirable all over the world. Out of the entire periodic table of elements, gold and silver are most suitable as a means of payment as they are impossible to copy. Gold became equivalent to money when people realized that its purchasing power remained same across time.

• When did coins come into existence ?

  • The first western coins originated in Turkey, around 650 B.C. Many great kings built their empires around a monetary system based on gold.  Because gold was more rare, silver was used for coins with a low nominal value.

• A short history of monetary gold

  • The gold coins existed from 491 A.D to 1453 A.D and were accepted as money from England to China. Gold coins called florins appeared in 1252. Dutch guilder came  next. Ducats were another form of gold coins that were introduced in Italy.

• What are the advantages of a gold standard ?

  • Most important advantage is that it forces government to be disciplined in their fiscal policy because they cannot turn to printing money. Gold also acts as an inflation hedge. Due to the mounting silver shortages, the United Kingdom and many countries in the British Empire adopted a gold standard in 1816. They were soon followed by Canada (1853), the US (1873) and Germany, where the new gold mark was introduced in 1872. In the course of the 19th century, the gold standard became more and more popular

• Why was the gold standard abandoned ?

  • Abandoning gold standard gives the government to print fiat money. This was the main reason why US abandoned gold standard in 1971. Many European countries ditched gold standard in 1914 to finance First World War.

• What is fiat money ?

  • Money that is not backed by something substantial. Its value rests on the confidence that goods or services can be paid for

• What is meant by fractional banking ?

  • The initial credit from the central bank to commercial banks is in turn used by commercial banks to generate a far higher credit level in the society.

• Where was fiat money invented ?

  • China( Emperor Khan found a way of creating paper money that was pitched as something that is as valuable as gold and silver)

• Other examples of fiat money throughout history

  • Louis XIV, king of France in 1716 set up a bank and issued bank notes. However it ended as a disaster

• Other misfortunes with fiat money

  • Post French revolution, “assignats” were issued that could be later used as money. This exercise of Quantitative Easing 101 failed miserably. In 1796, hyperinflation hit France and paper money lost all its value

• What is Quantitative Easing ?

  • One can easily understand this complicated and fancy term if one thinks it as equivalent to “ Operation Firing up the Printing Press”. Japan’s BOJ is seen as the inventor of QE. The original purpose of QE was to lower the interest rates. But from 2008 onwards, the Fed and other central banks started aggressively expanding their balance sheets by buying up assets such as Treasuries (US government  bonds) and mortgage-backed bonds in order to support the housing market and to finance the large fiscal deficits that arose as a result of the economic fallout from the credit crisis.

• Do all central bankers agree on QE ?

  • No. Dallas Fed Reserve president owns a sizable portion of its portfolio as gold. Bank of England ED of Financial stability is also against QE

• When did hyperinflation occur ?

  • Hyperinflation arises when the money loses its value and power. Some examples are Germany in 1923, Hungary in 1946, China in 1949, Yugoslavia in 1994, and Zimbabwe in 2008

• Can we trust official inflation figures ?

  • In many countries, manipulation of key figures and economic indicators has been elevated to a work of art. CPI publication has become a con job

• How is inflation calculated ?

  • Many tricks are used by statisticians, who are pressurized by politicians, to lower CPI – Replacement of cheaper alternatives, Geometric means, Hedonic adjustments etc.

• Examples of the distortion of inflation figures

  • WSJ articles illustrating cost price of a TV model

• Do central banks combat or cause inflation ?

  • Even though they advertise that their main job is to control inflation, they are the ones causing inflation by printing more and more money. Through excessive growth of debt, most Western currencies have lost over 95% of their spending power in the last century alone.

• Does anybody really understand this financial system ?

  • In most countries, governments and banks have worked together to monopolize the creation of money. The fact that our money is backed by nothing but hope and trust must be kept hidden from ordinary people. Even most economists do not fully understand money. Only those who have studied monetary economics know the inner workings of our financial system. And most of them
    end up working for their government or central bank, so they are bound to keep their mouths shut.

CENTRAL BANKERS : THE ALCHEMISTS OF OUR TIME

• When did the first form of banking emerge ?

  • The first recorded debt systems were in Sumer civilization around 3500 B.C. European banks appeared in early Middle ages. The word ‘bank’ comes from the Italian word ‘banca’, the name used for
    the marble tabletop upon which Italian goldsmiths dropped foreign coins. From the sound of the coins being dropped, they could assess whether a coin contained a lot of copper or nickel.  Banks as we know them today were first set up during the Renaissance in the Italian cities of Florence, Venice and Genoa.  The most famous amongst them is Medici Bank.

• How did central banking start ?

  • European Royalty needed money to fight wars. This financing was provided by so-called moneychangers. These moneychangers  understood pretty quickly that lending to powerful entities such as kings and churches carried less risk because of the continual stream of income. The German Rothschild family established an international banking business and dynasty, becoming one of the most powerful families in the 19th century

• The first central bank

  • Amsterdam Wisselbank founded in 1609.  Most central banks in the past 400 years were initiated by rich businessmen who understood quite well that (central) banks, which owned the monopoly on creating money and were backed by government tax revenue, had a wonderful business model.

• Who created the first government bonds ?

  • Scotsman William Paterson.  Paterson was backed by a group of rich traders from the City of London who would generate the starting capital. He was also supported by Charles Montagu, one of the most important officials within the Ministry of Finance. Together, they persuaded the government to create a bill so that the Bank of England could be established. The Royal Charter was granted on 27 July 1694. The first loan by the Bank of England was to finance the Royal Navy by issuing Navy Bills. The start of the Bank of England is often seen as the start of a new era. Fiscal deficits by governments could be financed by means of selling (perpetual) bonds

• How large has the bond bubble become ?

  • As of 2012, US – $17 T, EU Total – $16T, UK – $10T, Japan – $2.7 T, Australia – $1.7 T, Switzerland – $1.3 T

• Who supervises central banks ?

  • Over the course of 20th century, many governments took over central banks from private shareholders.

• Where are the most important decisions about the banking industry made ?

  • Bank of International Settlements ( BIS) in Basel. The BIS can be seen as the mother of central banks and was founded at the International Bankers Conferences at Baden Baden (1929) and The Hague (1930). In April 1945, a decision to liquidate the BIS was made, but it was reversed by the US in 1948. The BIS had survived but was badly wounded. The BIS still operates as a counterparty, asset manager and lender for central banks and international financial institutions. Switzerland agreed to act as the headquarter state for the BIS. The headquarters would be situated in Basel. Today it is 60 central banks. Fed did not join until 1994 as US saw BIS as a rival to their IMF. Soon US joined BIS to get EU support for their war on gold.

THE HISTORY OF THE DOLLAR

• How did central banking get started in the US ?

  • Robert Morris, a former government official, founded the first central bank in the US in 1781. He is seen as the father of the system of credit in the United States. His Bank of North America was based on the model of the Bank of England and could create as much money as needed through fractional reserve banking.

• When was the Federal Reserve created ?

  • December 1913. It was the most beautiful Christmas present Wall Street could have wished for. For the third time in US history, the monopoly on the printing of dollars was transferred from government to private banks. Not many politicians realized the far-reaching consequences this decision would have. Immediately after the introduction of the law, all US banks became compulsory
    shareholders of the Fed.

• Is the Fed really independent ?

  • New York Fed is far more important in the Fed system than all the other 11 regional Reserve banks combined.  Even though Fed presents itself as a normal central bank with 12 districts, NY Fed runs the show

• When was the dollar system born ?

  • 1944 – Bretton Woods conference, names after the forest surrounding the hotel where the conference took place

• What was decided at the Bretton Woods conference ?

  • Dollar is the new world currency

• Why did Europe accept the dollar system ?

  • US proposed Marshall Plan, which was designed to help finance Europe after the devastations of the war.

• For how long did the Bretton Woods system work ?

  • Following the Bretton Woods conference, all national currencies became pegged to the dollar, which was linked to gold at a rate of $ 35 per ounce. The dollar was the official world’s reserve
    currency and the anchor of the monetary system. The world now operated under a pseudo gold standard which economists call the ‘gold exchange standard’.  However by end of 1960s, the system was falling apart

• When did the US close its ‘gold window ?

  • Aug 1971

• How did the world react to Nixon’s decision in 1971 ?

  • Technically speaking, America defaulted in August 1971, since the country could no longer fulfill the obligations agreed upon in Bretton Woods. But surprisingly, the Nixon shock created only
    a relatively short dollar panic in the world’s financial markets.  At first, the inflation caused by the printing of extra dollars was moderate, but later in the 1970s, inflation began to take off, leading to
    a severe recession in 1979 and 1980. It would take years of strong leadership by Fed Chairman Paul Volcker to tame inflation and make the dollar a ‘strong’ currency again.

• How important is the worldwide oil trade for the survival of the dollar ?

  • Very important. By trading only in dollars, the oil trading countries keep the demand for dollar alive

• What is the role of the IMF and World Bank in this dollar system ?

  • Support the dollar as a world reserve currency. US insisted that countries could join IMF only after decoupling their currency from gold

• How transparent is the Fed ?

  • Not very. There is  a strong culture of secrecy within the Fed organization.

• Have any Wall Street bankers gone to jail ?

  • Very few. Most get away by paying fines.  A study of hundreds of media reports shows that the total amount of fines and settlements paid by Wall Street banks between 2000 and 2013 to avoid prosecution, adds up to $ 100 billion.

A PLANET OF DEBT

• When did the music stop ?

  • After over thirty years of falling interest rates, the period of unrestrained private build-up of debt came to an end with the start of the credit crisis. Between 2008 and 2013, central banks worldwide created over $ 10 trillion of new money to take over bad loans from the private sector, to monetize debts and to stimulate the economy. The Fed balance sheet grew from $ 800 billion to almost $ 4,000 billion in just five years.

• What has happened to the US national debt since the start of credit crisis ?

  • The US national debt grew by $ 8 trillion in a five-year period to reach $ 17 trillion at the end of 2013. To put this into perspective, it took 169 years (from 1836 to 2005) for the first $ 8 trillion of national debt to accumulate

  • To resuscitate interbank lending, central banks allowed commercial banks to borrow money at interest rates close to 0

  • Budget deficit in 2009,2010, 2011, 2012, 2013 is –10%, –9%, –8%, –7%, –6% of GDP

• When does the size of fiscal deficits become dangerous ?

  • Historical analysis of hyperinflations suggests that the the tipping point is when government’s deficit exceeds 40% of the expenditures. Japan is at the risk of hyperinflation where half of govt. revenues goes in to debt servicing. Savings rate in Japan has dropped to 2% because of aging population

• Didn’t the credit crisis start much earlier in Japan ?

  • After the crash of Japan in 1990s, it decided to turn on the printing press of its central bank. Debt service costs 25% of tax revenues. Public debt is 240% of GDP. Most banks are barely surviving. BoJ has maintained short term interest rate at close to 0 since 1999.

• Who is most aggressive in their QE policies, Japan or the US ?

  • Japan – Amount set aside for QE is twice that of US QE allocation

• Is China still financing the US ?

  • After QE1 in 2008, QE2 in 2010 and QE infinity in 2012, there is a widespread concern that dollar might get massively devalued. Hence China has been investing hundreds of billions of dollars per year in hard assets such as gold and other commodities.

  • QE3 is now called QE infinity by many because of the open ended nature of the program where Fed has launched $85 B per month of bond purchasing program

  • Market jumped by 12% after QE1 announcement, 3.1% after QE2 announcement and moved by barely 2% after QE3 – Law of Diminishing effects can be seen in QE announcements too

  • Many suggest that China and other developing countries should invest in Australian and Canadian dollar as the countries have large base of commodity assets

• How large is China’s credit growth ?

  • China is more addicted to printing press mentality than US or Japan

  • Despite national financial reserves of almost $ 4,000 billion, China has been confronted with its own debt crisis after the banking system’s assets grew by $ 14 trillion between 2008 and 2013.This is the same amount as the entire US banking system.  China’s credit to gross domestic product (GDP) ratio surged to more than 200% last year from just over 110% in 2008

  • Short term trust loans amount to 50% of GDP

  • Shadow banking is rampant in china and is estimated to be 45% of GDP

  • Ironically, GDP itself is speculated to be a cooked number

• Is the renminbi ready to replace the dollar ?

  • Since renminbi is not fully convertible, it will take many years for this possible scenario to pan out

• So China is fearful of making too sudden monetary changes ?

  • Yes, History gives enough evidence for the same.

• How big is Europe’s debt problem ?

  • 1 Trillion Euros

  • The total amount of money created during UK’s QE program from 2010 to 2014 was around $ 598 billion

  • compared with Japan, where the size of QE is double the size of the American program (relative to GDP), money printing has been slowing down in Europe between 2012 and 2014

• Is Switzerland still a monetary safe haven ?

  • As a result of all the monetary madness after the outbreak of the financial crisis in 2008, more and more money started to flee to Switzerland. This caused the Swiss franc to gain in value, which
    had a substantial negative impact on Swiss exports and tourism. To avoid further harm, the Swiss National Bank (SNB) pegged the Swiss franc to the euro at a value of 1.20 euro.

  • At the end of 2013, the SNB had the most holdings relative to GDP (85%) of any major industrialized country

• What is happening in the so-called currency wars ?

  • most of the currencies involved have stayed on a par with each other. To the general public, the dollar, the British pound, the euro and the Swiss franc all seem to have kept their value. But this is only with respect to each other. Because of this ‘debasement of currencies’, the smart money has started to flee towards commodities and other hard assets.

• Can we grow our way out of this debt ?

  • In the eighteen most important countries belonging to the OECD, the total amount of public and private debt (relative to GDP) grew from 160% in 1980 to 321% in 2011. This amassing of debt has not caused any problems, since the interest rate over the same period fell from over 20% in 1980 to almost 0% after the credit crisis. National debts increased by 425% on average and have risen in many countries to almost 100% of their GDP

  • Growing out of debt, works only in the context of strong economic growth. Is there a sign of one in most of the countries today ?

• How can we get rid of our debts ?

  • Default / Print money and Induce inflation  / Raising taxes

• How have debt cancellations worked before ?

  • If you go by growth rates, they seem to have worked. But one must always be wary about the lies, damn lies and statistics. Whenever a country is in a crisis and undertakes debt cancellation, it is already at its nadir in terms of the growth, that any improvement in the post debt cancellation stage looks like a stellar performance

• Possible debt cancellation scenarios

  • Fed cancels its $2 T debt out of a total of $17 T of treasury debts

  • Central banks cancelling government debt

• When do things go wrong ?

  • when the national debt rises to over 90% of GDP, this tends to slow future economic growth

  • cumulative increase in public debt in the three years following a banking crisis is on average 186%. This explains why public debt in many advanced countries (the US, Japan, the UK) has increased strongly in recent years and reached or even crossed the 90% level.

  • The Minsky moment, named after American economist Hyman Minsky, is the point in time at which, after decades of prosperity, a wave of selling takes place by parties who had made
    investments with too much debt. In order to reduce these debts, they even have to sell good investments at increasingly lower prices. Such a disastrous sell-off of government bonds is one of the
    major risks we are now facing. At some point, central banks could end up buying almost all their domestic government bonds. Investor money would then flee towards equities and hard assets

  • The risks of things going wrong has increased since 2008 as central banks have resorted to unorthodox interventions that would have been considered unthinkable before the credit crisis.

THE WAR ON GOLD

• The essence of the war on gold

  • It is an endeavor to support the dollar. Also, the level of gold price and the general public’s expectations of inflation are highly correlated. The survival of the current financial system depends on people preferring fiat money over gold

• Do central banks fear a flight to gold ?

  • Yes. The war is being fought not only by central banks but also by commercial financial institutions

  • In 2013, both ABN AMRO and RBS cancelled gold accounts that allowed investors to redeem their value in physical gold. In a letter to clients, ABN AMRO explained that it had changed its precious metals custodian rules and the bank would ‘no longer allow physical delivery’, only paper settlement. And US banks are only allowed to advise investors to buy gold shares when they have a gold analyst on their payroll.

• Was private ownership of gold ever prohibited ?

  • Post crash of 1929, President Roosevelt presented an economic recovery plan called ‘the New Deal’. The plan included a ‘Gold Reserve Act’, passed by Congress at the end of January 1934, which empowered the federal government to confiscate all of the Fed’s gold and bring it under the US Department of the Treasury. Roosevelt also made use of his special presidential authority to issue Executive Order 6102. This prohibited civilians from possessing gold, gold coins or gold certificates. Anyone caught ‘hoarding’ gold was to be fined $ 10,000. In Europe there has never been a ban on possessing gold.

• When did the war on gold start ?

  • War on gold took off in the 1960s when trust in dollar started to fray.

• How was the gold price managed ?

  • London Gold Pool creation in 1961 to keep the gold price low

• The IMF’s role in the war on gold

  • IMF created international reserve assets called special drawing rights(SDR). Since 1975, the Americans have worked with the IMF time and again to try to control the gold market by unloading tons of
    gold.

• How did the IMF amass its gold reserves ?

  • The IMF received most of its gold from member countries, which had to pay 25% of their funding quotas to the IMF in physical bullion. This was because gold played a central role in the international monetary system until the collapse of the Bretton Woods agreements in 1971. Seven years later, the IMF fundamentally changed the role of gold in the international monetary system by eliminating its use as the common denominator of the post-World War II exchange rate system and ended its obligatory use in transactions between the IMF and its member countries

• Are there more cases of double counting in the US ?

  • Possibly yes

• How often have US gold reserves in Fort Knox been audited ?

  • None

• Did the game plan change after 1980 ?

  • The new trick in the town is “expectation management”. Time and again, it has been communicated through press communiqués that the Fed or the IMF was considering selling gold, and time and again we have seen the gold price fall as a result

• Didn’t the British help by unloading gold in 1999 ?

  • Yes,  Between 1999 and 2002, the UK embarked on an aggressive selling of its gold reserves, when gold prices were at their lowest in 20 years.  The UK sold almost 400 tons of gold over 17 auctions in just three years. So, Britain was hand in glove with US in the war on gold

• Further evidence of systematic gold price suppression

  • The central bank of Australia confirmed in 2003 that its gold reserves are mainly used to control the price of gold.

• Recent methods to manipulate the gold price

  • Futures market trading via electronic means has given rise to sharp volatility in gold.  Especially since the start of the credit crisis, market participants have now and again been bombarding precious metal futures markets with a tsunami of sell orders. The price of gold was forced down by $ 200 during a two-day raid in April 2013, and silver was sent 35% lower in three days in September 2011.

  • Speculator driven markets will only drive away long term investors. Inducing volatility is another method that has been used in the fight against gold.

• More evidence of manipulation of precious metal markets

  • The author provides email transcripts to show that silver markets are rigged big time

• Investigations into manipulation in precious metals markets

  • CFTC seems to playing a blind eye to the rampant manipulation in the gold and silver market

• Do regulators now want Wall Street to stop trading commodities ?

  • Yes

• Why has this gold manipulation not been reported on before ?

  • It has been reported before but the mainstream financial media have so far neglected to pick up this story.

THE BIG RESET

• Why do you expect a Big Reset of the global financial system ?

  • Two major problems in the world’s financial system have to be addressed: 1) the demise of the US dollar as the world’s reserve currency, and 2) the almost uncontrollable growth in debts and
    in central banks’ balance sheets. For all of these issues, central banks have only been buying time since the start of the credit crisis in 2007. Insiders predict that much more radical action will be needed before 2020.

• How can the international monetary system be changed ?

  • No easy answers

• Since when have people started planning a new international monetary system ?

  • Soon after the worldwide crash of financial markets in 2008, the IMF and others began brainstorming about a possible next phase of our international financial system. In 2010, the IMF published a report that looked into the possibility of a financial system without a dollar anchor. As if to underline its intention to reform the international monetary system, in 2012 the IMF added the Australian and
    Canadian dollars

• Will gold be part of a reset ?

  • While most experts believe there will be no return to a full gold standard, gold will probably play a much greater role in the next phase of the financial systems

• Will SDRs become the new world currency ?

  • Likely. According to some experts, the IMF needs at least five more years to prepare the international monetary system for the introduction of SDRs.

• Some other reset scenarios

  • gold-backed dollar could be introduced in the US

  • US still values gold at the historical price of just $ 42 per ounce. This is unusual because the ECB and many other central banks value their gold reserves at market prices. The US government hopes to spread the message that gold is a metal with little value, while the dollar is the value of choice

• What is China’s master plan ?

  • China has been hoarding gold in order to safeguard the country’s economic stability and to strengthen its defense against ‘external risks’, which could be translated as a collapse of the dollar or the euro or even the global financial system

• How large are China’s gold holdings compared with the West ?

  • The Chinese want to increase their gold reserves ‘in the shortest time’ possible to at least 6,000 tonnes. That amount would put the Chinese on a par with the US and Europe on a gold-to-GPD ratio.

• Does China understand the US war on gold ?

  • Yes, from the articles from the Chinese officials. China had accumulated over $ 1 trillion of US Treasuries between 2000 and 2010, a dollar devaluation would be very negative for China

• Why is a monetary reset desired by China ?

  • They want to de-Americanize the world

• The Russian point of view

  • Similar to China

• Could the US confiscate foreign gold reserves stored in New York to introduce a new gold standard?

  • It is a possibility

• Do we need to fear more financial repression?

  • History has shown that the closer we come to a major reset, the more likely it is that forms of financial repression will be activated. The reset of the Cyprus banking system demonstrated that  very few of those affected were prepared in advance.

The author concludes saying that reset is imminent :

We Westerners concluded our capitalist system, based on free markets, was a superior one because communist countries ‘switched over’ to our side. Well, at the end of 2008 our system also ran aground. However, like the communists leaders in the early 90s we pretend all is still fine. Authorities are now turning to precisely those measures which we so despised in the communist system. Economic figures are increasingly being manipulated and colored to reflect a more rosy picture. Good news  is often the result of propaganda and the work of spin-doctors. The economy and its financial markets are being increasingly centrally controlled. Free markets are disappearing more and more. Interest rates are manipulated, gold wars are fought, the  ‘plunge protection team’ intervenes almost openly in American stock markets, QE as far as the eye can see. We have entered an era of virtual global state capitalism. China is a perfect example. As are Russia and the US, the EU, the Arab World, the UK and Japan. The economies of West and East are now  intertwined in a way never seen before. 

Since the fall of Lehman, central bankers are desperately trying to avoid a collapse of the financial system. Governments and  central bankers know the whole economic system will fall apart once they stop printing money. This leads to the only logical conclusion that we are stuck with infinite QE. As more and more paper assets are being printed, more and more ‘smart money’ will flee towards asset classes that can’t be printed.

For the very first time in history, a financial and monetary crisis has emerged which is so severe that it has the capacity to end in an all-encompassing distrust of paper assets. This could even lead to an unprecedented wave of hyperinflation in which prices explode, debts melt away, the economy collapses and banks will close.

Central bankers are therefore very much aware that it is essential to come up with a reset plan before this occurs. Authorities will do everything possible to modify the financial system in order to avoid another 2008-style collapse. In my opinion it’s not a matter of if, but only when, they will introduce their reset plans