Classic Liberal Blog

In "Glenn Beck, Gold, and Stupid Politicians," I mentioned that Section 9006 of Obama's Patient Protection and Affordable Care Act "puts gold coin buyers and sellers under closer government scrutiny." Well, Robert Wenzel's got more information.

Dodd-Frank Bill Contains Provision that May Lead to Tracking of All Gold Coins

The Dodd-Frank Financial Reform Bill contains a provision that requires companies buying gold and other minerals to submit an annual report outlining what they are doing to ensure their minerals are "conflict-free."

The concept of conflict-free began with diamonds mined in a war zone and sold to finance an insurgency, invading army's war efforts, or a warlord's activity. The idea being that the purchase of diamonds from such war zones should be illegal, ostensibly to stop the financing of the wars. It is believed by observers of the diamond industry ... that DeBeers was behind the idea of conflict-free diamonds as a way to limit the supply of diamonds that come on the market. Nevertheless the concept took hold.

According to Wikipeida:

On July 19, 2000, the World Diamond Congress adopted at Antwerp a resolution to strengthen the diamond industry's ability to block sales of conflict diamonds. The resolution called for an international certification system on the export and import of diamonds ...

On January 17 - 18 of 2001, diamond industry figures convened and formed the new organization, the World Diamond Council. This new body set out to draft a new process, whereby all diamond rough could be certified as coming from a non-conflict source.

The KPCS was given approval by the UN on March 13, 2002,[and in November, after two years of negotiation between governments, diamond producers, and Non-Government organizations, the Kimberley Process Certification Scheme (KPCS) was created.

Got that? All diamonds are now certified under the "Kimberley Process" to prove that they are not from "conflict zones".

The Dodd-Frank Bill appears to "nudge" the gold industry towards a certification process. Couple this nudge with the requirement in the Healthcare Bill that gold dealers will be required to fill out 1099 forms on all customers who buy or sell more than $601 worth of gold coins, and it is clear that the noose is tightening around the gold industry. It will take some time, but don't be surprised to find that down the road a "Kimberley Process" will be created for gold and that all newly manufactured gold coins and gold bars will be stamped with a unique serial number.

Then the serious tracking of who owns how many gold coins will begin.

Why the (sudden) obsession with tracking gold? After all, as noted *ahem*, scholar David Frum proclaimed, "Sell your gold — and buy a foreclosed condo in Florida!"

Well, it has a lot to do with this ...

The Death of Paper Money

Ebay is offering a well-thumbed volume of "Dying of Money: Lessons of the Great German and American Inflations" at a starting bid of $699 (shipping free.. thanks a lot).

The crucial passage comes in Chapter 17 entitled "Velocity". Each big inflation -- whether the early 1920s in Germany, or the Korean and Vietnam wars in the US -- starts with a passive expansion of the quantity money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is much like lighter fuel on a camp fire before the match is struck.

People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason" , causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks. The shift invariably catches economists by surprise. They wait too long to drain the excess money.

"Velocity took an almost right-angle turn upward in the summer of 1922," said Mr O Parsson. Reichsbank officials were baffled. They could not fathom why the German people had started to behave differently almost two years after the bank had already boosted the money supply. He contends that public patience snapped abruptly once people lost trust and began to "smell a government rat".

Some might smile at the Bank of England "surprise" at the recent the jump in Brtiish inflation. Across the Atlantic, Fed critics say the rise in the US monetary base from $871bn to $2,024bn in just two years is an incendiary pyre that will ignite as soon as US money velocity returns to normal.

Morgan Stanley expects bond carnage as this catches up with the Fed, predicting that yields on US Treasuries will rocket to 5.5pc. This has not happened so far. 10-year yields have fallen below 3pc, and M2 velocity has remained at historic lows of 1.72.

As it happens, another book from the 1970s entitled "When Money Dies: the Nightmare of The Weimar Hyper-Inflation" has just been reprinted. Written by former Tory MEP Adam Fergusson -- endorsed by Warren Buffett as a must-read -- it is a vivid account drawn from the diaries of those who lived through the turmoil in Germany, Austria, and Hungary as the empires were broken up.

Near civil war between town and country was a pervasive feature of this break-down in social order. Large mobs of half-starved and vindictive townsmen descended on villages to seize food from farmers accused of hoarding. The diary of one young woman described the scene at her cousin’s farm.

"In the cart I saw three slaughtered pigs. The cowshed was drenched in blood. One cow had been slaughtered where it stood and the meat torn from its bones. The monsters had slit the udder of the finest milch cow, so that she had to be put out of her misery immediately. In the granary, a rag soaked with petrol was still smouldering to show what these beasts had intended," she wrote.

Great numbers of people failed to see it coming. "My relations and friends were stupid. They didn’t understand what inflation meant. Our solicitors were no better. My mother’s bank manager gave her appalling advice," said one well-connected woman.

"You used to see the appearance of their flats gradually changing. One remembered where there used to be a picture or a carpet, or a secretaire. Eventually their rooms would be almost empty. Some of them begged -- not in the streets -- but by making casual visits. One knew too well what they had come for."

Corruption became rampant. People were stripped of their coat and shoes at knife-point on the street. The winners were those who -- by luck or design -- had borrowed heavily from banks to buy hard assets, or industrial conglomerates that had issued debentures. There was a great transfer of wealth from saver to debtor, though the Reichstag later passed a law linking old contracts to the gold price. Creditors clawed back something.

Hardly an Austrian, even Ambrose Evans-Pritchard is starting to warn about possible hyperinflation. After all, paper money always dies. Always.

Be prepared.

Note:

The book mentioned at the beginning of the above story selling for $699, is available free here: "Dying of Money." (H/T - ‘Dying of Money’ Is Alive and Well on Scribed.com)