good afternoon and welcome to capital account i'm lauren lister here in washington d.c. these are your headlines for tuesday may twenty ninth two thousand and twelve china and japan are scheduled to begin trading in their own local currencies this friday that's what the japanese finance minister came out with that news now this allows traders to trade and you wan and yen without first converting them into dollars so we'll talk about what this means for the u.s. dollar the global reserve currency are we headed towards a world where no one single currency brain to brain and then to what french president charles de gaulle famously recognized as america exorbitant privilege and

more trouble in europe as danes borrowing costs over germany's rise to the highest level since the start of the euro that's according to the financial times now the rescue of banking is reportedly what has investors wherry with concerns about the terms of the nineteen billion euro bailout now this is just one in a string of events we've seen over the last several months that you would think would have investors running to safe havens like gold so why has gold been on a downward trajectory since last august almost a year is it not a safe haven well john butler author and veteran of global finance is here to tell us why that is not the case not even at all and is the u.s. government with its debt addiction its debt ceiling debate and fiscal cliff the rads setting a bad example that others are following while the national football league is reportedly raising the debt ceiling for each of its teams so we'll tell you what we think let's get to today's capital account.

the turmoil in europe you might call a choose your own adventure tale of risks today it's in spain tomorrow it's greek elections not exactly tomorrow but next month tomorrow surely something though and while we've seen germany's sell two year bonds with no return literally a zero per cent coupon we haven't seen a rush to gold which is traditionally considered a safe haven at least the prices fallen since its peak in august of last year so is an investor like let's say warren buffett who is not

a proponent of gold correct when he writes something like this which we've seen in recent months that gold has two significant short comings being neither of much use nor procreative if you own one ounce of gold for an eternity you will still own one ounce at its end now he's talking about gold being not productive but is that really the case well john butler is here to talk about it he's founder of and for a capital and author of this book you see the golden revolution how to prepare for the coming global gold standard and i should also mention he was an interest rate forex and commodities strategist a managing director during chip bank as well as lehman brothers so real veteran of this space and we are happy to welcome you to our l.a. studio thanks for being with us today. thank you or ok so let's just start with what's going on with europe and look into gold so there is so much going on in europe and you can pick any number of things that just seems like the kind of risk

that would drive investors to safe havens yet what we've seen with gold traditionally a safe haven since its peak in august is that overall it's been on a decline it's had a downward trend and when you look at other safe havens like say the u.s. dollar looking at the dollar index it's been in that period either steady or a little bit so what is the deal mr butler is gold not a safe haven as roubini or warren buffett would have us believe. gold is very much a safe haven but there are times when gold does not appear to behave as a safe haven and those are times when stress is build within the heart of the banking system when banks find they're losing so much money on their loan books or in the case of european banks today losing so much money on their holdings of euro area government bonds that they're basically forced to buy more tier one capital assets to shore up their capital ratios and they have to sell whatever else they've

got to be able to acquire those tier one assets and the regulators determine what to or when assets are and the basket does not include gold so in fact to the extent that banks do have positions in gold and those positions are liquid and can be easily sold they sell them to raise tier one capital but keep in mind banks also extend credit to investors to hedge funds to other players in the financial system who also invest in gold and if banks aren't able to extend credit to those investors because their capital impaired well then those investors to the extent they have leverage gold positions may need to close them out this is a technical factor but just you wait once the smoke clears and if the regulators relax capital requirements like they did back in two thousand and eight for example well then guess what all of a sudden people will be able to move right back into gold in the price will shoot higher immediately very quickly once it's clear that these capital constraints are being relaxed will end with this is what we've seen we've seen the european banking

authority require european banks to hold more tear when capital they have impose stricter funding requirements that to nine percent is that tear one capital ratio they're required to have by this summer by june so are you saying that the dynamic that you just described you believe is playing out now and that this is the factor that's causing downward pressure on gold. absolutely banks are distrust the regulators require them to raise tier one capital ratios that requires banks to buy a high quality that is highly rated government bonds by regulatory dick top banks simply have to do it if their capital ratios are not sufficient regulators have will threaten to restructure them shut them down who knows what they might do in the meantime banks have to reduce lending and they have to raise to one capital and to the extent that they are lending to entities that invest in gold well then you'll see forced liquidations temporarily of those gold positions until this

capital issue is resolved and you say that when the smoke clears and banks don't have to acquire or keep as much care when capital that this will reverse and the gold price will increase again my question to you what would be the chain of events that would cause that and do you believe that really will happen because even though we have this regulation now the banks are trying to comply with we hear about three after that which has i believe seven percent tariff on capital requirements so when exactly do you see this unwinding. well it probably won't be too long because the stresses that are building not just in the european banking system but by extension the global financial system are beginning to look eerily similar to what happened in two thousand and eight and just as gold was in a downtrend in july august september october two thousand and eight well finally when the policymakers pulled out all the stops changed the rules relaxed capital

requirements ease more to mark require means you name it gold caught back up to work government bonds had done in the meantime and in fact it overtook them there was a huge rally in gold euro in two thousand and eight i think we're going to see a very similar dynamic play out this time around i don't know exactly which actions policymakers will take but they will take actions once again to loosen a relax these capital requirements to give the banking system more flexibility to ease the strains in general in financial markets and that will lead to a dramatic recovery in the price of gold keep in mind the price of gold recovered already in november two thousand and eight when other risky non safe haven assets were still clearly in a down trend and remained in a down trend until march of two thousand and nine by that time gordon gold had risen by several hundred dollars an ounce and then it kept going up two thousand and nine if i remember correctly so warren buffett when he blows off gold is and i'm productive at that mr bell or does he miss the point entirely that gold is

insurance a form of liquidity without the liabilities associated with currency. well look i mean it's funny that buffett's empire is centered around an insurance company you'd think you'd have a better concept of what insurance is i mean look warren does insurance produce anything or does it protect what does produce it's not supposed to be productive and yet there's demand for it and in fact is uncertainty increases as concerns about the stability of the financial system or the economy in general increase while the other factors equal people demand more insurance but if you demand more insurance then you're going to have to reduce your position and sell something else to acquire the funds you need to acquire more insurance so gold functions like an insurance policy and for warren buffett to not understand that is surprising yeah look warren listen to john ballard he's landed out right here now you mentioned that gold is not part of that tier one capital basket of assets but there have been

some reports now i've only seen them on the blogosphere i haven't seen them anywhere else that the committee that puts together basel rules capital requirements has been studying including gold and tear one capital first of all do you think there is any merit to that or any credibility to these reports do you think it's likely and would this be a game changer of gold was included in this basket of assets. it's a potentially significant development that first of all it's not surprising that the b.r. yes the bank for international settlements is indeed studying this because the banks themselves are going to the b.o.'s and they're asking for the chair one collateral capital basket to be expanded to include additional assets because of course that will make it easier for them to acquire more tear one capital and raise their capital ratios which is what the regulators say they want so they're pushing for this they think gold should be a chair one capital asset many of the banks do but the regulators don't really know

how to respond to that because on the one hand you think ok fine if the banks need to additional to your one capital we should find some things that qualify as additional safe haven assets but then wait a minute you get onto a slippery slope here because if indeed gold were able to compete within the banking system on a level playing field with government bonnes well then banks would take a look at all these government bonds they own to pay very little interest indeed interest rates that are below the rate of inflation and then they'd look at gold they would think maybe we should diversify maybe maybe we should sell some of these government bonds we have for gold which might protect us if there is a wave of inflation but do the governments that issue those government bonds want the banks to have more flexibility to move out of government bonds into other assets such as gold well after all that's what's keeping their financing costs down that's what make is making it easy for them to finance these outrageously large

deficits so i'm not sure that the regulators will choose to act on this but it's an interesting issue that highlights some of the fundamental flaws in the modern financial system absolutely interesting point and i'm with you i don't think that governments would go along with the regulations that make their dad less desirable but we have seen on a more micro level sun bank some clearing houses excepting gold blue. gone for margin calls except in gold as collateral for some loans as in the case of j.p. morgan early last year they reportedly started doing that so as we see a dearth of good assets which has been reported along with some regulatory issues which demand that more loans more exposures be collateralize be backed by collateral do you think that gold will have an increasing role in this regard. it's interesting how it's creeping in around the mortgage and i mean even though if gold is not in the tear one basket it can't really occupy

a place at the center of the global financial system but it's including to it's interesting to see how it is creeping in at the margin the fact is people want to use gold this money there's huge demand to use gold as money and to the extent you can use gold as money can use gold as a reserve as a as an insurance policy people want to do that don't forget that's exactly what central banks themselves are doing they're buying gold at a faster clip now than they have in years and that should be telling us something right so so some people want to remodel gold and some people don't want to use the dollar anymore which is a currency that they want to maybe do you monetize for their purposes at least in the case of some countries that want to trade their local currencies and are doing so as we see in the case of china and japan which they're going to begin reportedly the end of this week so we're going to talk about what that signifies when we get back after a break so john butler stick right there we are going to speak with you in a few minutes he's author and founder of amp for

a capital and still i had last summer may have kicked off the debt ceiling political game and washington but that n.f.l. their owners have added a debt ceiling hike to their play book we'll give you our three fans but first your closing market numbers. what drives the world the fear mongering used by politicians who makes decisions to break through get through to be made who can you trust no one who is you who with a global machinery to see where we had a state controlled capitalism is called sessions when nobody dares to ask we do our t. question. morning. you know sometimes you see a story and it seems so for like sleep you think you understand it and then you

glimpse something else and you hear see some other part of it and realize everything you thought you knew you don't know i'm sorry welcome to the big picture . of me or what you want. but in the alone a fellow will get the real headlines with none of them are the problem with the mainstream media today is that they're completely disconnected from the viewers and what actually matters to those viewers and so that's why young people just don't watch t.v. anymore if they want news they go online and read it but we're trying to take those stories that people actually care about and transfer them back in t.v. .

so before the break we were talking about some examples of gold becoming more like money being used more broadly or broadly considered now there are also examples of countries moving away from the current global currency standard of the u.s. dollar as the reserve currency china and japan will begin trading in their own currencies this friday reportedly now what impact will this have on the dollar's value both short and long term we're going to talk about it but i said all should also mention that the brics the coalition of brazil russia india china south africa the largest emerging economies on the globe made it clear at their spring meeting that they aren't happy with the u.s. monetary policy now they said this before but here's an excerpt from the delhi declaration that came out of that they said would draw attention to the risks of large and volatile cross border capital flows being faced by the emerging economies

and should also note that they made a comment about developing economies or developed economies excuse me monetary policy now that's happened before but what's different now is that they're making plans to loan in their local currencies to facilitate trade between the nations and they're also looking at setting up their own development banks so is this a material move away from the dollar let's talk about both of those issues with john butler founder of and for a capital and author of the gold revolution how to prepare for the coming global gold standard so let's talk about a couple of these deals so with the the china and japan deal to trade in their local currencies how significant do you see this and what do you see as the impact on the u.s. dollar short and long term. well i think it's very significant from a monetary regime change point of view i mean not only are these two of the largest economies in the world but they're two countries that you know let's face it

historically have not had particularly good relations and have gone to war more than once over the last century so you have a situation here where it looks like china and japan are really cozying up to each other to a degree that's nearly unprecedented in modern economic times and given their sheer size and their share of the global economy in share of global trade the fact that they are now embarking on the ability to bypass the u.s. dollar in pawar is that they will over time divest dollar reserve balances or at a minimum accumulate them at a slower rate going forward now other factors equaled that will place upward pressure on u.s. interest rates and or downward pressure on the dollar it is a major step away from the dollar's long held pre and then it reserve currency studies and other countries smaller countries a kona mees are also following along or in some cases have already engaged in these

sorts of agreements so this is a very significant and at some point you reach a tipping point where so many countries are engaging in such agreements and bypassing the dollar that the dollar really begins to lose lose reserve status and i'm in a major way well let's talk about what that tipping point will be because one of kind of you could call it the unintended consequences of western sanctions on iran is that some of iran's largest trading partners china and india those are two of iran's largest customers for oil they now are brokering deals with iran to buy oil with their own currency china's worked it out to pay with renminbi iran has said they'll accept rhymin be for oil india has reportedly made a deal with iran to pay for oil with rupees so what do you see is the impact of that. well again it is the law of unintended consequences i mean the united states has you know very serious issues with iran and it's willing to impose very severe sanctions on iran as

a result but in this case the unintended consequence is that the bric countries which are all trading partners of iran and as you point out quite large trading partners in a couple cases well they don't think this is a good idea at all and they said very clearly in that deadly declaration from what you quoted a moment ago that they think u.s. policy towards iran is very unhelpful and they think that it would be far better to focus on negotiations to focus on if anything increasing trade with iran bringing the wrong more into the fold of the developing liquid modern global economy and they think that's the solution to help iran to become a more modern country so there's clearly an issue here with respect to iran where foreign policy issues collide with monetary regime change in india iran may represent an important tipping point in that regard and what do you think that tipping point would be as we see some of these countries conducting trade and their own currencies not converting it to the dollar first. well you get to the point

where it becomes a bit farcical i mean let's face it if the bric countries all find a way to use their local currencies to get around u.s. sanctions but the u.s. still insists on sanctions well if you can't enforce them through the financial system well then you're going to have to enforce them in another way in other words physically it will come to the point on the road or on it will eventually come to the point where the u.s. will literally have to blockade iran and start stopping chinese oil tankers or tankers that are moving oil back and forth between iran and china or iran and india and now how are our china and india going to respond to a u.s. blockade of iran it it's not going to make the us any friends and i think eventually the writing is going on the wall is going to be so clear for all to read that the u.s. will either have to back down or risk a very large shift away from the dollar as the global reserve currency as the

global currency for the oil trade really solely for we will come to a head eventually and exactly how it would be resolved i don't know but will there be a role and get all of that and i'll get to sure you that the role of the dollar will be diminished relative to the role today and just a couple seconds here but do you think the role of gold and the scenario that we see playing out with iran and these countries in trade. what's happening is the world is becoming more multi-polar the us share of the global economy has been declining for years the bric share has been increasing you reach a point where the size of the u.s. economy the u.s. is share of global trade is just too small to justify this legacy dollar reserve standard which is a leftover of bretton woods events such as we're seeing today with the brics with iran with sanctions are only accelerating this move towards a more multipolar world in which u.s.

economic had germany just doesn't exist anymore and therefore us monetary had germany cannot exist when you look at history the more multi-polar the world becomes the more central the role gold is going to play why because the more multi-polar the less any one country is able to impose terms on others they must all agree on what they want to use as money naturally they will agree to use as money that which no other country can manipulate that which no other country can use to its own interest at the expense of others as an objective reference point in a gesture of reference point that cannot be easily manipulated by other countries we're seeing gold come back into the fold today in large part as a result of this rise of a multi-polar world and all come together foreign policy that policy monetary policy at solitaire and the same boat plan now before i think so much valor for giving us your insight into all of this.

yes it's. such a boat oh for. our let's wrap up with loose change we've heard a lot about wall street compensation and we've seen protests from occupy wall street and other groups against the c.e.o. was a big bank take a look. thanks . turns out though that jamie dimon the highest paid banker last year hey you know what his salary kind of pales in comparison to the compensation of the media executives it turns out are now out earning wall street c.e.o.'s by a lot so jamie dimon raked in twenty three million in compensation the head of

c.b.s. was paid sixty nine million dimitri what does this say about the changes are just two examples there are many more though that we are getting some of that money i know. you're not a. titan but you're fine as far right and we're in news which was why i think it's interesting because i think it's amazing because obviously i'm surprised i'm surprised i'm surprised because ultimately i think ultimately it's the financier to the top the pyramid but propaganda plays a tremendous role ok in society as far as is controlled that is a physical control mechanism probably gives a very important mental control mechanism and i would argue it's more important what kind of propaganda is discovery shelling out dimitri oh all sorts of propaganda i mean i don't know we've added almost eighty and all of that i know it was something yes i could. if i was just messing that have you all seeing. let's move on because house speaker john boehner he brought back the debt ceiling debate

we know it's going to happen again at the end of the year this fall i hear he is talking in washington admitted may about it last year however the president requested a quote unquote clean increase of the debt limit business as usual well i've run a business and that's no way to do it. well it looks like maybe one big business is following the lead of the u.s. government the n.f.l. is raising the debt ceiling for each team according to sports business journal they're increasing the feeling from one hundred fifty to two hundred million shannon when you are n.f.l. go to girl what say you. i believe it's funny that they have a salary cap for the players so as much as they're going to go into debt it's not going to help the players any at all with their already large salaries i just think it's really i mean they plan on going to all the other ways tax payers players

everybody getting the shaft five years ago i should mention the n.f.l. tried to decrease the per team debt limit from one hundred fifty million to one hundred twenty five million so times now that changed those thirty for the n.f.l. well now it's stimulus why don't think look this isn't surprising in my view right this is normal everything runs on that now so of course the n.f.l. is going take its cues from washington is going to say listen you know we don't run like a normal business anymore let's raise the debt ceiling let's raise the debt ceiling where we get a few more touchdowns we will grow our way out of the day the same b.s. line of logic it doesn't work or i'm sorry to say but you know if the n.f.l. wants to try this is raise it at least our protocol for i'm not going to pay for the n.f.l. unless they try and do something sneaky. have a nationalized benefit and you can bet your national football league in earnest all right let's leave it there because the n.f.l. actually does quite well according to my media sources that's all we have time for that's our show today thank you so much for watching now and please make sure to come back tomorrow also in the meantime you can follow me on twitter out more in

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