Tue Oct 23rd, 2012 at 09:19:58 AM EST
From today's Salon comes a story straight out of an old war movie or Indiana Jones (h/t Sam for the similes): German court of auditors wants Bundesbank to count gold at Fort Knox (Eurointelligence daily briefing, 23.10.2012)
Paranoia hit a new extreme in the form of an official report urging the German central bank to have formal audits of its foreign-held gold reserves; report was triggered by MPs acting on rumours that the German gold stock has disappeared, or replace by certificates of unknown gold quality (Greek bonds for example); no, it is not April 1; acting on the criticism, the Bundesbank already audited domestically held reserves; it yesterday released court of auditor report with blacked-out details; Bundesbank says it has no doubt about the integrity of its gold holdings in the US, the UK and France, but seeks to repatriate samples of its gold holding to check for quality; ... Paul de Grauwe, meanwhile, says the Bundesbank undermines the ECB in order to bring about a German departure from the eurozone.
More detail from Eurointelligence:
This is the most hilarious story in our area we have come across in a long time. Suddeutsche's front page lead is that the German court of auditors has asked the Bundesbank to weigh all the gold after German MPs acted on rumours that the German gold might no longer be there, or replaced by some certificates.
Weighing the gold!? Haven't the German MPs heard of Archimedes and his bathtub
? (Then again, ignoring Archimedes is probably sound thinking, as Archimedes was a Sicilian Greek. You can't trust Mediterranean Science.)
The Bundesbank duly counted and weighed all the 82857 gold bars stored in Frankfurt, some 1100 tons. MPs were even allowed in the cellar to see if the gold is still there.
Good, you should be able to see the gold with your lying eyes!
In an ultimate act of desperation, the Bundesbank is even considering to let journalists inside the vaults.
Journalists, the last bulwarks of intellectual honesty!
The problem is only that the gold held outside Germany has not been audited. There are no official figures, but Suddeutsche estimates about 1500 tonnes are held by the Fed, and about 800 tonnes by the central banks of England and France. The total value is some 133bn. The court of auditors has now demanded regular audits of Germany's foreign gold reserves. The last audits from New York were from 1979/1980. The Bundesbank has since been let into the vault, but not allowed to open the boxes in which the bars are stored, something that has obviously stoke[d] suspicions.
Oh, dear, I wonder what shenanigans the people at Fort Knox might be up to.
The Bundesbank has released the court of auditors statement, with several parts being blacked out, presumably given the continued official secrecy about the location of Germany's gold reserves. The Bundesbank insisted that there is no doubt about the integrity of the foreign depots warning that the doubt itself could have considerable political implications. As a sign of goodwill, Suddeutsche writes, the Bundesbank wants to repatriate 50m tons from abroad, melt it and test the quality.
Right, because physics hasn't progressed beyond having to melt the gold to ascertain its purity (the reasons to ignore Archimedes are obvious and given abouve). I suppose one could use x-ray or neutron diffraction, or Nuclear Magnetic Resonance to test the integrity of the bars down to atomic level. Luckily for Germany, DESY in Hamburg should be able to do this, so it wouldn't be necessary for the Bundesbank to rely on the French (gasp) Institut Laue-Langevin for the analysis. One might think CERN could be an option, being in Switzerland and all, but it's not under control of the Zurich gnomes, but it's a mongrel institution full of physicists of disreputable nationality, and in French (gasp) speaking Geneva to boot. In any case, all this modern physics is not for real Germans, what would Siegfried have done? Surely melt the gold bars.
In an editorial, Suddeutsche writes that the gates should be opened for inspections. (yes, no kidding!).
(We are just trying to picture Jens Weidmann opening a vault in Fort Knox and discovering an IOU with a smiley on it. It is hard to beat this story in term "we were robbed" type paranoia. It also has a certain Götterdämmerung quality. We wonder how the Fed, the BoE, and the BoF reacts to these allegations, which are, after all, fuelled by the German court of auditors, an official institution of the German state. The Fed may respond by just sending the gold back to Frankfurt - that is if it is still there of course!)
Before we start feeling too sorry for Weidmann, who appears to be the sane adult in this story, let's recall that he's the guy who likened Mario Draghi to Mephistopheles
who, in Goethe's Faust II (apparently the creation myth of the Bundesbank), famously convinces the Kaiser to use paper money rather than gold, to disastrous effect.
It couldn't happen to a nicer German central banker, really. It serves him right for stoking hyperinflation hysteria in the middle of a depression. Here's Paul de Grauwe's article mentioned by Eurointelligence: Stop this campaign against ECB policy (FT.com, 22 October 2012)
This guerrilla warfare by the Bundesbank president is based on a failure to understand the role of a central bank in a modern economy. Central banks were created to deal with the endemic problem of financial capitalism: its instability and the impact this has on the banking system. This has led to the consensus that the central bank should be a lender of last resort in the banking system to ensure that the bubbles and crashes that are part and parcel of capitalism do not bring down the banking system.
Should this role of lender of last resort also be extended to the government? It must be, if financial stability is to be maintained, because the sovereign and the banks hold each other in a deadly embrace. When the banking system collapses, this threatens the solvency of the sovereign. When the sovereign defaults on its debt, it pulls the banks into default. This means that the banking sector cannot be stabilised if the sovereign is unstable. A central bank that wishes to stabilise the banking sector is condemned to also stabilise the government bond market. Failure to do so leads to a banking crisis, forcing the central bank to provide huge amounts of liquidity to banks that it refuses to provide to the sovereign.
Standalone countries such as the US and the UK understand this and have an implicit contract between the government and the central bank, whereby the latter will always provide liquidity to the government in times of crisis. Without such a contract, financial stability cannot be guaranteed.
What Paul de Grauwe appears to forget is that Jens Weidmann is on the record (and not at a cocktail party, but at his Bundesbank inauguration speech) that financial stability is not a primary concern
New Bundesbank president Jens Weidman was official enthroned yesterday; indicates his main focus would be to watch over, and comment on, German government's fiscal policy; says price stability must take precedence over financial stability.