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Showing posts from September, 2009

Money defined in six words

Gary North, one of the most prolific libertarian authors ever, began a series of articles yesterday called What is Money? His first installment was exceptionally clear and tightly-written.

Drawing on Mises' 1912 work, The Theory of Money and Credit, North says money can be defined in six words:
money is the most marketable commodity. [Mises] had in mind gold and silver coins, but his theory encompassed any commodity that can or has served as money in history. . .

Property rights are the foundation of money, Mises argued. Property rights provide the legal setting for voluntary exchange. He argued that the development of money was an unplanned outcome of the decisions of individuals who sought to increase their wealth by increasing their productivity. . .

What had originally been a commodity valued for some other characteristic increasingly was valued for the purpose of facilitating exchange. In other words, this commodity became money. . .

[G]overnments began to extend their control ov…

Why Fed defenders oppose an audit

"An audit would make people realize that, while Bernie Madoff defrauded a lot of investors for a lot of money, the Fed has defrauded every one of us by destroying the value of our money. An honest and full accounting of how the money system really works in this country would mean there is not much of a chance the American people would stand for it anymore."

-- Ron Paul

Understanding the nature of money

Money - most people are interested only in acquiring more of it, whatever its nature happens to be. The people who run the government and the banks are several giant steps ahead of the pack.

They understand that to get the most money possible they must be in charge of the production and use of money. That is why we use federal reserve notes (or their dictated substitutes) in everyday exchanges rather than gold or silver coins (or their accepted substitutes). Government, through its central bank, issues the notes and mandates their acceptance. The U.S. government no longer outlaws competing monies directly. They don't have to. It never occurs to most people to use anything else because of their lack of knowledge and interest in monetary affairs. This means alternative monies don't have the status of a generally accepted medium of exchange, which means they are not truly money, no matter how otherwise sound they might be.

Imagine if your neighbor could dictate that the pape…

Turk skewers anti-gold propagandist

The Economist and Financial Times are not known for friendly commentary on the gold market, James Turk tells us, and a recent Lex column in FT illustrates his point. Inserting his comments in brackets while italicizing Lex's statements, Turk writes:
Stories of those who preserved their wealth or escaped hunger in decades past by hoarding precious metals when their governments set the printing-presses loose provide gold bugs with a compelling historical narrative. [Yes, and one that is very relevant today given what governments and central banks around the world are doing to national currencies by again setting the printing presses loose.]

But the US is not Weimar Germany [Not yet, but wait a few months.] and, in spite of interest rates that make gold ownership cheap [Which is only one of gold’s many advantages at the moment], the opportunity cost of owning it is still unattractive in the long-run. [Complete rubbish. Gold has appreciated at double-digit rates on average this dec…

Government as vampire

The September 9 Buttonwood commentary on the Economist blog talks about how consumers are cutting spending during this crisis.
The volume of consumer credit fell by $21.6 billion in July, the sixth monthly decline in a row. According to Lombard Street Research, this was the second largest percentage decline since World War Two. The 3-month annualised rate of decline is now running at 7%.The column concludes with this observation: "[W]ithout the government, one fears the economy might look like the lead character of Weekend at Bernie's."

I haven't seen the movie nor have I heard much about it, but the plot summary at IMDb describes it as "A pair of losers try to pretend that their murdered employer is really alive, but the murderer is out to 'finish him off.'"

I don't know what Buttonwood meant by his comment, but there's certainly truth to the assertion that government intervention in this crisis is an attempt to give the dead the appearance of…

Memorable quotes on money and banking

"If anything had or could have a value equal to gold and silver, it would require no tender law; and if it had not that value it ought not to have such a law; and, therefore, all tender laws are tyrannical and unjust and calculated to support fraud and oppression." Thomas Paine, 1786

"Silver Certificates once were a promise to deliver silver. U.S. Notes now are a promise to deliver taxes and inflation." - G. Edward Griffin

"[Inflation] often makes it more profitable to speculate than to produce." Henry Hazlitt, Economics in One Lesson

"Without the money-based, bank-based division of labor, most of us would never have been born." -- Gary North

"Thus the sound-money principle has two aspects. It is affirmative in approving the market's choice of a commonly used medium of exchange. It is negative in obstructing the government's propensity to meddle with the currency system." -- Ludwig von Mises, Theory of Money and Credit


Bernanke now says recession "very likely over"

Speaking to "experts and Washington insiders at the Brooking's Institution in Washington" today, Ben Bernanke said that "from a technical perspective, the recession is very likely over at this point," though unless you work for the government you will continue to sweat from job insecurity for a long time. Keep in mind Bernanke, the leading "expert," along with his audience of "experts," were completely blindsided by this crisis.

Fed chairmen never admit to seeing trouble ahead. They may have "concerns" about current trends, but they never see disasters staring them in the face. In Bernanke's now famous words, the U.S. government has a technology called a printing press that can rescue us from any crisis, in the unlikely event one should arise.

And what about the ones who did see the financial debacle coming, such as Peter Schiff and most Austrian economists?

They are roundly ignored in the mainstream. Austrian theory not only …

Do prisoners use fiat paper money?

Of course not.

In an article posted at way back on June 3, 2009, Chris Casey explains:
Since money is banned in prisons, the historical use of cigarettes by prisoners as money avers that money requires alternative value (i.e., value apart from its use as money) and proves that our present system of fiat currency (and fractional-reserve banking) is eventually doomed.

Prisoners exchange cigarettes for sex, drugs, gambling, and the killing of other inmates (all other recreational activities being provided free of charge by taxpayers). The cigarettes hold alternative value through their direct consumption (smoking). . . .

Fiat money does not exist in prison. Prisoners do not dye sheets of paper green and attempt to circulate them as money. No inmate would accept this as money, not even if the penal equivalent of a Bretton Woods agreement existed between the toughest gangs.

Why is it that criminals continue to use real money in their transactions? Because they have not been fooled oth…

Fiat gold led to fiat paper

In a Texas Straight Talk posted earlier this year, Ron Paul discussed the meaning of fiat money. "Fiat," he points, is latin for what can be crudely translated as "there shall be." Fiat money is therefore money that exists only because government creates it. It is an entirely different creature than the money that arises on the market, where individuals choose a commodity that best serves the needs of trade to act as a medium of exchange.

As a result of government's fiat paper money, Paul says, Americans have lost "the concept of budgeting." And the government acts like a reckless teenager, with the taxpayers as parents footing the bill.
Every dollar created and spent by government makes the dollars in your pocket worth less and less. Eventually any currency controlled by government will be debased to worthlessness, and will wipe out the savings of the citizens who put faith in that currency.As Jorge Guido Hulsmann explains in his book, The Ethics…

Gold breaks a barrier, again

Yesterday, gold broke the $1,000-per-ounce mark for the third time in less than 12 months. Peter Schiff comments:
[T]here is no shortage of market analysts who are not buying gold while questioning the motives of those who are. Although they offer a variety of strained reasons, they nearly all agree that it has nothing to do with inflation, which is nearly universally considered dead and buried. As a self-confessed gold bug, I can assure all that inflation is the only reason I buy gold. And recently, I'm buying a lot. . . .

While there are those who buy gold to speculate on its appreciation, the underlying factor that drives that appreciation in the first place will always be inflation. If governments were not creating inflation, there would be little investment advantage to owning gold. . .

When economies move into recession, there is always political pressure for governments to intervene. Their one tool is the printing press. . .

Most analysts, however, simply look at the dubious C…

Gold dollar vs. paper dollar

For another view of this chart visit the Mises Institute.

A Fed Report Card: Maintaining the value of the dollar

Inflation: Politically-Correct Plunder

Aside from natural disasters, human error, and private crime, what would account for the continual destruction of capital that keeps us from enjoying a better life? Claude Frédéric Bastiat (30 June 1801 – 24 December 1850) lays the blame on plunder, which he defines as “prohibiting, by force or fraud, freedom of exchange, in order to receive a service without rendering one in return.” [Economic Sophisms, p. 132] Improvement in the social order is held back by the “constant endeavor of its members to live and prosper at one another’s expense.” The plunder he describes receives both legal and moral sanction, and would today simply be called policy.

One policy he doesn’t discuss is government inflation, the act of increasing the money supply. As credit expansion, which entails the creation of deposit accounts from nothing (as a child playing make-believe might do), inflation destroys capital by promoting overconsumption and malinvestment. Since it erodes purchasing power, inflation un…

How the Fed bought the economics profession

From Ryan Grim at the Huffington Post:
The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.

This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed's thrall, the economists missed it, too.

"The Fed has a lock on the economics world," says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. "There is no room for other views, which I guess is why economists got it so wrong."

One critical way the Fed exerts control on academic economists is through its relationships with the field's gatekeepers. For instance, at the Journal of Moneta…

Real Federal Deficit is $2.13 Trillion

From Richard Daughty, the Mogambo Guru:
If you want to know what kind of monetary morons we have in charge of the Federal Reserve, then you have come to the right place, because a record of sorts was set last week, in that the loathsome, disastrous Federal Reserve bought up – in the last 12 short months – $1.011 trillion in US government securities! Yikes! . . .

It’s called “monetizing the debt”, which Ben Bernanke said, in response to a direct question about it recently, that the Fed would “never” do! “Never” has now been re-defined to mean “continually?” Hahaha! Too much! . . .

. . . and if you want to know the actual size of the actual federal deficit for the actual last year because you are pretty sure that the government is lying to you about the real size of their deficit-spending, then you have also come to the right place, because Treasury Public Debt is, as of last Friday, $11.797 trillion, whereas 12 lousy months ago it was $9.667 trillion, meaning that even if you are not sobe…

Steve Saville on Gold Money

Writes Steve:
The probability that there will be some sort of official link between China's currency and gold anytime soon is very close to zero, and the same can be said about every other national currency. Unfortunately, the current major trend is for increasing, not decreasing, government control over banking and money. . . .

Many years into the future there will come a time when our present monetary system is so ravaged by inflation that a complete system change will be unavoidable. At this future time the reintroduction of an official monetary role for gold could become a realistic possibility.

Rather than having a Gold Standard or some other official (government-mandated/controlled) link between the currency and gold, the optimum solution would be for the government to get out of the money business altogether and let the market use whatever money it chooses to use. The trouble is, the optimum solution is so far outside the realm of mainstream thinking that it won't even fin…

Inflation and the Fall of the Roman Empire

Read the transcript of Professor Joseph Peden's 50-minute lecture "Inflation and the Fall of the Roman Empire," given at the Seminar on Money and Government in Houston, Texas, on October 27, 1984. From the lecture:
"If a city couldn't pay its costs or pay the salaries of its employees, it simply struck up some token coinage and issued that."

"The Roman people, the mass of the population, had but one wish after being captured by the barbarians: to never again fall under the rule of the Roman bureaucracy."

"Prices in this period [258 - 275 A.D.] rose in most parts of the empire by nearly 1,000 percent. The only people who were getting paid in gold were the barbarian troops hired by the emperors. The barbarians were so barbarous that they would only accept gold in payment for their services."

Mankind's savior, the International Division of Labor

Money makes the division of labor possible, and the use of money among the world's people makes that division international in scope. Murray Rothbard:
The nineteenth century saw the benefits of one money throughout the civilized world. One money facilitated freedom of trade, investment, and travel throughout that trading and monetary area, with the consequent growth of specialization and the international division of labor.But there's a catch: government has to stay out of the way:
It must be emphasized that gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium. Above all, the supply and provision of gold was subject only to market forces, and not to the arbitrary printing press of the government.

The international gold standard provided an automatic market mechanism for checking the inflationary potential of…

Ron Paul on the Fed

From his Texas Straight Talk column:
Fed policies have been as bad for the economy as they are good for politicians and bankers, as the recently released numbers on the debt and deficit demonstrate.For the first time since World War II the annual budget deficit is projected to be over 11 percent of the nation’s gross domestic product.It is also projected that by 2019 the national debt will be 68�f GDP.Our path, if unchanged, is completely untenable.The administration claims that it inherited a dire situation from the last administration, which is absolutely true.However, that hasn’t stopped them from accepting all the policies and premises that got us here, and accelerating those policies to rapidly make a bad situation much worse.The bailouts started with the last administration.They have gotten bigger with this one.The last administration gave us expanded government involvement in healthcare with a new prescription drug benefit.This administration gave us a renewal and expansion of S…

That tricky GDP

According to convention, when government at any level spends money, it contributes to Gross Domestic Product, GDP. The Bureau of Economic Analysis calculates GDP periodically, and Richard Daughty, the Mogambo Guru, vents about its methodology and conclusions. In its most recent report, the second-quarter GDP reflected "negative contributions" from private-sector components, but the BEA hastens to add the "good" news. Mogambo:
For some reason, I think that we are supposed to be calmed that these losses "were partly offset by positive contributions from federal government spending and state and local government spending." Gaaaaaahhhh!Since I find it hard to express the horror I feel as a result of GDP falling while government spending is increasing, I will not try, and instead focus on the arcane handling of imports which, of course, seems perverse, in that imports are a subtraction in the calculation of GDP, so that when imports increase, GDP decreases.

Ohanian vindicates Rothbard

Joseph Salerno brings our attention to a National Bureau of Economic Research working paper on the Great Depression that is almost hardcore Rothbardian.

Salerno writes:
In writing his article, "Who — or What — Started the Great Depression," UCLA economist Lee E. Ohanian spent four years poring over wage data and culling information from sources related to Hoover and his administration. . . .

Ohanian contends that Hoover's policy of propping up wages and encouraging work sharing "was the single most important event in precipitating the Great Depression" and resulted in "a significant labor market distortion."

Thus, "the recession was three times worse — at a minimum — than it otherwise would have been, because of Hoover."

The main reason is that in September 1931 nominal wage rates were 92 percent of their level two years earlier. Since a significant price deflation had occurred during these two years, real wages rose by 10 percent during the same…

End the Fed by Ron Paul

Here is my Amazon review of Dr. Paul's new book:
I read the book in its entirety last night and couldn't put it down. Ron Paul makes his case on several levels - constitutional, economic, moral, and political. The writing is fresh, vigorous, and accurate. He includes excerpts from his exchanges with Greenspan and Bernanke, and has a chapter devoted to his intellectual journey in arriving at his convictions about central banking and fiat paper money.

My favorite chapter unfortunately was one of the thinnest - Chapter 4: "Central Banks and War." Commenting on the impact of the Fed during World War I, Paul writes (p. 66): "In total, scholars have estimated that only 21 percent of the war was funded through taxation. The remainder was funded by Fed-backed borrowing (56 percent) and outright money creation (23 percent), for a total cost of $33 billion."

For the U.S, the war meant the launching of the imperial presidency and a globalized foreign policy; for Germany,…