Monday, March 12, 2018

Gary North on central banking, gold, federal debt, and Keynesianism

I have never met Gary North and probably never will.  Yet, through his writings he has had a far-reaching influence on my thinking, especially with regard to government and economics.  He runs a membership website,  For $14.95 a month you get access to everything on the site, including four daily articles that he writes six days a week and posts while most people are still asleep.  Members can ask questions in the forums to which he and other members will post replies.

North wrote what I consider a very important book on money and banking that’s available on Kindle: What is Money?  It is not only an enjoyable and highly informative read, but at $0.99 it’s virtually a gift.  Get it, read it, reflect on its insights.

Over the years I’ve accumulated excerpts from his daily articles that I thought were not merely important but profound.  Some of his articles are posted for members only.  I am sharing excepts from four of those articles here.

Central banking

[The] push behind central banking began with the creation of the Bank of England in 1694. It was motivated by private bankers who wanted to clean up through leverage, and they also wanted a cartel operation to keep out interlopers. They wanted a government monopoly. Next, the banking cartel needs an agency that will protect the cartel. It will always provide money for the cartel if it gets in trouble: bank runs. This is what the central bank does. As part of the payoff to the government for the monopoly, the central bankers also promise to defend the government whenever it runs into financial difficulties. So, there's a quid pro quo. The crooked bankers get their leverage, and they get their guarantees, and the crooked politicians get their spending, and they get their guarantees.

The public doesn't know, and the public doesn't care. This is a fundamental political fact: you must not expect the public to reform the system. The public knows nothing about the system. The public doesn't understand the system. The public can barely function during the day. People get used to keeping themselves going, week to week, or even day to day, and we should not expect much more than this from the average guy in the street. He knows how much money he's going to need to pay his bills at the end of the month, which means he's smarter than Congress. But the best you can hope for is that he is going to pay his bills at the end of the month. Don't expect him to save for retirement. Don't expect him to save to send his kids to college. Expect him [to vote] for people who promise him to get his kids educated cheaply, and then to get himself supported in his old age.

The logic of gold

When you buy gold, you are shorting Western civilization.

I have been saying this for 50 years, and I will not stop saying it.

When you buy gold, you are shorting Keynesianism. You are shorting the Chicago School of economics. You are shorting the stock market. You are shorting currencies. You are saying to yourself, loud and clear, that you do not believe that a world controlled by central banks is a stable, reliable world….

The average man believes in the promises of politicians. To the extent that he understands central banks, he trusts them too. He thinks the world is run by experts, and these experts are going to do whatever it takes in order to make the world safe for the average Joe. So, there are lots of reasons not to buy gold. You will be told by everybody that buying gold is foolish. Your investment advisor will tell you this. Your brother-in-law will tell you this. CNBC will tell you this.

The entire civilization is built on this presumption: gold is a barbarous relic. This is because modern civilization is built on the wisdom of central bankers. The modern world is built on permanent monetary debasement….

Why should you buy gold if you don't own any gold? Because there should be something in your life that says this: "I don't trust the politicians, the central bankers, and the Medicare system." At some point in your life, you have to put it on the line. You have to have at least a symbolic amount of your net worth tied up into an asset that will protect you briefly if there is a major crisis….

Anyone who refuses to own gold is saying, loud and clear, that he trusts Janet Yellen, he trusts Obama, he trusts Jeb Bush, he trusts Hillary Clinton, and he trusts his local Congressman, who has assured us Social Security and Medicare payments are guaranteed forever. He also trusts the business cycle. He doesn't think he's going to get fired. He doesn't think mass inflation is a possibility.

On Federal debt

This is the horrendous fact about federal debt. The worse the policies get, the more likely that rich investors and institutions will fund the ever-rising federal debt. It will be the equivalent of pouring gasoline on the fiscal fire. This is because long-term Treasury debt is subsidized by widespread error. The entire investment community believes that US Treasury debt is the safest of all forms of debt. This idea is found in economics textbooks. It is basic to the capital structure of the world.

The error regarding the safety of federal debt has been widespread for so long, and there has been no threat of default for so long, that people have become immunized against any suggestion that, ultimately, there is going to be a great default. People just cannot believe this. There are 250 years of tradition on the side of those who say that the federal government will never default. This has blinded people to the reality of the unfunded liabilities of Medicare and Social Security. It has also blinded them to the possibility of a great default. This very blindness subsidizes the expansion of the debt. People simply cannot bring themselves to believe that there will be a default.

It all boils down to this: you can't get something for nothing. The federal government cannot continue to tap the capital markets without affecting the capital markets. Capital that would've flowed into the private economy, especially capital formation, flows instead into the coffers of the federal government, where most of the money is wasted. This de-capitalizes the private sector. It reduces productivity. It is hailed as sound fiscal policy by all Keynesians, most monetarists, and most supply-side economists, but few Austrians. Obviously, members of Congress are not concerned. The voters are not concerned. Trump is not concerned. Who is concerned? A handful of Austrian School economists. They have no influence in academia, finance, or politics.

So, the federal debt will continue to rise. The recession will arrive. The on-budget debt will then become exponential. To this will be added the unfunded liabilities of Medicare and Social Security. The deficits in both of those accounts will increase. The general fund will have to be tapped in order to fund Medicare and Social Security. This will push the on-budget debt even higher.

We can see where this is heading. Almost nobody else does.

Don't lose sight of the obvious, namely, the irreversible increase in the on-budget debt. It reminds us, day by day, that the day of reckoning is approaching. Kicking the can down the road politically cannot go on forever.


Here is Keynesianism in four words: "Deficit spending overcomes recessions." That is all you really need to know. . . .

This economic outlook can be refuted with one question: "Where did the government get the money to make the purchases?”

There are only three possible answers.
The government taxed it. So, the people who were taxed cannot spend it. Thus, there is no increase in total spending. 
The government borrowed it. So, the people who lent the money cannot spend it. Thus, there is no increase in total spending.
The government borrowed it from the central bank, which created the digital money out of nothing. So, there is no increase in total demand; there is only an increase in the money supply. When the government spends it, it will redirect this newly created money toward government projects, but the result will be a transfer of assets from the private sector to the public sector. There is no increase in total spending.
This is easy to understand. But Schiller and the Keynesian economists never quite face this. They never refuted [it] in a systematic way. They never acknowledge these three refutations of the Keynesian system. They never acknowledge that this is a philosophy of magic: stones into bread. Ludwig von Mises called [it] that in 1948, and he was correct.

We live in a world in which people have Ph.D.'s and win million-dollar awards based on an erroneous economic philosophy that is easy to refute. There are lots of arcane Keynesian formulas, but they cannot answer these three questions. There is no increase in total spending. There is simply a transfer of spending from the private sector to the public sector. It means that the government spends more, and people in the private sector spend less. It usually means that governments don't invest. Investors who would have lent to businesses instead lend to the government.

Keynesianism is all about shifting resources out of the private sector into the public sector. The Keynesians see this as productive. Austrian School economists see it as unproductive. The Keynesians see this as creating wealth; the Austrian School economists see this as destroying wealth. The debate rarely gets into the academic journals. The debate rarely gets into the public political sector. That's because politicians want to spend money. Voters will receive freebies from the government, and the only way to pay for these freebies will be these: taxing, borrowing, and spending fiat money into circulation.

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