Restoring Economic Sovereignty: The Push for State-owned Banks

by Ellen Brown

“It is time to declare economic sovereignty from the multinational banks that are responsible for much of our current economic crisis. Every year we ship over a billion dollars in Oregon taxpayer dollars to out-of-state and multinational banks in the form of deposits, only to see that money invested elsewhere. It’s time to put our money to work for Oregonians.”– Bill Bradbury, former Oregon Senate President and Secretary of State, quoted in The Nation

Responding to an unfilled need for credit for local government, local businesses and consumers, three states in the last month have introduced bills for state-owned banks — Oregon, Washington and Maryland – joining Illinois, Virginia, Massachusetts and Hawaii to bring the total number to seven.

While Wall Street is reporting record profits, local banks are floundering, credit for small businesses and consumers remains tight, and local governments are teetering on bankruptcy. There is even talk of allowing state governments to file for bankruptcy, something current legislation forbids. The federal government and Federal Reserve have managed to find trillions of dollars to prop up the Wall Street banks that precipitated the credit crisis, but they have not extended this largesse to the taxpayers and local governments that have been forced to pick up the tab.

In January, Federal Reserve Chairman Ben Bernanke announced that the Fed had ruled out a central bank bailout for state and local governments. The collective state budget deficit for 2011 is projected at $140 billion, a mere 1% of the $12.3 trillion the Fed managed to come up with in liquidity, short-term loans, and other financial arrangements to bail out Wall Street. But Chairman Bernanke said the Fed is limited by statute to buying municipal government debt with maturities of six months or less that is directly backed by tax or other assured revenue, a form of debt that makes up less than 2% of the overall muni market. State and municipal governments, it seems, are on their own.

Faced with federal inaction and growing local budget crises, an increasing number of states are exploring the possibility of setting up their own state-owned banks, following the model of North Dakota, the only state that seems to have escaped the credit crisis unscathed. The 92-year-old Bank of North Dakota (BND), currently the only state-owned U.S. bank, has helped North Dakota avoid the looming budgetary disasters of other states. In 2009, North Dakota sported the largest budget surplus it had ever had. The BND helps fund not only local government but local banks and businesses, by providing matching funds for loans to commercial banks to support small business lending.

In the last month, three states have introduced bills for state-owned banks, following the North Dakota model. On January 11, a bill to establish a state-owned bank was introduced in the Oregon State legislature; on January 13, a similar bill was introduced in Washington State (discussed in an earlier article here); and on February 4, a bill was introduced in the Maryland legislature for a feasibility study looking into the possibilities. They join Illinois, Virginia, Hawaii, and Massachusetts, which introduced similar bills in 2010.

Broad-based Support

The bills are widely supported by small business owners. The Seattle Times reported on February 3 that 79% of 107 business owners surveyed by the Main Street Alliance of Washington supported the Washington bill. More than half said they had experienced a tightening of business credit, and three-fourths of those said they could create additional jobs if their credit needs were met.

A survey by the Main Street Alliance of Oregon produced similar results. Their survey, which covered 115 businesses in 28 communities, found that two-thirds of small-business owners had delayed or canceled expansions because of credit problems; 41 percent had been turned down for credit; and 42 percent had seen their credit terms deteriorate. Three-quarters of the business owners surveyed supported the Oregon bill.

Also supporting the idea of a state-owned bank is Oregon state treasurer Ted Wheeler, with this twist: he thinks Oregon can unlock additional lending capacity in partnership with existing institutions by creating a “virtual” bank. The state would not need to build new brick and mortar banks requiring hundreds of new employees to service them. The new tools afforded the state by being a “bank” could be arranged quickly and cheaply through a framework he calls a “virtual economic development bank.” In an OpEd posted on Oregonlive.com on February 9, he wrote:

This new model would consolidate Oregon’s various economic development loan programs in one place, and allow state government to step in as a new lending participant, which will help qualified Oregonians to secure additional financing. We also have strategic investment tools such as the Oregon Growth Account that could be better utilized as part of this framework.

Banks “create” money by leveraging their capital into loans. At an 8% capital requirement, they can leverage capital by a factor of twelve, so long as they can attract sufficient deposits (collected or borrowed) to clear the outgoing checks. States give this leveraging power away when they put their deposits in Wall Street banks and invest their capital there.

State and municipal governments have assets tucked all over the state in separate rainy day funds, which are largely invested in Wall Street banks for a very modest return. At the same time, states are borrowing from Wall Street at much higher interest rates and have to worry about such things as credit ratings, late fees, and interest rate swaps, which have proven to be very good investments for Wall Street and very bad investments for local governments.

By consolidating their assets into their own state-owned banks, state and local governments can leverage their own funds to finance their own operations; and they can do this essentially interest-free, since they will own the bank and will get the interest back. The BND contributed over $300 million to state coffers in the past decade, a notable achievement for a state with a population that is less than one-tenth the size of Los Angeles County.

The growing movement to establish local economic sovereignty through state-owned banks has been a grassroots effort that has grown spontaneously in response to unmet needs for local credit. In Oregon, the push has come from an active volunteer group called Oregonians for a State Bank working with the Working Families Party. In Washington, a major role has been played by the Main Street Alliance, a project of the Alliance for a Just Society (formerly NWFCO). The chief legislative champion in Washington State is Rep. Bob Hasegawa. In Maryland, the campaign was initiated by the Wisconsin-based Center for State Innovation (CSI), working with the Service Employees International Union (SEIU) and the Progressive States Network. Progressive Maryland is a prominent NGO supporter. Detailed analyses of the Washington and Oregon initiatives and their projected benefits have been done by CSI. For grassroots efforts in other states and for petitions that can be signed, see http://publicbankinginstitute.org/state-info.htm.

Ellen Brown is an attorney and president of the Public Banking Institute. She has written eleven books, including Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free (2010).

5 Reasons Why Silver Prices Move

 

02/19/11 – 08:28 AM EST

Silver prices have a reputation of being manipulated, volatile and less liquid. Silver hit a record high of $50 an ounce in 1980 after the famous (or infamous) Hunt brothers bought the metal aggressively for 7 years; at one time owning more than 200 million ounces of silver.

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The silver bubble burst soon thereafter shedding 50% of its value almost immediately, and over the last 30 years the metal has traded as low as $4 and as high as $31.79 an ounce.

Along with gold, silver prices are at the mercy of investment demand, safe-haven buying, inflation fears, momentum trading and price manipulation. The one thing that silver prices have going for them that gold doesn’t are oodles of industrial demand.

Indeed, silver can be found in a plethora of products, from iPads to cars to solar panels, making it the perfect metal for those wanting a hedge against currency debasement as well as exposure to a global economic recovery.

David Morgan, founder of Silver-Investor.com, says he could see silver prices as high as $45 in 2011 “and if things get really crazy we could go beyond that.”

Silver is also at the mercy of stocks. When equities plummet, investors are often forced to sell silver for cash, but any significant dip can trigger a wave of buying as investors purchase silver at “cheaper” prices, resulting in a strong tug of war. Because fewer people own silver than gold, the market is smaller, which results in violent price action.

Here are five fundamental factors that will contribute to silver’s strong price moves in 2011.

5. Price Manipulation

Price manipulation is the most controversial theory that has circulated among gold and silver bugs for 20 years. Some argue that precious metal prices have been illegally suppressed over the last two decades by central banks, governments and trading houses. The Gold Anti-Trust Action Committee, or GATA, is the biggest complainant and mainly points to the “hugely disproportionate short positions,” according to Chris Powell, secretary and treasurer of the organization.

The manipulation headline has been gaining traction of late after trader Brian Beatty filed lawsuits at the end of October against JPMorgan(JPM) and HSBC for conspiring to “suppress and manipulate” silver prices on the Comex.

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The allegations are particularly noteworthy because HSBC and JPMorgan are custodians of the physically backed exchange-traded funds like the ETFS Physical Silver(SIVR) and iShares Silver Trust(SLV), which means the big banks, in charge of storing the metal investors are buying, are being accused of manipulating the prices.

Bart Chilton, commissioner of the Commodity Futures Trading Commission, is pushing the commission to prosecute a two-year investigation into the silver market. According to reports, the CFTC is also looking into JPMorgan and possible silver manipulation trading.

The drama continues. A Chicago law firm, Cafferty Faucher, filed a law suit at the end of December against HSBC and JPMorgan accusing the two of using their positions as silver holders to purposefully suppress the silver price so they could profit from their short positions.

JPMorgan had been trying to combat these allegations by reducing its huge silver short position. George Gero, senior vice president at RBC Capital Markets, said it was mostly done in the physical market in London and was finished by now. The move by JPMorgan could have been part of the reason why silver prices rallied from $24 to $30 an ounce in November and the first half of December. Any more unwinding initiatives could result in modest silver price rallies.

GATA goes one step further in the silver-manipulation story and proposes that central banks are buying the metal on the sly to suppress prices. The idea behind the suppression is that the world looks at gold and silver as barometers of the health of economies — gold more so than silver, but both are “de-facto” currencies. The suppression theory means that global economies are in worse financial shape than investors think.

Powell argues that silver has often been an official currency, even more so than gold, “so it would be hard to dispute a central banking interest in silver today.” To embroil JPMorgan even further into this quagmire, Powell says that the investment bank is often the agent of the Federal Reserve in the markets and could be helping the Fed intervene in the silver market.

The convention wisdom among those who adhere to the manipulation theory is that if silver manipulation comes out of the market or is brought to light then prices would pop much higher.

The opposition, however, is just as passionate. “There’s no vested interest on anybody’s parts to suppress prices here,” says Jon Nadler, senior analyst at Kitco.com. “The allegations remain at that level, simply allegations.”

Nadler argues that despite the rumored manipulation, prices have still climbed. “If this is suppression, I think it’s completely ineffectual, and let me have more of it,” Nadler says.

Philip Klapwijk executive chairman of GFMS Research Group, says there is “nothing to these allegations.” He thinks they will continue to be chatter for silver prices in 2011 but that they will just be a lot noise. “If there was a massive short position, the degree to which those shorts are under water is now quite extraordinary.”

4. Gold and Silver Ratio

Many investors use the gold/silver ratio to determine where silver prices will head. The ratio refers to how many ounces of silver it takes to buy one ounce of gold. If the ratio is high it means that silver prices have slipped. If the ratio falls, silver prices are outperforming gold.

The ratio has come down from over 60 to the mid 40′s even touching 45/44. According to 2010 closing prices the ratio was 46, meaning it took only 46 ounces of silver to buy one ounce of gold. At the beginning of 2010, the ratio was 65. It is currently 43.

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In 1980, a previous high for both metals when gold was $850 an ounce and silver was $50, the ratio was as low as 17. Some bullish experts say that if gold and silver were to reach that ratio again, silver should be north of $80.

“If you moved to [even] 30:1, you would have a considerable swing in the value of the silver properties relative to gold,” says Rob McEwen, CEO of U.S Gold(UXG), who, with two silver and gold deposits in Nevada and a silver deposit in Mexico, has a vested interest in higher metal prices.

Klapwijk says that the current ratio of 46 actually makes silver expensive in comparison to gold. This ratio is “not sustainable level in the long run” and will move up over time to up to 50. That doesn’t necessarily mean that silver prices have to sell off, it just means that silver might not outperform gold but instead will lag the yellow metal.

Randall Warren, chief investment officer at Warren Financial Service, also thinks this ratio could correct in the short term and provide from headwind for silver prices. He argues that the 100 year average is about 50. If that ratio were to resume at 2010 closing prices, silver should trade around $28.42.

Warren is much more bullish on the ratio over the long-term, however, and is confident that the commodity bull market will recover and prosper. He thinks the ratio could hit 30 by the end of 2011, which would imply “longer-term higher silver prices by the end of 2011.”

3. Currency Debasement

The most popular reason to own silver is as a hedge against inflation.

The theory is as paper currency loses value, silver will retain its purchasing power, making it a safe place to preserve one’s wealth.

While many investors talk about silver’s inverse relationship to the U.S. dollar, BullionVault’s head of research Adrian Ash prefers to categorize it more broadly as “anti-currency.”

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The same applies to gold. “They are stateless, they don’t have the burdens of debt, which any multinational currency has. They are a long-term story,” Ash said, in describing their attributes.

Echoing Ash, Philip Klapwijk says that all three major internationally-traded currencies: the euro, yen and dollar, have generated some degree of “suspicion” from investors amid sluggish economic performance, “very” unattractive short-term interest rates and growing, massive sovereign debt obligations.

Despite its recent rally, Chuck Butler, president of EverBank World Markets, expects the U.S. dollar to show another round of weakness in 2011, providing continued support for silver. Some analysts like Oliver Pursche, portfolio manager of the GMG Defensive Beta Fund, are even calling for the possibility of QE3 and QE4.

Even ‘dormant’ inflation is picking up in the U.S., with core consumer prices up 1%, versus a year ago, 1.6% if you count food and energy, which every other country does. Producer prices are even higher, up 3.6% year over year.

Inflation in the eurozone is up 2.2% compared with 1.9% in December. The U.K.’s reading came in very hot at 4%, Brazil is at 5.99% and China is at 4.9%, not as high as expected but steeper than the 4.6% December reading. Global food costs rose 3.4% in January, according to the U.N.’s index.

The biggest threat to silver’s inflation thesis is if central banks around the world decide to raise key interest rates. The People’s Bank of China is the latest and recently raised the deposit rate by 25 basis points to 3% for the third time since October.

Higher interest rates make it more appealing to keep money in the bank and a higher lending rate makes it less appealing to borrow. Both might hurt consumer demand for silver as well as industrial demand.

Ash, however, was unfazed arguing that central banks would have “to raise interest rates by a long way before it really makes a difference for cash savers.”

The negative real interest rates, the interest rate minus the inflation rate, is still 1.9% in China, making precious metals more valuable than paper currencies.

2. Industrial Demand

The industrial demand behind silver prices is expected to be strong in 2011 but not remarkable.

Industrial demand staged such a big comeback in 2010 from 2009 as the global landscape recovered, that this year’s levels will pale in comparison.

“This year, this type of news will not be quite as unequivocally good,” GFMS’ Klapwijk said. “We’ve had such a significant rebound in industrial demand for silver that gains will be somewhat harder to come by this year compared to 2010.”

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Meanwhile, BullionVault’s Ash has heard complaints about high silver prices from industry representatives, because the pass-through of these high prices are hurting their customers.

Ash wonders whether the industry will begin looking for silver substitutes, especially in newer uses such as solar panels and chips — if prices become unfavorable.

“Has silver gotten over the fact that it’s an industrial metal primarily?,” asked Ash.

EverBank’s Butler sums up his expectations of industrial demand for silver this year as “steady — nothing phenomenal, but nothing that’s weak.”

The one thing silver does have going for it is a slew of new products never before imagined that use the metal, like iPads. “We’ve seen in the last year the growth in that type of use increase about 18%,” says Phillips Baker, CEO of Hecla Mining(HL), one of the largest silver producers in the world.

Baker, in fact, credits steady industrial demand with keeping silver prices afloat as investment demand ebbs and flows.

1. Investment Demand

Traditionally, silver investing was reserved for the fringe precious metal buyer, who thought global wealth would be eradicated and that silver and gold would be the only currencies left standing.

However, as the financial crisis rocked global markets at the end of 2008, a trend started to develop of regular investors allocating a certain amount of their portfolios into precious metals, although mostly gold, silver was included.

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The biggest physically backed silver exchange traded fund in the U.S., SLV, held 6,524.93 tons the Friday before Lehman Brothers declared bankruptcy and how holds 10,411 tons, or 333 million ounces.

The SLV added 1,428.60 tons just in 2010 alone while its smaller competitor the SIVR grew its holdings 81% to 16,627,688.2 ounces.

The advent of physically backed silver ETFs over the past five years has given investors an easy way of speculating on silver. One share of the SLV is equal to one ounce of silver.

If investors start piling into the ETFs, the funds must add more silver, taking more silver out of the open market and triggering higher prices. But the reverse is also true. If investors sell gold ETF shares en masse and there are no buyers, there will be inflows of silver into the market, which will weigh on prices.

Large swings in the silver price can also point to buy orders or sell stops. When the silver price sinks to or rises to a certain level, a trader will be forced to sell or buy silver. This trading restriction is set up to protect the trader from losses and to protect gains, but often can accelerate sell-offs and rallies.

Rumors are also circulating that Asian buyers are planning to take delivery of shares of the SLV, or trade in their shares for the metal. They would have to do so in 50,000 share lots, which could cost as much as $1.5 million. IShares reserves the right to cancel a redemption if it is too large a request to meet. Currently the ETF holds 10,411 tons, down 510 tons since the beginning of 2011.

There have been reports of a physical shortage of silver. Whether the shortage in production lags or too much demand from these Asian buyers remains to be seen.

There are currently 16.1 million shares sold short of the SLV and they might go running scared over fears of iShares having to deliver a massive amount of silver to these Asian buyers, especially if rumors of a supply crunch are true. The combo, logically, would push prices higher.

On the flip side, if any of these rumors are debunked, traders might ditch silver for other assets, which illustrates the volatility of prices and the fickleness of investors.

Despite using silver as a trading vehicle, most retail investors still don’t own it, which is one of the fundamental reasons silver bulls think the price will skyrocket.

“We’re going to go into a period like the high tech market where there is a mania,” says Rob McEwen, CEO of U.S. Gold, who thinks the market is about half of the way there.

There have been other signs that investment demand is on the prowl, which was critical to silver’s killer rally in 2010.

According to Patricia Cauley, director of metal products at the CME, open interest in contracts for silver grew 9.2% in 2010 versus 8.6% for gold. Open interest contracts illustrate the new buyers in the market.

Average daily trading volume was 76,000 contracts for silver in the fourth quarter of 2010 , which doubled from the third quarter and is up 82% from the same period a year earlier. Cauley says this points to a “renewed interest in silver…. As we see the price of gold keep going up. The poor man’s gold has come back.”

David Morgan says that during gold’s 80% rally, rumors were plentiful as to who was committing new money to the metal, even famous poker player, Amarillo Slim, made the list. Morgan believes that it was more the spread trade that had investors piling into the market.

“Once [silver] reached the $20 level, the trade for large fund managers was the spread that was short gold, long silver.”

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The silver trade might hit some more snags over the long-term.

First of all, investors are paying almost three times as much for an ounce of silver than they did in the beginning of 2009, so the “easy” money has already been made. The monster rally might scare off those who haven’t bought the metal yet.

Silver prices are also very volatile. Because the market is thinner, a big buyer or hoarder can really affect prices. Silver’s industrial component can also leave it vulnerable to signs of an economic slowdown especially in emerging market countries.

There is also a lot of pressure on investor demand to support high silver prices. The above ground supply of silver is increasing annually. According to Randall Warren, new mines in Mexico coming on stream could trigger a silver rush in 2012.

Although industrial demand and new products are sopping up some supply, “heavier lifting is called for this year from the investor community just to keep the game alive,” says Klapwijk. He estimates that several billion dollars of investment inflows are needed.

According to the World Silver Survey, net investment demand grew by $1.3 billion in 2009, the year with the most recent data available, to $2.6 billion. These calculations factor in an average price target of $14.67, which was considerably higher in 2010.

Billions of dollars of new investment inflows at recent record prices isn’t impossible just daunting and puts a heavy burden on investors and traders to keep silver prices afloat.

US Long Bonds, The Only Trend That Matters

Commodities / Gold and Silver 2011

Porter Stansberry with Braden Copeland write: We call it “the only trend that matters.”

It is the most important financial idea we could ever give to you. The fate of millions of Americans rests in a single market, where just one financial instrument trades, and…

This market is collapsing. Its downfall began, as we predicted at the time, in late 2008.

This single market determines our standard of living, our role in the world, and our prestige as a nation. It directly influences the price of food and oil. And that’s not all…

Most of the world’s other markets depend on this market, too. The price of every fixed-income security in the world is based directly on this market. The prices of U.S. stocks depend on this market – not directly, but strongly in comparison.

Most important, the U.S. dollar depends on this market.

You see, foreign investors own trillions of this asset. As the market collapses, foreign investors will sell. As they sell, they will also unload dollars. This market is the key to the future value of bonds, stocks, and the U.S. dollar. That’s why the decline of this market is the only trend that matters.

We’re talking about the collapse of the largest bond market in the world – the market for U.S. Treasurys.

The best illustration of this trend is the chart below. We urge – no, we beg – our readers to pay attention to this chart. Put a copy of it on your refrigerator. Update it weekly. Keep your eye on it. And make sure you truly understand what it means.

The chart compares the value of long-dated U.S. Treasury bonds (TLT) to the price of gold (GLD). When we say “long-dated,” we mean U.S. government debts that don’t come due for more than 20 years. This chart shows the value of the bond market compared to gold since December 2008.

Whenever someone tells you he believes we are exaggerating the risks of our government’s debt load and its dependency on “quantitative easing” (aka printing money), show him this chart.

This chart demonstrates the collapse of the purchasing power of our currency as gold rises. And it shows the corresponding collapse in the credit of the U.S. government as bonds fall.

Just to be clear about this… We are not rear-looking experts. We have been warning about these issues frequently (almost continuously) since December 2008. Here’s what we wrote back then:

None of the government’s bailout plans will solve any of the problems. The government can only shift the burden of the failures. Instead of bondholders and shareholders being wiped out, taxpayers are put on the hook. These actions will temporarily resuscitate the economy – but cause a permanent decline in the value of the dollar… inflation will wipe out much of the value of long-dated U.S. government bonds, causing their prices to plummet.

In that issue, we told folks to “buy as much gold bullion as you can reasonably afford.” We’re repeating these warnings again because the market for U.S. Treasurys recently “broke down” through an important level. The big government bond fund (TLT) just struck its lowest low in nine months. The decline seems to be accelerating.

When we began writing about the looming collapse of the bond market and the risks to the U.S. dollar, a lot of people called us “right-wing nutjobs” or “gold bugs.” That’s not the case.

Our advisory was founded (in 1999) on the idea the Internet would change our lives in a profound way. We write about the biggest financial trends we can understand – whatever they happen to be. We have always strived to understand the facts and allow the facts to dictate our view. Now, three years after we first predicted the collapse of the Treasury market, more and more people have discovered these facts. They can look around and see with their own eyes what’s happening. Our ideas have gone from fringe to mainstream.

Despite the growing number of people waking up to these facts… and the considerable rise in gold over the past 10 years, it’s still not too late to buy gold and silver bullion. But I urge you to hurry. The secret is getting out… and precious metals are destined to skyrocket in the coming years.

Good investing,

Growing Investment Opportunity in Agriculture

 

Commodities / Agricultural Commodities  

With the world nearing 7 billion, there are a lot more mouths to feed. Throw in that many in emerging markets are requiring higher-quality diets and you’ve got a squeeze on the global food supply.

Bushels of corn reached their highest prices in nearly three years this week after the U.S. Department of Agriculture (USDA) reported that corn inventories will fall to levels not seen since 1996.

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We’ve witnessed nearly a 100 percent surge in the price of corn over the past year as increased demand has been met with diminishing supply. Dry weather conditions due to La Niña in Argentina and other disruptions have shriveled supply despite a near record amount of acreage being planted. Globally, corn consumption has increased 10 percent over the past five years to reach record levels and stock-to-use ratios for corn suggest we’re currently experiencing the tightest global corn market since the late 1970s, according to Macquarie.

This jump is due to increased corn consumption for ethanol and greater demand for feed grain. The USDA estimates that just under 40 percent of U.S. corn production will be consumed for ethanol, up from 31 percent in 2008-2009. China will likely need to import 5 million tons of corn in 2011 in order to meet the country’s booming need for feed grain. In the U.S., an additional 60 million bushels will be used for feed despite a reduction in livestock, according to the Des Moines Register.

Corn is just one part of the food pyramid that is rising. Around the world, prices for wheat, soybeans, cocoa and other grains have jumped in the last 18 months in conjunction with the global recovery. Prices have jumped because demand outstripped supply.

This chart from Potash Corp. shows that grain production has failed to meet consumption in seven of the past 11 years. This is despite producing a significantly larger amount of grain in 2009 than in 2000. Potash Corp. estimates world grain production declined more than 4 percent in 2010. An extreme drought in Russia chopped grain production in the country by 38 percent and 13 percent in neighboring Ukraine.

These tight supply/demand fundamentals reflect the impact of a growing global population and increasing economic strength in emerging markets, Potash says.

As per capita wealth has grown in other countries, there has been a huge jump in demand for grains. This chart shows the amount of bushels consumed as GDP per capita rises.

Much of the rise is due to people consuming more meat as their fortunes rise. To meet this higher protein diet, more chickens, cows and hogs are fed grains and demand skyrockets. You can see that China and India are still in the very early stages of increased consumption.

We think the agricultural space is ripe with opportunity. With global grain inventories relative to demand at multi-year lows and the rising emerging market middle class showing a healthy appetite for more meat and dairy products, demand for increased crop yields should remain strong.

None of U.S. Global Investors Funds held any of the securities mentioned in this article as of 02/14/11.

How Much More Demand Can Silver Handle?

Jeff Clark, BIG GOLD writes: The numbers for silver demand are starting to make some market-watchers nervous. The U.S. Mint sold over 6.4 million silver Eagles in January, more than any other month since the coin’s introduction in 1986. China’s net imports of silver quadrupled in 2010, to 122.6 million ounces, roughly 13.7% of global production. Meanwhile, mine production can’t meet worldwide demand; the only way demand gets fulfilled is from scrap supply.

That is some very hungry demand. Which raises the question, how long can this pace continue?

This is important for various reasons, starting with how demand contributes to price. If demand falls off, our investments could, too.

While I’ve discussed the concern regarding the lack of supply before, which has its own implications for the silver market, let’s focus on investment demand. Frankly, is there room for it to continue to grow? After all, how long can investors continue to set records?

There are a number of ways to measure this – the amount of money available to invest, its percent of total financial assets, its contrast to demand in the last bull market, etc. – but I think the bottom line to answering the question is to compare the biggest silver investments to some popular equities. If they rival that of the stocks we always see on the news and analysts constantly talk about and every fund manager wants to own, then it might be reasonable to assume demand could be nearing its pinnacle.

So how do the world’s largest silver ETF and one of the biggest silver producers compare to the more fashionable equities?

The largest silver ETF, iShares Silver Trust, has net assets of $9.6 billion (as of February 4). This pales in comparison to the more popular stocks trading in the U.S. In fact, SLV has roughly 3% the market cap of Apple. It would have to grow over 43 times to match Exxon Mobil.

Pan American Silver, the largest pure silver producer trading on a major U.S. exchange, has a market cap of $3.72 billion. This is 4.7% the size of McDonald’s. The market cap would have to increase more than 53 times to match Walmart. It is over 62 times smaller than Microsoft.

This isn’t to suggest SLV and PAAS will match the market cap of these other companies, but clearly the masses are still demanding much more of them than the biggest of silver’s investment vehicles.

So how much more demand can silver handle? As much as it takes to make it the household name I’m convinced it will be before this is all over. When SLV is a favorite of fund managers. When Silver Wheaton is a market darling of the masses. When Pan American is Wall Street’s top pick for the year.

Imagine what those bars on the right will look like when most everyone you know is talking about poor man’s gold. The rise could be breathtaking.

Remember that silver rose over 3,646% from trough to peak in the last precious metals bull market; it’s up about 630% in our current run. A return matching the 1970s advance would push the price to $152. This price level is further supported by the fact that this is about where it would be when inflation-adjusted for its 1980 peak.

When you look at the potential growth in market cap of the world’s biggest silver investments, it becomes easy to view any downdraft in price as nothing but a buying opportunity. I know I do.

The Sophistry of the US Dollar and Debt Monetization

 

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Sophistry does not refer to the author or his argument who I assume believes exactly what he is saying, and of which reasonable people can make what they will.  And he is certainly not alone in his thinking.  More recently thought leaders have said the very same thing, and sometimes couched as an attack on anything else to stand up to the value-is-whatever-we-say-it-is crew of central planners and their financial engineers. 

I have done him the courtesy of including the entire piece with a link, with my comments in italics along the way.  I dislike it when someone ‘cherry picks’ something I have written, setting up a silly strawman argument and a false premise, and then attacking it often in a clumsy manner.  And I think this argument of Mr. Roche is well said, and worth considering seriously.  He might be right. 

But I do not think so.  I think his reason jumps the tracks at a key juncture and runs into the weeds thereafter. I fear this is a system that requires an exponentially greater reach of control and misdirection to keep working as in a late stage ponzi scheme.  And that is what makes it especially dangerous, because it must at some point silence all dissent, and promote its provisions and arrangements amongst the unwilling, or fail.

So as I said, he does a very good job of explaining it well, and many intelligent and people with weighty credentials and position seem to agree.  But many of these same people also said they ardently believed in the efficient market theory and the benefits of deregulation, and we see how quickly that belief system has collapsed under the weight of the financial crisis, although its remnant echoes are continually reappearing in various places and policies.  Old ideas die more slowly than old soldiers, especially when they continue to enrich a powerful status quo.

Rather, the sophistry is in the evolving nature of US dollar and its role as the world’s reserve currency, and too often the discussions that surround it.   Perhaps rationalization would be a better word, but sophistry captures the intent of it I think.

As you may recall, the basis for the unilateral departure of the US from the Bretton Woods regime and the gold standard under Nixon was that the full faith and credit of the US Treasury, with an independent Fed as guardian of the realm, would force the Dollar to act as though it were still externally constrained, as in the case of a gold standard.   As Greenspan said, the dollar works as long as it acts as though it were on a gold standard.

This is why, as I recall, the Fed is prohibited by statute and custom from buying debt directly from the Treasury.  It must first pass through the public markets at auction, in the belief that market discipline will prevent excess money creation by legitimate price discovery and higher interest rates as required.

It might be useful to consider at this time a different definition for monetization, that is not the archaic ‘printing of money.’  Monetization might best be described as those actions which consciously misprice the decreasing value and prospects of money, normally a currency, and by corollary the associated risk and returns.  As you can see this includes the debasement of specie money through various means, but also the more modern method of egregiously tinkering with interest rates beyond merely policy rate adjustments.

As I have pointed out previously, to circumvent market discipline merely requires a Fed with the will to do it, and a few complicit primary dealer banks to play along with it.  This can work well as long as no one with sufficient sovereign standing calls them on it, or the people who are the users of the currency rise up en masse against it.  This is convenient arrangement amongst regulators and market fixers is merely an impasse, and is not sustainable in a floating exchange rate system.  The arrangement requires ever increasing duplicity and threat of force. After these many years, the dollar is now literally hanging on to its value with its reserve currency nails.

And so I think a collapse of the dollar is more possible now than at any time in the past.  It is only sustained by the trauma which the decline of such a large economy would cause on the world markets and those central banks unfortunate enough to hold its debt.  This is the best case one can make to explain a hyperinflation

Pragmatic Capitalism
The Fed Is Not Monetizing U.S. Government Debt
By Cullen Roche

The Fed’s purchases of Treasuries continue to attract a huge amount of attention. Despite solid evidence that the program is failing to have any real fundamental economic impact, there are other worries about the program. None has been more apparent in recent weeks than the Fed’s supposed monetization of the US government’s debt. These fears of monetization are unfounded due to the various myths that are perpetually touted by the mainstream media, supposed experts on the US monetary system and even Fed officials. (Quite a collection of the mistaken, certainly not the hoi polloi and not so easily dismissed, but let’s read on.  I have to add though that flags get raised in my mind whenever I pick up this tone in an argument early on. - Jesse)

In an article Monday, Bloomberg reported that the Fed has been buying an exorbitant proportion of the recently issued Treasury debt:

More than 40 percent of the government bonds the Fed bought in January for its so-called quantitative easing were auctioned in the previous 90 days, up from 20 percent in December and 15 percent in November, according to Bank of America Merrill Lynch. The central bank is concentrating on newer securities as its $600 billion program depletes primary dealers’ holdings of Treasuries to the lowest since November 2009.

Why does this matter? Because it gives the appearance that the US government is directly funding itself via the Fed’s purchases. This would be nefarious if it were true and would give credence to the endless complaints about the high rate of inflation in the USA (which is currently running at a staggering 1.5%-2.25% depending on the source). Fortunately, the concerns are unfounded.  (Unfortunately they are not, but read on. – Jesse)

The issuance of bonds continues to this day due to Congressional mandate. In reality, our bond market funds nothing and serves only as a reserve drain which helps the Fed maintain its overnight target interest rate. It has nothing to do with funding the government.  (It would be interesting to test this theory.  For example, if the US were to have a failed bond auction this year. – Jesse)  When the US government wants to spend money they do not call China and ask for a line of credit. They do not count tax receipts. And they most certainly do not call the Fed to ensure that we have any money left. No, the truth is that the USA never really has nor doesn’t have any money. So the entire implication that the Fed is helping to fund US government expenditures is entirely inaccurate and anyone who implies as much is still working under the now defunct gold standard model and clearly doesn’t understand the workings of the modern monetary system. 

(This is the heart of the sophistry.  For the theory as it stood for many years was that market discipline and an independent Fed would take the place of the gold standard in placing some constraint on the value of the bond and the dollar.   Otherwise why would the Treasury simply not create the bonds to satisfy its obligations and place them on the Fed’s balance sheet?  Or better yet, just issue currency and skip the interest?  Because the theory is that by using interest rates as a governing mechanism and forces the debt to be placed through an open system of auction, the efficiency in valuation of the market would act as a standard and as a restraint. – Jesse)

When the US government was working under the gold standard the US Treasury would literally print up certificates to purchase gold from the gold mines. These gold bars would be delivered to the government and the Treasury would issue a check to the miner. This new money would end up at the Federal Reserve Bank in the form of deposits. This would naturally increase the money supply. An increase in the money supply is scary for obvious reasons. So, the term debt monetization has its origins in the days of the gold standard, but persists to this day despite the fact that we are no longer on a gold standard. Not surprisingly, the term is still used today despite the fact that the US government can’t monetize its debt via Fed purchases (I elaborate below). 

(This description of the gold standard is regrettably cartoon-like, and completely ignores the role it played as a market force in international trade.  Most of the gold volume was related to the exchange of goods in trade, and not through the purchase of new supply from miners.  In a situation where a nation consumed more than it produced, the decline of its gold holdings would weaken its currency, forcing a unit devaluation vis a vis gold.  And vice versa with those countries with a mercantilist bent.  Since actual gold was changing hands, and a relatively modest increase is added each year to total supply, it was difficult to game the system.  Monetary policy in the form of devaluation was still very possible, but a bit awkward if one used actual specie instead of certificates. But it was enforceable and transparent. I am on the record as not favoring a return to the gold standard in the US at this time, because its financial system is too unstable and corrupted.  But gold and silver represent a major attraction for international trade in some manner, for the reasons outlined above.  The US dollar was purported to serve this purpose as the world’s reserve currency post 1971, but it has failed in the exact manner predicted by those who said it could not work because of the vagaries of human weakness and the corruptibility of policy. - Jesse)

This issue was magnified yesterday when Richard Fisher of the Dallas Fed invoked the evil “debt monetization” term in his speech:

The FOMC collectively decided in November to temporarily undertake a program to purchase U.S. Treasuries that, when added to previous policy initiatives, roughly means we will be purchasing the equivalent of all newly issued Treasury debt through June. By this action, we have run the risk of being viewed as an accomplice to Congress’ fiscal nonfeasance. To avoid that perception, we must vigilantly protect the integrity of our delicate franchise. There are limits to what we can do on the monetary front to provide the bridge financing to fiscal sanity. The head of the European Central Bank, Jean-Claude Trichet, said it best recently while speaking in Germany: “Monetary policy responsibility cannot substitute for government irresponsibility.”

The entire FOMC knows the history and the ruinous fate that is meted out to countries whose central banks take to regularly monetizing government debt. Barring some unexpected shock to the economy or financial system, I think we are pushing the envelope with the current round of Treasury purchases. I would be very wary of expanding our balance sheet further; indeed, given current economic and financial conditions, it is hard for me to envision a scenario where I would not use my voting position this year to formally dissent should the FOMC recommend another tranche of monetary accommodation. And I expect I will be at the forefront of the effort to trim back our Treasury holdings and tighten policy at the earliest sign that inflationary pressures are moving beyond the commodity markets and into the general price stream. I am a veteran of the Carter administration and know how easily prices can spin out of control and how cruelly markets can exact their revenge. I would not want to relive that experience.”

Fisher’s implication is that the Fed is directly helping to fund the US government’s spending. After all, if they’re buying the debt then they’re obviously funding the spending, right? Wrong. As regular readers know, the US government is never constrained in its ability to spend. Our monetary system underwent a dramatic change when Richard Nixon closed the gold window. It removed any constraint on the US government’s ability to spend. Nonetheless, the operating structure of the gold standard (issuing bonds, etc) still largely remained intact.

(The constraint is softer, and more pernicious than when the US was on a gold standard. The constraint is now the external valuation of the bond in the generic sense, and the dollar, which is a bond of zero duration. During the Carter administration, for example, the dollar was constrained by monetary inflation, the decreasing valuation placed on the bond and dollar by the rest of the world. A gold standard acts as a hard restraint, stopping the monetary authority from debasing the currency early on. Without that constraint perception make the process non-linear. Rather than a hard stop, with a transparent and visible devaluation process, the value can erode slowly over time until it reaches a tipping point, and a more precipitous slide into a collapse. The Fed is confident they can stop this based on the Volcker experience. This remains to be seen. They have no prove of it in theory because it involves human behaviour and significant, if not critical, international exogenous variables. – Jesse)

For a brief instant, Mr. Fisher appears as though he is on the verge of understanding the system he now heavily influences as a new voting member of the FOMC. Mr. Fisher says that the spending effectively comes first:

But here is the essential fact I want to emphasize and have you think about today: The Fed could not monetize the debt if the debt were not being created by Congress in the first place….The Fed does not create government debt; Congress does.

Lights should be going off in Mr. Fisher’s head at this point as he says this. This is important because Mr. Fisher is essentially acknowledging that the Fed is not the entity that actually conducts helicopter drops. Of course, spending comes before debt issuance. It can be no other way in a monetary system such as ours. The Fed’s role in this process is purely monetary. It has nothing to do with the fiscal side. The Fed does not “print money”. Congress is the entity that prints money via deficit spending.  (And the Fed is supposedly the independent constraint on this, and of course the printing of money that occurs in the private banks and the shadow banking system. – Jesse)  And they always decide how much to spend before considering any potential constraint from taxes or bond issuance. Unlike a household or state the US government does not need money before it spends. (The Fed is the only relatively unrestrained source, as well as being the regulator, the governor if you will.  Because the US must issue a bond at some point to cover its spending. This is not a mere detail.  It is a rhetorical device to argue the timing, for it is implicit in the process of governance..  But only the Fed can expand its balance sheet ex nihilo, from nothing.  – Jesse)  From a common sense perspective, you would think that this would set alarms off in most people’s heads, however, it does not. The idea that the US government is never revenue constrained is so foreign to most people that their minds repel it. (And rightfully so, since such an outlook is a tenet of the Robert Mugabe School of Business, University of Zimbabwe – Jesse)

By now you might be thinking that this is all semantics. Who cares if the Fed isn’t helping to fund the spending? They’re still buying the bonds and the spending is occurring regardless of the Fed’s actions. Well, it’s important for several reasons:

1.  Someone who understands the modern monetary system understands that a sovereign government with monopoly supply of currency in a floating exchange rate system has no solvency issue. Therefore, it should not be treated as if it is a household, business or state. (This sounds as though it could be  the motto of the Weimar school of modern monetary economics.  What is missing is that for this to be correct that monopoly must be comprehensive, ie, there must be some force that cause the misallocation of wealth in the world from a central planning commission, and a mispricing of risk.  In other words, its necessary to be the world’s reserve currency and to own the ratings agencies. Otherwise the only floating that gets done is the value of a currency printed ad infinitum down the drain.  The value of a fiat currency is tenuously based on the belief that the monetary authority will not assume it has no solvency issue because it owns a printing press and is willing to use it recklessly, that the currency retains some stable relationship to some useful goods.- Jesse).

2.  If solvency is not a concern (and here reason departs from reality, especially given the many serious instances of high inflation experienced by countries not on a gold standard since the end of World War II.  Technically Russia was not insolvent when the Soviet Empire collapsed. It merely re-issued a ‘new ruble’ after knocking a few zeros off the old one.  Tell the good news to those whose life savings were destroyed. – Jesse)  then clearly the concern is inflation or potential hyperinflation. But as we’ve seen over the last few years the Fed has not succeeded at creating inflation anywhere close to the historical average and certainly not dangerously high levels of inflation. To someone who understands how the modern monetary system functions it not surprising then, that the Fed has been unable to generate inflation during a balance sheet recession. (Inflation is how one measures it.  I would submit that the Fed is quite expert at generating asset inflation in things like financial assets and housing, having done it quite well a few times now.  But I would agree that this is not sustainable, for the reasons noted by Jefferson so many years ago, that this printed money is used for merely speculative as in gambling, not adding the ‘mass’ of the economy but merely serving as a subtle means of wealth transferal.  For fiat money is not wealth, but merely the means of allocation and transference. – Jesse)

3.  Fear mongerers want you to believe that the Fed is the evil entity that “prints money”. The truth is that the Fed can do no such thing. Only Congress can print money and it’s clear that their actions in recent years have failed to generate significant inflation. This is a sign that the government’s spending has been ineffective and misguided. Although I acknowledge that the US Congress is never constrained in its ability to spend this by no means implies that the US Congress should spend beyond its means. To do so can possibly result in malinvestment or very high inflation.  (As a general rule of thumb, name calling, also known as poisoning the well of a counter argument, often introduces and highlights the weakest points in a discussion. Having said that, in a fiat system the interest rates are a key bellwether and governing mechanism to the money supply and the expansion of credit which is the source of money. To this extent to say that the Fed is not involved is to use the same defense that the Wall Street banks used in the subprime mortgage crisis.  They did not originate the loan. They merely bundled them, helped to misprice them, and then sold them to the unsuspecting, the marks in this great con game. – Jesse)

4.  The idea that the Fed is buying government debt might imply that there are is a shortage of buyers of US debt. This is impossible as government debt issuance serves only as a reserve drain. Auctions are designed around calculated reserves and are carefully designed so as not to fail.  (There are a shortage of buyers at certain prices, so the Fed steps in to buy them in the act of mispricing of risk. – Jesse)

5.  Voting members of the FOMC do not understand the actual workings of the Federal Reserve System and the US monetary system and have played a direct role in the misguided policy response in recent years. Of course, this is nothing new. This problem has persisted throughout the entirety of the last 40 years and is largely to blame for the structural flaws in the US economy currently. (If those voting members included Greenspan and Bernanke and I would most heartily agree, but I do not think that is what Mr. Roche intends. – Jesse)

6.  The overwhelming majority of US citizens have no idea how the US monetary system actually functions and therefore are reluctant or unable to force any sort of real change. (As I recall those same citizens rose up almost en masse and besieged their Congressmen to vote against TARP.  They were ignored by the Congress which has been inundated by money from the banking lobby. The desire for change is clearly there.  What is lacking is choice, and I think it is fraud with intent. – Jesse) Those with political or monetary motivations tend to invoke fearful language that incites anger and in truth only adds to the problems in the US economy by driving the voter base to react to their emotions and not their knowledge of the system in which they reside.

7.  Quantitative easing does not increase the money supply and is therefore not inflationary. (Apparently the Adjusted Monetary Base escapes his attention, in addition to the Fed’s role as ‘the standard in proxy’ acting in lieu of an external standard such as gold or a peg to a hard currency – Jesse) Although this operation can have significant psychological impacts (such as inducing undue speculation)  (You bet your ass it does, and it is doing it right now – Jesse) QE can only work in the same manner that traditional monetary policy is implemented at the short-end of the curve. This occurs by setting a target rate and by being a willing buyer of any size at that rate. This is NOT how the current policy is designed. The current structure of QE leaves interest rates entirely controlled by the marketplace and not the Fed. Therefore, the mixed results should come as no surprise to anyone as the policy was poorly designed to begin with and is likely doing little more than contributing to excessive speculation and promoting the continued financialization of the US economy. The Fed’s implementation of such policies (such as QE) and complete misunderstanding of such policies does nothing but help create disequilibrium in the marketplace and increase the odds of future instability. (What Mr. Roche seems to be saying is that the Fed should just set rates across the curve, and chuck the marketplace.  Now THAT’s bare-knuckled monetization.  It might work if the Fed could also set a price for oil, food, gold and silver, and make that stick for example.  They are trying with gold, and silver with less success, but not even that much for the others. - Jesse)

8.  Monetization is achieved by act of Congress via deficit spending and is independent of the Fed’s monetary policy. Anyone who uses the term in the context of the Fed’s contribution of government spending does not understand how the modern monetary system works. In a strict technical sense, monetization is always

(This ignores the role of private banks in creating credit which becomes money. Certainly the Congress plays a key role in the creation of money through government spending and the issuance of debt. But the private banking system plays a key role as well. And the gatekeeper for all this is the Fed.   This also ignores the Fed’s new ability to buy purely private debt and mortgage obligations. Indeed, as I recall in those distant days when there was a misplaced fear that with its illusory surplus the Fed might run out of sovereign debt to buy, the Fed reassured us that it could buy debt from many other sources. They can do it, and they are doing it. – Jesse)

End Note: It is disappointing to find that these types of discussions too quickly devolve into name calling and sloganeering for one’s team, to little benefit except for page clicks and crowd persuasion, which faux reasoning seems to drive too much of the financial reporting today.

Indeed, there seems to be little actual investigative reporting in general being done anymore in the states. And we are seeing far too little reasoning being done from those quarters from which we might expect better. It is too often talking head versus talking head in the staged manner of professional wrestling.  And conspicuous in this deficiency is the economics profession, which too often become a pliable mouthpiece for this or that well-heeled constituency. But it is as one might suppose it to be. There is nothing so corrosive to intellectual integrity as the cover up of a well-intentioned but artificial and inherently deceptive scheme gone badly, and one is caught in a credibility trap.  And of course a status quo based on position and privilege always has its allures.

Many people have raised a voice about the frauds at the center of the financial collapse, and we are at the point where this type of discussion does not matter overmuch; people are going to believe what they wish to believe based on self-interest and the principle of relativism and expediency. Chartalism holds wonderful rewards for those that can pull the levers, and punishment for those who step out of line. 

The problem with these sorts of central command and control constructs is that they assume that men can act with a wonderful enlightment, with the wisdom and selflessness of angels.  Unfortunately they do not often do this.  Such a system is the preferred tool of autocrats, and is inherently inimical to openness and democracy, always requiring secrecy and unilateral power.

“The Constitution is not an instrument for the government to restrain the people, it is an instrument for the people to restrain the government – lest it come to dominate our lives and our interests.” Patrick Henry

One can rationalize almost anything in the service of the power that sets all value and serves none other.  It becomes a matter of duty, of merely following orders.  As an official of another empire destined to its decline once asked, “What is truth?” and then turned and washed his hands of it, which was the expedient thing to do.  Truth is what the few say it is, when the hubris of the will to power is at its zenith. And then it consumes all, for the will to power serves none but itself.

I think there will be a tipping point, some catalyzing event which will spark an unavoidable reaction in the public, in which the people will finally stand and demand justice.  And then some change will come, for good or ill. We are seeing the early stages of that in the world today and in many places where the people are suffering.

By Jesse

Watch this!: Swedish TWINS ** both attempt ** SUICIDE ** on UK Motorway

The Next Financial Crisis

Oil Price Could Doom Obama

Like death and taxes, the price of oil is always with us. And like taxes, it may be President Barack Obama’s worst nightmare at election time next year.

Among forecasters, there is a sharp division between those who see an inexorable rise in the price of oil and those who believe it will stabilize about where it is now.

The hawks see gasoline streaking ahead to $4-a-gallon this year and $5-a-gallon in 2012.

Others say demand will collapse and it won’t go that high. The Energy Information Administration is very conservative in its forecasts and it gives very high prices only a 10-percent chance of coming about.

Adding to the confusion is a nasty little spat between the International Energy Agency in Paris and the Organization of Petroleum Exporting Countries over price, inventory and what OPEC calls “technical factors,” such as pipelines down for repair or the loss of the Deep Water Horizon rig in the Gulf of Mexico last year. IEA is saying that OPEC is keeping its production quotas low to jack up the price-currently just over $90 a barrel and the highest grade Brent crude from the North Sea as high as $99 a barrel-and it is endangering the global recovery with its actions.

But OPEC Secretary General Abdalla Salem el-Badri has taken issue with the IEA for roiling the markets with weak data and speculation. “Supplying the world’s media with unrealistic assumptions and forecasts will serve only to confuse matters and create unnecessary fear in the markets,” he said.

OPEC, which drastically cut back its targets for production in 2008 with the collapse of the global economy, has, in fact, increased its production by 2.3 million barrels a day while formally not changing its declared targets. OPEC controls about 42 percent of the world’s oil production.

What is certain is that world is slurping up more oil than ever. The latest IEA prediction is that daily consumption is increasing and will reach 89.1 million barrels a day as the recovery proceeds. Emerging markets and China in particular are held responsible for the surge.

With the exception of two of the savants of the oil industry, the legendary T. Boone Pickens and former Shell Oil Company chief John Hofmeister, comment in the United States has been muted. When asked why the price of oil was so high despite the recession, White House Press Secretary Robert Gibbs brushed aside the question, recommending the reporter ask the secretary of Energy, a physicist who has not spoken on oil pricing.

Jack Gerard, president of the American Petroleum Institute, did not offer an explanation when he was asked the same question at a meeting in Washington.

The fact is that the price of oil is not determined only by simple supply and demand but by complex premiums and market sensitivities. It is a market that is roiled by wars and rumors of wars and, because oil was the first truly globalized commodity, the premiums can have their genesis far from the futures markets of New York and London.

Uncertainty in Russia, turmoil in Central Asia, the ongoing suspense of Iran’s nuclear plans and even corrosion in the Trans Alaska Pipeline System are cranked into the price. No wonder so many hedge funds are involved in oil. Instability is mothers’ milk to hedge funds.

There are left-wing blogs that maintain that the price of oil and its occasional spikes are created by elaborate speculative plays on the futures markets in New York and London. The left is traditionally paranoid about oil and oil companies, but who is to say they are not right this time? The memory of Enron is still fresh.

One way or another, two things stand out: The chances are that the summer driving season will put pressure on gasoline prices this year, after an extremely cold winter all over the Northern Hemisphere. The conservative (10-percent chance of happening) scenario by the Energy Information Administration says $4-a-gallon gas would come at the end of the summer.

The second reality is that the world thirst for oil has not been slaked; as the world prospers, the greater that thirst.

In 1974, the heads of 23 democracies lost their jobs because of surging energy prices. Obama, beware.

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