Turk - Capital Controls, Panic, The Great Depression & Gold

With tremendous volatility in global markets, today King World News interviewed James Turk out of Europe. Turk told KWN that we are headed into an extraordinarily dangerous time for both the markets and the financial system, that will end in a massive panic. Here is what Turk had to say about what is taking place: “Today was a very important day, Eric, because gold was strong while the stock markets were weak. This is a trend I expect to continue, and one that will baffle many financial analysts, going forward, that don’t understand this type of cycle.”

James Turk continues:

“I was hoping to see more strength in the precious metals at the end of last week, Eric, given the pummeling gold and silver were given. But I guess that was too much to ask for with July option expiry this week.

Having driven the price of gold and silver down to this low level, I assume the paper-shorts will try to keep prices as low as possible, in order to maximize their profit by having calls they sold expire out of the money. We've seen this happen many times over the years....

“But there has not been any change in my thinking. Gold and silver are simply testing the May lows. So far the test has been successful. More importantly, we have to keep foremost in our minds that gold and silver remain in a bull market. I keep being reminded of this fact every time I look at the news, which keeps getting worse over here in Europe.

I think Nigel Farage got it exactly right in his interview with you on Friday. He said that the leaders over here need to resort to financial ‘repression’ to keep the euro project from falling apart. Of course that is not a solution, but simply a stop-gap by panicky leaders, who don't know what to do or who listen to bad advice.

Anyway, after Nigel's interview, the Spanish government announced the imposition of various capital controls, limiting the use of cash by companies and individuals. Expect more capital controls, soon, throughout the eurozone. That will only add to the panic, which is already bubbling just below the surface.

As we know, Eric, government actions like these do nothing to solve the problem. Financial repression is never a solution. Capital controls only buy more time, but you can't do that forever. So money continues to leave the European banks. The bank runs are not disappearing. In fact, they jumped across the Atlantic to South America, where Argentine banks are rapidly losing dollar-denominated deposits.

Bank runs were a focal point of the Great Depression, but they were just part of a bigger 3-step process that has parallels to today. After the 1929 stock market crash, people moved money out of investments and put it into banks. They wanted the liquidity, and, at first, did not fear for the safety of their money on deposit. We went though this step with the Lehman collapse.

As the economy weakened in the 1930s, people started to convert their deposits into cash currency. This was the second part of the crisis, when fear for the safety of one's money became more important than liquidity. We are now at stage two in Europe, and soon will be reaching this stage in the US. The downgrade of the major US banks, last week, is bringing heightened awareness of the fragility of the US banking system, meaning they are extremely very vulnerable to an economic downturn.

Europe's economy is clearly on a downward path, and economic activity in the US is slowing too. So the third step of the process might be closer than we think. That's when, in the 1930's, people moved out of cash, and into gold.

They did so back then because even though the US dollar was still formally tied to gold, people began to understand that there was more paper outstanding than there was gold in the US reserve. They believed that the US government could not possibly keep its promise to redeem $20.67 for one ounce of gold, so they moved out of paper-currency.

Importantly, they were right. President Roosevelt eventually devalued the dollar by 69.4%, dropping the gold content of one US dollar from 23.23 grains to 13.71 grains of fine gold. He adjusted the price of gold from $20.67 an ounce to $35 an ounce.

In the 1930's, if people we lucky enough to get their money out of any of the hundreds of banks that failed, they didn't want to take any more chances, Eric. They soon realized that the paper currency in their hand wasn't much safer than when they had their money on deposit in a bank. The panic to obtain gold or silver marked the bottom of the Great Depression. The solution was a higher gold price, and that is the same solution needed today.

President Roosevelt knew the solution in the 1930s, and lowered the gold content of the dollar, thereby raising the gold price. Central planners don't like that solution because it takes away the power they now have with fiat currencies, backed by nothing but their promises, but a higher gold price is coming nonetheless. It is the only solution.”

EU planning for worst-case scenario in case of Greek eurozone exit

By Luke Baker, Reuters

BRUSSELS – European finance officials have discussed as a worst-case scenario limiting the size of withdrawals from ATM machines, imposing border checks and introducing capital controls in at least Greece should Athens decide to leave the euro.

EU officials have told Reuters the ideas are part of a range of contingency plans. They emphasized that the discussions were merely about being prepared for any eventuality rather than planning for something they expect to happen — no one Reuters has spoken to expects Greece to leave the single currency area.

Belgium’s finance minister, Steve Vanackere, said at the end of May that it was a basic function of each eurozone member state to be prepared for problems. These discussions appear to be in that vein.s

But with increased political uncertainty in Greece following the inconclusive election on May 6 and ahead of a second election on June 17, there is now an increased need to have contingencies in place, the EU sources said.

The discussions have taken place in conference calls over the past six weeks, as concerns have grown that a radical-left coalition, SYRIZA, may win the second election, increasing the risk that Greece could renege on its EU/IMF bailout and therefore move closer to abandoning the currency.

No decisions have been taken on the calls, but members of the Eurogroup Working Group, which consists of eurozone deputy finance ministers and heads of treasury departments, have discussed the options in some detail, the sources said.

As well as limiting cash withdrawals and imposing capital controls, they have discussed the possibility of suspending the Schengen agreement, which allows for visa-free travel among 26 countries, including most of the European Union.

“Contingency planning is underway for a scenario under which Greece leaves,” one of the sources, who has been involved in the conference calls, said. “Limited cash withdrawals from ATMs and limited movement of capital have been considered and analyzed.”

Another source confirmed the discussions, including that the suspension of Schengen was among the options raised.

“These are not political discussions, these are discussions among finance experts who need to be prepared for any eventuality,” the second source said. “It is sensible planning, that is all, planning for the worst-case scenario.”

The first official said it was still being examined whether there was a legal basis for such extreme measures.

“The Bank of Greece is not aware of any such plans,” a central bank spokesman in Athens told Reuters when asked about the sources’ comments.

The vast majority of Greeks — some surveys have indicated 75 to 80% — like the euro and want to retain the currency, something Greek politicians are aware of and which may dissuade them from pushing the country too close to the brink.

However, SYRIZA is expected to win or come a strong second on June 17. Alexis Tsipras, the party’s 37-year-old leader, has said he plans to tear up or heavily renegotiate the 130-billion-euro bailout agreed with the EU and IMF. The EU and IMF have said they are not prepared to renegotiate.

If those differences cannot be resolved, the threat of the country leaving or being forced out of the euro will remain, and hence the need for contingencies to be in place.

Switzerland said last month it was considering introducing capital controls if the euro falls apart.
In a conference call on May 21, the Eurogroup Working Group told eurozone member states that they should each have a plan in place if Greece were to leave the currency.

Belgium’s Vanackere said two days after that call that it was a basic function of each euro zone member state to be prepared for any eventuality.

“All the contingency plans (for Greece) come back to the same thing: to be responsible as a government is to foresee even what you hope to avoid,” he told reporters.

“We must insist on efforts to avoid an exit scenario but that doesn’t mean we are not preparing for eventualities.”