Barbarous Relic

Lunch with Ron Paul

2011-12-29T14:49:00.000-08:00

Ron Paul published Gold, Peace, and Prosperity in 1981. What makes his pamphlet especially attractive today is the speed with which it can be consumed. A reader could get through his robust prose during an hour lunch break.

But why would a reader want to do that? Why not read one of Paul’s more recent books instead, even if it couldn’t be read in one sitting?

The answer is, the earlier work provides an excellent foundation for his later writings. It offers a clear, non-technical summary of his views on money and the economy.

Ron Paul has made his mark as an advocate of sound money. As such, he is totally opposed to fiat money and its imposition through the government-supported cartel, the Federal Reserve. It is largely through a hijacked monetary system that government has become a threat to civilization. In this pamphlet, Paul puts it all in perspective with everyday language, as if he’s talking to you - over lunch.

Sound money, he says, is money that is “fully redeemable.” The paper currency people use in transactions is only a substitute for money proper, which traditionally has been gold and silver coin. The adverb “fully” means that every note issued is a claim ticket to a specified weight of gold stored in a bank warehouse.

Why is this arrangement sound? Because it makes the value of money depend on the profitability of mining gold, rather than the “politics of the hour,” as Mises put it. A money that’s sound means the money supply remains relatively stable.

Unsound money is money that bankers and government can inflate virtually without limit. Unsound money equates “monetary policy” with varying degrees of inflation, as determined by a panel of politically-influenced bureaucrats.

Since inflation is indistinguishable in its effects from counterfeiting, the bureaucrats are simply counterfeiters with grandiose titles; their sacred monetary policy is nothing more than “legalized counterfeiting.” Inflation, Paul explains, citing Murray Rothbard, is “new money issued by the banking system, under the aegis of government.”

Blaming Arabs, businessmen, labor unions, or consumers for rising prices doesn't drown out the steady hum of printing presses running 24-hours-a-day, ballooning the money supply, and thereby debasing every dollar previously printed.

Referencing Hans Sennholz, he says:

An increase in the money supply confers no social benefits whatsoever. It merely redistributes income and wealth, disrupts and misguides economic production, and as such constitutes a powerful weapon in a conflict society.

If inflation is so bad, why does it exist? Because it benefits “whoever gets the new money first” - government, bankers, and favored businesses.

A good example is the credit the government created to bail-out the Chrysler Corporation, largely to finance a labor contract that pays the employees twice the average industrial wage. But unions, like businesses, can only persuade government to inflate if the inflation mechanism is in place. A redeemable currency would make this impossible.

Who pays for inflation? The poor and middle classes, and those on fixed incomes. By the time they get the new money - if they get it at all - prices have gone up (or they’ve failed to drop, as they would have without inflation). These groups are cheated by inflation, and eventually are either wiped out through currency depreciation or made dependent on government favors. This pattern has been known for ages, as Paul shows with numerous historical references.

Expansion of the money supply through "spurious paper currency," noted [Andrew] Jackson, "is always attended by a loss to the laboring classes."

"Of all the contrivances for cheating the laboring classes of mankind," added Daniel Webster, "none has been found more effectual than that which deludes them with paper money."

But if prices rise from an increase in the money supply, wouldn’t the price of labor go up, too? Quoting William Gouge, President Jackson’s Treasury advisor in 1833, Paul writes:

Wages appear to be among the last things that are raised. . . . The working man finds all the articles he uses in his family rising in price, while the money rate of his own wages remains the same.

When Lincoln issued greenbacks to pay for the Civil War, Paul notes, “prices rose 183%, while wages went up only 54%. During the World War I inflation, prices rose 135%, and wages increased only 88%. The same is true today.”

In answer to the claim that the Fed was created to prevent inflation and the periodic panics that erupted in the 19th century, Paul points out that inflation was written into the central bank’s founding charter, in the requirement to provide a more “elastic” currency. With the Federal Reserve Act of 1913,

a 40% gold cover for Federal Reserve notes and 35% for Federal Reserve deposits were required. The fact that it was not 100% showed that the central bankers planned more inflation. . . .

The central bank never set out to protect the integrity of our money. In fact, the Fed set out to destroy it by institutionalizing inflation. The gold coin standard was doomed and today's inflation made inevitable the day the Federal Reserve was created.

A gold coin standard, regulated by the market, acts as a restraint on inflation because it is the money, not the paper issued as a substitute. This is why governments hate gold - they can’t produce it in unlimited quantities. Using a non-redeemable paper currency avoids the risks of raising taxes while allowing politicians to pay for their wars and bureaucracies by running the printing press behind the curtain.

Since a gold standard enables the average person to restrain the government's attempts to inflate, control the economy, run up deficits, and fight senseless wars, the central planners had to eliminate this fundamental American freedom to own gold. This was accomplished with the Gold Reserve Act of 1934, which outlawed private ownership of gold, prohibited the use of "gold clause" contracts, and abolished the gold coin standard.

Thanks to Paul and others who support sound money, the government in 1974

reversed the unconstitutional 1934 law that barred private ownership of gold. In 1977, gold clause contracts were legalized.

One of my favorite passages in the book is Paul’s succinct comment on the Great Depression. Ben Bernanke wrote a collection of technical essays on the subject and has earned the reputation among his Keynesian colleagues as an expert on the Depression, never mind that he got it wrong. In 2002 he famously apologized to Milton Friedman and Anna Schwartz for the Fed’s mismanagement of the money supply after the Crash, which he concluded could have been avoided if central bankers had provided “low and stable inflation” as a monetary background. (For an in-depth discussion of this episode, see Joseph Salerno’s Money, Sound and Unsound, Chapter 16, “Money and Gold in the 1920s and 1930s: An Austrian View”.) Applying the Austrian theory of the trade cycle, Ron Paul summarizes the Depression in 25 words:

Federal Reserve inflation during the 1920s, combined with economic interventionism by both Republican and Democratic administrations, caused and perpetuated the Great Depression of the 1930s.

One could hardly state the truth more concisely.

Many commentators are pointing out that the U.S. is declining into a police state, if it isn’t there already, but what some - especially the monetarists - overlook is the connection between honest money and freedom. For Ron Paul, freedom is “the ultimate justification for honest money.” And here he presents one of the most familiar quotes in libertarian literature, a non-Keynesian comment written by Keynes himself:

There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose.

Ron Paul was one of those one-in-a-million many years ago. Sit down with him some lunch hour and see why.

Finding Hope in a World of Perpetual War

2011-12-27T19:59:00.000-08:00

Because I'm free
Nothing's worrying me.
from
“Raindrops Keep Falling on My Head” by Hal David and Burt Bacharach

It takes time to steal a wise man’s freedom. He can’t be talked out of it. But he can be made to give it up for something higher. What’s higher? Why, his country, of course. What is his country? He doesn’t know exactly. Whatever it means it can’t omit the government. The government, he learns in government schools, is a vital part of the better things in life.

It started long ago, well before even the oldest among us were alive. Ruthless exploiters had taken over the economy. What was needed was regulation, we were told. Not market regulation - not the profit and loss kind, which only fed the cutthroats of the world - but government regulation, the kind that uses government ways. Free markets, we were assured, meant scoundrels were free to chew up innocents. With government regulations and the institutions they created we would have nirvana. The bad boys would be put in their place. The little guys would be the economy’s poster boys.

But there was more to it than this. The regulations would come within the framework of a new ideology. The bad boys wouldn’t want to be bad anymore. They would shed their shell of arrogant individualism for the enlightened beauty of selfless service. They would repudiate their exploitative ways. They would seek to cooperate. With whom? With the regulatory agencies. The big tycoons and their friends in government would partner to serve the little people.

Partners in war

What better example of this new partnership than the combined efforts of government and business leaders in getting the country into the 20th century’s two world wars. The little people were served by the honor of being conscripted into the military and sent overseas to kill as many of our enemies as possible - the enemies on the battlefields and on the seas, who were also conscripted and ordered to kill by their governments. And when the enemy finally surrendered most of the little guys came home. Many died, but Americans are told they perished for a value higher than themselves, their country, whatever that is exactly.

As for the big tycoons, they joined with important officials and ran the war economy by fiat - cheap credit, higher taxes, pro-war cheerleading, and ruthless suppression of anti-war sentiment. As fate would have it, some of the businesses made record high profits. Freedom was outlawed to a great extent but only because of the wars. Freedom cannot be tolerated during war, especially wars that could easily have been avoided. But when the wars ended the little people got most of their freedom back.

As long as people have freedom, they can push back when pushed and know that the law will stand by them. Except, as noted, during war. They can start a business, pursue a career, move wherever they want, buy and sell, get married, raise a family, travel - all without getting permission from the government. They can do anything except violate another person’s freedom. With the exception being war.

And that’s precisely the problem.

Perpetual war for perpetual control

War in the 21st century has achieved a unique status. War now is war without end.   Bringing the troops home from Iraq did not end the war on terror. The war on terror is a war on a concept. You cannot negotiate for peace with a concept. If you believe terror is your enemy, your enemies could be anywhere - the North Pole, a soccer game in Africa, or Dr. Seuss Day at your local elementary school. What is terror? Whatever the U.S. government declares it to be. Disagree and you could end up in a FEMA camp. Or dead. Who is to be the judge of whether one is committing an act of terror? The commander-in-chief. We are at war. The commander-in-chief runs the show in wartime.

There are three possible ways the war on terror can be stopped. Perhaps the most obvious - and too nuts to consider seriously - is for U.S. agents to kill so many people it would shake the pillars on which government rests. Since government by nature is a parasite, destroying its host - humanity’s net producers - would kill the parasite and end the war. There would be no one to produce and thus no one to tax, either directly or through monetary debauchery. Another way is by decree - a president such as Ron Paul says, “Game over.” An announcement such as that could be the equivalent of JFK announcing his intention to bring all U.S. troops home from Vietnam by the end of 1965 - with the same results. I trust Dr. Paul is fully aware of the risks and would manage them accordingly. Finally, the third way is through bankruptcy. A government that can’t pay its bills cannot prosecute a war.

Led by the Federal Reserve, the western world’s central banks are bringing down their governments by doing what governments so desperately want: loaning them more money. Money in this sense is the thin-air variety, the kind that confiscates wealth. Paper money will keep the charade going until the currency becomes so worthless no one uses it, not even the governments’ enforcers. With the currency destroyed the wars will stop, at least temporarily. At that point it’s anyone’s guess as to what will happen. The Keynesians could be in ascendance and force a new paper regime on us, or we could at last achieve monetary freedom and bring government under our control.

Ron Paul’s election would amount to a second American Revolution. Even with powerful forces opposing him he could, in time and with the aid of an uncompromising constituency, kill the Fed, kill the income tax, stop the wars, bring the troops home, and put government back in its cage. If this sounds impossible consider that it was once normal - a benevolent, prosperous normal. There would be pain but it would be the pain of a doctor administering a needed medicine to treat a deadly disease. The goal would be the restoration of health, rather than the perpetuation of government destruction.

Conclusion

Our greatest hope lies in the election of Ron Paul. If the establishment somehow keeps him out of the White House, we would have to wait for government to default on its debts and fight for freedom under those conditions.

My latest book, The Jolly Roger Dollar: An Introduction to Monetary Piracy, is available in Kindle format on Amazon.

Morgan Monetary Piracy

2011-12-08T18:17:00.000-08:00

When a major fractional-reserve breakdown occurred in 1907, Thomas Woodrow Wilson, then president of Princeton, endeared himself to the banking movement by declaring that "all this trouble could be averted if we appointed a committee of six or seven public-spirited men like J. P. Morgan to handle the affairs of our country." [Griffin, p. 448] Colonel Edward Mandell House, a close Morgan associate who served as shadow president when Wilson was elected to the White House, became the "unseen guardian angel of the [banking] bill" that emerged in 1913. [Griffin, p. 459]

Originally drafted at a secret meeting of banking elites at Morgan's hunting lodge on Jekyll Island, Georgia in November, 1910, the Glass-Owen Bill, as it was finally called, overwhelmingly passed the House and Senate on December 22, 1913 and was signed into law by Wilson the following day. [Griffin, p. 468]

The Fed began operations in November, 1914, with Morgan men occupying key positions. The new law gave the bankers what they wanted: a monopoly of the note issue. Commercial banks could only issue demand deposits redeemable in Fed notes or nominally in gold. National banks were compelled to join the System but had the legal option of becoming state banks, which were not required to join though many state banks chose to do so in 1917 when federal regulations were relaxed. [Rothbard. p. 112]

Critically, gold coin and bullion were moved further away from the public when member banks shipped their gold to the Fed in exchange for reserves. [Rothbard, p. 119]

The inflationary potential of the system is revealed by its structure: The Fed inflated by pyramiding on its gold, member banks by pyramiding on its reserves at the Fed, and nonmembers by pyramiding on its deposits at member banks. Furthermore, after a few years the Fed began withdrawing fully-backed U.S. Treasury gold certificates from circulation and substituting Federal Reserve Notes instead. With Fed notes requiring only 40 percent backing of gold certificates, more gold was available on which to pyramid reserves.

Also, with the advent of the Fed, reserve requirements for demand deposits were cut approximately in half, moving from a 21.1 percent average under the National Banking System to 11.6 percent, then lower still to 9.8 percent in June, 1917, after the U.S. had joined the war. Reserve requirements for time deposits dropped from the same 21.1 percent average to 5 percent, then 3 percent in 1917. Commercial banks developed a policy of shifting borrowers into time deposits to inflate even further. [Rothbard, pp. 238-239]

Thus, the country now had a government-privileged central bank called the Federal Reserve. By hoarding gold as its pyramidal base, the Fed was weaning the public from the use of gold coins, which would make them easier to confiscate later on. Through the Fed, member banks would be inflating at a uniform rate to avoid trouble with redemption demands.

Did this new system bring the big bankers in line, as it was supposed to? Did the Federal Reserve Act provide "a circulating medium absolutely safe," as the Report of the Comptroller of the Currency of 1914 stated?

Did the people running the banking cartel, almost all of whom were Morgan men, create a better world for most Americans?

Drawing on data from the National Bureau of Economic Research, [Ron] Paul shows that at least 18 "mathematically impossible" recessions have occurred since the Fed's creation.

The "Great" War

The ones who profited from World War I had little in common with the men who fought it. The fighting was left mostly to young conscripts, many millions of whom were killed or wounded. The ones who profited knew their way around Washington.

If monetary control had resided with the market instead of government, the war would not have been fought. Or if it had started, it would've ended much sooner. Sound money had to die before men could die in such large numbers.

When war got underway in August, 1914 the European belligerents immediately stopped redeeming their currencies in gold and started issuing debt. Needing a lucrative market for their bonds, England and France selected the House of Morgan in the U.S. to act as their sales agent. The money acquired from bond sales reverted back to Morgan to purchase war materials, rewarding him with commissions on both the sales and the acquisitions. Furthermore, many of the companies with which Morgan did business were part of the vast Morgan domain. The pacifist Morgan, who said, "Nobody could hate war more than I do," was raking in huge profits keeping the Allied war machines cranking out death and destruction overseas.

As G. Edward Griffin writes, referencing Ron Chernow's work on the House of Morgan,

Morgan offices at 23 Wall Street were mobbed by brokers and manufacturers seeking to cut a deal. The bank had to post guards at every door and at the partners' homes as well. Each month, Morgan presided over purchases which were equal to the gross national product of the entire world just one generation before. [Griffin, p. 236]

"The United States became the arsenal of the Entente [Ralph Raico writes]. Bound now by financial as well as sentimental ties to England, much of American big business worked in one way or another for the Allied cause. . . The Wall Street Journal and other organs of the business elite were noisily pro-British at every turn . . . ."

For Wall Street, peace was not an option. With the possibility of Allied bonds going into default, investors would incur a loss amounting to $1.5 billion. Commissions would be lost as well as the profits from selling war materials. The Treasury could make direct grants to the Allies but only if the U.S. abandoned its "neutrality" and entered the war. [Griffin, p. 239] Following Wilson's address to Congress, it did so officially on April 6, 1917.

The Morgan cash flow was thus saved. The U.S. extended the Allies credits – which reverted back to Morgan to pay off loans – income taxes surged, especially on the wealthy, and the Fed inflated. Between 1915 and 1920 the money supply and prices roughly doubled. Federal deficits were running a billion dollars a month by 1918, exceeding the annual federal budget before the war. . . .

Trusting government instead of the market

On March 12, 1933 President Roosevelt delivered his first fireside chat and told the American people the new dollar, which they could no longer redeem for gold coin, was money they could trust. "This currency is not fiat currency," he insisted. "It is issued only on adequate security – and every good bank has an abundance of such security."

He told his audience their confidence in the "readjustment of our financial system" was the most important element in its success – even, he said, "more important than gold." "Have faith," he pleaded. Do "not be stampeded by rumors or guesses."

On April 5, 1933 he issued Executive Order 6102, in which he told Americans that a month hence they would be prosecuted as felons if they still had gold coins in their possession. . . .

Alan Greenspan noted that in the two decades following the abandonment of the gold standard in 1933,

the consumer price index in the United States nearly doubled. And, in the four decades after that, prices quintupled. Monetary policy, unleashed from the constraint of domestic gold convertibility, had allowed a persistent overissuance of money. [Dec. 19, 2002]

In other words, with the dollar no longer defined as a weight of gold or other metal, the Fed's "monetary policy" depreciated its purchasing power by 91 percent in 60 years, from 1933-1993.

As recently as a decade ago, central bankers, having witnessed more than a half-century of chronic inflation, appeared to confirm that a fiat currency was inherently subject to excess.

Central bankers merely "witnessed" the "half-century of chronic inflation" that followed their "monetary policy."

Sixty years ago Garet Garrett wrote:

There is a long history of monetary experience. It tells us that government is at heart a counterfeiter and therefore cannot be trusted to control money, and that this is true of both autocratic and popular government. The record has been cumulative since the invention of money. Nevertheless it is not believed. [my emphasis]

It's as if "monetary delusions are, by some strange law of folly, recurring and incurable," he says. When sound money was in use its supply was limited - by nature and economic law, not by government planners. For that reason the state abolished it and stuck us with a money they can create at will. The state's money removes the idea of limited means, and since it's controlled by the state, it removes the idea of limiting the state. Given the federal influence on education, media, and just about everything, should we be surprised no one is on center stage calling the government a counterfeiter?

If there is to be a ruling elite, let them rise to their positions naturally, as entrepreneurs on a free market. Only in such an environment will those on top be on permanent probation, as it were, forever subject to the market's approval, because the customers who put them there always have the option of removing them when they fail to deliver.

The preceding, including links, is extracted from my new Kindle book, The Jolly Roger Dollar: An introduction to monetary piracy. Download a free sample.

This too will be a brutal passage

2011-11-26T07:14:00.000-08:00

"Is everything gonna be all right"?

This is the question Ron Holland raises in a recent article, and of course the only answer is, no one really knows. "My advice is to legally diversify much of your wealth outside your home country, currency and the political leeches running everything and then live your life." What else can we do? We can pay close attention to the big banks and the governments they fund.

1. "As a contrarian I believe if the PIIGS return to their national currencies, this could actually benefit both them and those northern European nations remaining in the euro. While a win/win situation for individual nations this would be catastrophic for the banking elites and they seldom lose and why I believe the banks and EU politicians will do their best to keep every nation in the EU."

2. "If you want to know what will happen in the US, just watch the mega-bank bailouts in Europe and the forced austerity measures on the already bankrupt PIIGS and their citizens, this is our future. Forget what the politicians promise, the financial experts say or the establishment news propaganda as the tide of wealth confiscation will also sweep the United States. The Federal Reserve and central bank cartels have created too much fiat money and the politicians have borrowed too much sovereign debt to buy votes and they will steal your wealth to prop up the governments, banking elites and political establish."

3. The Super Committee, as expected, has turned out to be a Super Farce. "Basically nothing will happen in reducing the budget and our debt will be continually downgraded."

4. Could a Middle East war jack oil prices up to $200 a barrel? If Israel gets its way, there will be war against Iran. Oil prices could soar. A revolution in Egypt could cause further havoc in the Middle East.

5. Governments will crack down hard on dissenters, as witnessed in Egypt and the United States. Police are no longer "peace officers." They are fast becoming militarized - even in the schools. Law and order will be reduced to obey or else.

6. "If the firewall around the sovereign debt of Italy fails then the entire continent will likely be thrown into a prolonged recession and debt crisis as rising interest rates and falling bond prices jump the Atlantic to the final western redoubt of stable government bonds, the United States. This is what everyone fears most, no place of safety in the West."

7. Was the MF Global Collapse "a deliberate attack against those making money speculating against the dollar and favoring gold?" As Lawrence Lepard wrote recently,

Personally, I have $90,000 at MF Global and I would like to have my honestly earned money returned. Unfortunately, the odds of that happening any time soon seem slim. In part because when MF Global entered bankruptcy the judge appointed a Trustee whose law firm has done substantial work for JP Morgan, a deeply interested party. We will probably never find out what happened here. . . .

I, for one, do not accept that Jon Corzine is stupid enough to lever up MF Global 40:1 and use the proceeds and customer money to bet on European sovereign debt. This was a hit, pure and simple. That is why there is no resolution to the problem.

And why a "hit"? Simple: To punish commodities speculators for betting against government debt and fiat money.

So, how in the world can we wake up feeling optimistic about the future? We can't. That's asking too much. The government parasite is too big and powerful. And the government is imploding, financially.

Holland: "My answer is to quit worrying, take sound preparations and then get on with your life. Every generation and nation have had their trials and tribulations, success and failures and although today looks eerily like the 1930’s, this too will pass."

True. But it will be a brutal passage for many.

Commodity money takes care of itself

2011-11-15T21:14:00.000-08:00

In his 1982 article, “Monetary Policy: Theory and Practice,” Nobel laureate Milton Friedman said that "if a domestic money consists of a commodity, a pure gold standard or cowrie bead standard, the principles of monetary policy are very simple. There aren’t any. The commodity money takes care of itself." [emphasis added]

It takes care of itself. Consider that thought for a moment, then ask yourself why we've had politically-appointed bureaucrats running the money and banking system since 1913. The "official" reason was to maintain the stability of the dollar and avoid the kind of panics that plagued the 19th century economy. But the dollar has all but dried up in value, and the crises today are threatening to bring the whole planet to its knees.

Does this mean Friedman was right, even if he was never gold's champion? Did commodity money keep economies in balance, both within and between nations?

Clearly, the views not only of central bankers but of their Keynesian supporters in the economics profession is, No, it didn't. Precious metal coins can't be printed, and accelerated printing - make that wildly accelerated printing - is needed at times to get banks and governments out of trouble.

Trying to run a fractional reserve banking system with gold as the medium is a real pain for politicians and bankers because of the handcuffs it imposes. To those at the top, gold's great flaw is its scarcity and lack of a "high elasticity of production," as Keynes informed us, meaning it can't be wished into existence. Since bankers fund governments in times of war, clearly gold is more than a mere inhibitor of profits; it represents a potential threat to national security. Anything that limits government action is regarded as a threat to its existence, and anything that threatens the existence of our masters threatens us, the argument goes.

Historically, of course, no government has allowed itself to be at the mercy of metal when it comes to waging war, at least not since paper IOUs began circulating for gold and silver. Belligerent governments in 1914 had little trouble going to war, putting gold on the sidelines as the slaughter mounted to settle the disagreements. But after the war there was still the lingering thought that gold somehow should still be money, and so the house of cards was restructured into something called the gold-exchange standard from 1926-1931. It took an ordinary recession amplified into a deep depression by government tampering to convince people that gold was unfit for societies run by a government - central bank alliance.

The hijacking of gold to serve special interests is one of the most consistent facts of human history. It's also one of the most difficult to believe because of what it implies about the leaders we've been trained to respect. Did Lincoln, Wilson, Roosevelt, Johnson, Bush, etc.. really lie us into war, then fund it with banker voodoo? We certainly won't learn that in government schools.

Sixty-three years ago Garet Garret told his readers:

There is a long history of monetary experience. It tells us that government is at heart a counterfeiter and therefore cannot be trusted to control money, and that this is true of both autocratic and popular government. The record has been cumulative since the invention of money. Nevertheless it is not believed. [emphasis added]

After the election of Ronald Reagan in late 1980 a joke circulated that went like this: "What's flat, black, and smokes?" Answer: Iran on Inauguration Day. Given the rhetoric in the air and the belligerent history of the past decade, the joke could be tomorrow's headline.

But not if politicians were handcuffed monetarily. Not if they couldn't get the Aladdin in charge of the Fed to fund their ambitions. Not if people start to believe that government counterfeiting is real and a threat to their lives.

My new Kindle ebook, The Jolly Roger Dollar: An Introduction to Monetary Piracy, addresses in detail the relationship between central banking and war, as well as many other issues, providing numerous hyperlinks to web resources as references for further reading.

Preface to "The Jolly Roger Dollar"

2011-11-08T09:01:00.000-08:00

The following is the preface to my forthcoming book, The Jolly Roger Dollar: An Introduction to Monetary Piracy, which will soon be available on Amazon.

Money and banking should be permanently divorced from the State.

Mankind should be divorced from the state but that’s going well beyond the scope of this little book. For now, at least, our goal should be to kill central banking wherever it exists and open up the market to alternative moneys - alternatives to the fiat paper issued by central banks. Market participants should be free to choose what they wish to use for money without government interference. Legal tender laws, since they constitute invasions of private property, should be repealed. For the same reason, banking should lose the legal privileges that protect the practice of fractional reserve lending. What is needed is freedom - freedom to conduct our monetary and banking affairs regulated only by private property rights and economic law.

The cover of this book was created to remind readers that the monetary and banking system we have is fundamentally an act of theft. It is monetary piracy because the currencies we swap for real goods and property titles are hijacked versions of the real thing. What constitutes the real thing, who did the hijacking, when, for what purpose, and the results it has brought are discussed in the remainder of this work.

The money we now carry in our pockets or checking accounts serves the purpose of providing a medium of exchange. If it didn’t banks would be in the wallpaper business. But it also serves to transfer wealth from those unconnected to the money creation process to those closely associated with it. This is why monetary policy is more accurately thought of as monetary piracy.

In 2010, Federal Reserve officials celebrated the centennial founding of the Fed at Jekyll Island, Georgia. The institution that was finally passed into law in 1913 was supposed to make financial crises and bad money virtual impossibilities. It has instead made crises and bad money permanent conditions. If freedom is not allowed to work its curative powers, the Fed and its currency-on-demand machine will continue to harm us.

Liberty is always on the defensive, having to bargain and plead with a state-backed ruling elite. We should not have to justify human freedom. The free market, centered as it is around consumer preferences, open competition, and private property rights, will keep us honest, to borrow an expression from my father’s era. If there is to be a ruling elite, let them rise to their positions naturally, as entrepreneurs on a free market. Only in such an environment will those on top be on permanent probation, forever subject to the market’s approval, because the customers who put them there always have the option of removing them when they fail to deliver.

For the most part this book is based on articles I wrote over the past decade. I have redacted some of the material to clarify certain points or update sources. If the same thoughts reappear now and again, I offer this explanation: the subject of money and banking is so corrupted with myth, misinformation, and half-truths that repetition is a necessary corrective. It strikes me as incontestable that, as Goethe is said to have observed,

Truth has to be repeated constantly, because Error also is being preached all the time, and not just by a few, but by the multitude.

George Ford Smith
Lawrenceville, GA USA
November, 2011

The Utah Monetary Declaration

2011-09-30T07:57:00.000-07:00

Earlier this year Utah passed a legal tender act authorizing the use of federally-minted gold and silver coins as money within the state. Seeking to expand this idea to other states, sound money advocates from across the country met at the University of Utah campus in Salt Lake City on Monday, September 26, 2011 and drafted a declaration they are urging people to circulate as far and wide as possible, but especially to their state representatives.

Special thanks to Ron Hera for making this issue public.

Here is the Utah Monetary Declaration:

Utah Monetary Declaration

WHEREAS, money, as a medium of exchange, a store of value, and a unit of measure promotes economic activity, growth and productivity by facilitating specialization and trade, the accumulation of wealth and its long-term investment, as well as accountability in setting prices, tracking progress, and settling accounts;
WHEREAS, natural money – precious metal coin – by virtue of its inherent qualities of recognizability, measurability, uniformity, divisibility, durability, portability and scarcity has reliably retained its purchasing power, notwithstanding periodic fluctuations, over the centuries and millennia of human history, serving as an effective medium of exchange and store of value often without any governmental declaration to require, legitimize or perpetuate its adoption and operation as such;
WHEREAS, sound money, by retaining stable purchasing power over time, best serves societal needs by substantially reducing the uncertainty of inflation risk for creditors and deflation risk for debtors as well as encouraging saving and investment among the general populace and benefiting the economic zone in which it circulates by stimulating the economy and by attracting foreign capital and commerce to the region;

WHEREAS, history attests that monopolistic monetary systems frequently engender currency debasement, resulting in serious consequences such as lost purchasing power, inequitable wealth redistributions, misallocation of productive resources, and chronic unemployment, and that, as the cornerstone of a free market and society, the right to choose, whether between suppliers of goods and services, political parties and candidates, or between alternative media of exchange, effectively promotes the general welfare;

WHEREAS, for the equal protection of all people, rich and poor, the open circulation of complementary and competing currencies should be fostered and promoted by every sovereign state, including those of The United States of America pursuant to their monetary powers (expressly reserved in article 1, § 10 and in the 10th amendment of the United States Constitution) to monetize gold and silver coin as an alternative, voluntary medium of exchange, and as an effective check and balance against debasement of the national currency by the national government which is constitutionally precluded from demonetizing state legal tender, through disparate tax treatment, discriminatory regulation, the threat of suppression and seizure, or otherwise;

NOW THEREFORE, we the undersigned hereby declare and affirm that:
1.     As an essential element of true liberty and of the pursuit of happiness in a free society, all people enjoy the inherent and unalienable right to lawfully acquire, hold and use as a medium of exchange whatever form or forms of money they may prefer, including especially gold and silver coin.
2.     All free and sovereign states bear the moral, political and legal obligation not only to refrain from debasing their own currencies (except under the most exigent circumstances) and from erecting barriers to the unfettered circulation of monies issued under the authority of their sovereign trading partners, but also to affirmatively defend and protect against fraud, counterfeiting, uttering, passing off, embezzlement, theft or neglect by requiring full transparency and accountability of all state chartered financial institutions.
3.     No tax liability nor any regulatory scheme promoting one form of money over another should apply to: (a) the holding of any form of money, in a financial institution or otherwise; (b) the exchange of one form of money for any other; or (c) the actual or imputed increase in the purchasing power of one form of money as compared to another.
4.     Except in the case of governmentally assessed taxes, fees, duties, imposts, excises, dues, fines or penalties, the authority of government should never be used to compel payment of any obligation, contract or private debt in any specific form of money inconsistent with the parties' written, verbal or implied agreement, or to frustrate the intent of contracting parties or impair contractual obligations by invalidating the application of a discount or surcharge agreed to be dependent upon the particular medium of exchange or method of payment employed.
5.     The extent and composition of a person's monetary holdings, including those on deposit with any financial institution, should not be subject to disclosure, search or seizure except upon adherence to due process safeguards such as requiring an adequate showing of probable cause to support the issuance by a court of competent jurisdiction of a lawful warrant or writ executed by legally authorized law enforcement officers.

We hereby urge business leaders, educators, members of the media, legislators, government officials as well as judicial and law enforcement officers to use their best combined efforts to reinstate and promote the legal and commercial framework necessary to establishing and maintaining well-functioning, sound monetary systems based on choice in currency.

The signatories hereto concur in the general principles expressed in the foregoing declaration notwithstanding specific reservations some may have as to how such principles should be interpreted and applied in practice.

Austrians Remove the Burden of Fear

2011-06-21T07:56:00.000-07:00

Bad ideas are sometimes the hardest to de-throne. It’s probably accurate to say most people think of money as the paper currency printed by governments. And it is money in the sense that it functions as a medium of exchange, but is it sound, is it vulnerable to inflation? Its very existence is evidence that it is, so why are so many people reluctant to switch to a money that isn’t?

There any many myths surrounding hard money currencies, and one of them is that money, both its nature and supply, is best left to the alleged guardian of our rights, the state. The fact that money came into existence on the market and its ultimate form and supply were determined by economic law, is disregarded. Money matters belong to the state, because the state, unlike the rest of us, is in a position to remove itself from market discipline. Since the state is necessary to our survival, the story goes, it cannot do its job unless it can control the growth of money. Money therefore must be of such a nature that its supply can grow in accordance with the orders of a state-appointed committee.

Even the classical gold standard was under control of the state. When that control proved too limited for those eager for war, it was abandoned. The gold standard did not fail. States failed to keep the gold standard.

When Keynes unloaded his General Theory on the world in 1936 it was a manifesto of state economic law. Free market economists would critique his work, but capitalism untethered scared the public. After 1929 it became the devil in fine suits. The fact that even top economists and industry leaders failed to see the Crash coming was especially unnerving.

Unaware of Austrian trade cycle theory, the public saw the market as an alluring evil, drawing people into its clutches with promises of riches then suddenly stripping them of their wealth. Fear, then, and not ideological persuasion, led them to reject the market as it existed in the 1920s, and along with it any notion that the unhampered market was self-regulating.

Prior to U.S. entry into World War I, the government and its media allies worked hard trying to convince Americans that Germany was a threat to civilization itself. No such effort was required to scare them about the Depression. Unlike the Germans who were “over there,” the Depression was very painfully over here.

Robert Higgs’ outstanding book, Neither Liberty Nor Safety: Fear, Ideology, and the Growth of Government, underscores the importance of widespread fear for government growth. In his opening chapter, “Fear: The Foundation of Every Government’s Power,” he contends that, contrary to the positions of Hume, Mises, Rothbard, and others, “public opinion is not the bedrock of government. Public opinion rests on something deeper and more primordial: fear.” After the Crash, the man in the street feared the market, and the governments of Hoover and FDR were eager to oblige. Gold, by then, had been corrupted enough to take the fall.

Whether the public still feared the market six years later was immaterial because neither major party offered a free market candidate for election. But Franklin Roosevelt knew the importance of keeping the public uneasy. In his State of the Union address of 1936, he told listeners that “in thirty-four months we have built up new instruments of public power. In the hands of a people's Government this power is wholesome and proper.” In hands under control of “an economic autocracy such power would provide shackles for the liberties of the people.” It’s difficult to believe Americans would fall for the notion of a wholesome “people’s government,” but the times were ripe for collectivist concepts as long as they were served up properly. FDR won re-election that year by a huge landslide.

It’s been said that FDR “saved” capitalism by co-opting the radical left into his New Deal. Without FDR, in other words, we would be living under full fascism instead of quasi-fascism. The free market was still useful, especially the name, but only if government-appointed bureaucrats regulated it, and never mind the contradiction. Exactly which regulations were needed was a big unknown, but as a way of emphasizing the new in New Deal, government would experiment until it found the right combination. How would they know if the system of “rugged individualism” that favored the big guys was adequately harnessed? By looking at the economy. Every trouble spot, for the government, acted like a magnet, the attraction of which was in direct proportion to the potential votes at stake.

The Highly Regulated “Free” Market

So successful were FDR and his successors in saving capitalism that finding something today that isn’t taxed, regulated, subsidized, cartelized, forbidden, mandated, or bound like a mummy in endless red tape, is a near impossibility. We can get a feel for the massive amount of regulations the market is subjected to on the federal level alone by browsing the electronic version of the Code of Federal Regulations, updated daily by the Office of the Federal Register. Obama, as president, has the whole economy in his hands. As Higgs points out, with passage of

the National Emergencies Act (1976) and the International Emergency Economic Powers Act (1977), nearly all economic liberties in this country exist at the sufferance of the president. If he decides to take over the economy, he possesses ample statutory power to do so. [p. 132]

What was once an economy with a strong element of freedom has become an economy of rent-seeking special interests, or as Nock expressed it, people using politics to gain an “uncompensated appropriation of wealth produced by others.” In accordance with Garet Garrett’s thesis of a revolution within the form and the word, the old names have been quite useful for getting people to look the wrong way, as we saw in 2008 when Bush announced he was “abandoning free market principles” to save the economy from collapse.

The “forgotten man” of the Depression, whether Sumner’s or FDR’s, was fearful, and considering the intellectual ammunition at his disposal it’s easy to see why. But what can one say about today? Should people be fearful of the economic mess governments have created? Not necessarily. More people are beginning to understand, if only vaguely, that “politics” has brought the roof down, and that a sound economy is impossible without something politically indifferent supporting it: sound money.

Austrian critics are debunking the claims about gold’s role in the Great Depression, pointing out that the straw-man gold exchange standard of the 1920s and early 1930s was another government solution destined to collapse. Ben Bernanke’s statement that “the longer that a country remained committed to gold, the deeper its depression and the later its recovery” is being seen as grossly misleading, at best.

(Earlier in his commentary Bernanke explained that the gold standard of the 1920s was a “reconstituted” version of the gold standard that had endured prior to World War I. Abandoning a pseudo gold standard makes sense only if an honest monetary system replaces it. As it was, the country moved from one controlled system to one much worse.)

Unlike the poor souls of the Depression era, anyone on planet earth who is wired and can read English can access a vast literature of economic theory and criticism. It would be impossible to deal with today’s misinformation without the many works of Austrian analysis, most of which are accessible to a lay audience. In their absence we could well be the hapless captives of an FDR admirer like Obama.

Who said it, when and where?

2011-06-14T17:39:00.000-07:00

Over the years I've accumulated a long list of quotes about money and banking extracted from online articles and books I've read. Unlike most other sites that post pithy remarks from famous authors, I include hyperlinks to their sources, so that anyone who wishes can not only verify a quote but, perhaps more importantly, read the context in which it was used. And unlike other sites, most of these quotes originated with today's financial writers and economists, writing from a perspective consistent with Austrian School principles -- people like Peter Schiff, Lew Rockwell, Steve Saville, Joseph Salerno, Gary North, Edwin Vieira, Judy Shelton, Frank Shostak, Ron Paul, and others, even Alan Greenspan. What these writers have in common is their respect for a market-sponsored commodity money, traditionally gold and silver coins.

My purpose in publishing these hyperlinked quotes is to draw attention to the vast literature of criticism that has arisen over the money and banking system we are forced to live under. The list is continually expanding as writers are continually writing. I ask that you excuse the many omissions such a list necessarily entails and hope you will alert me to insightful quotes I have missed.

I personally find these words of wisdom intellectually stimulating. Observations such as Ron Paul's "“Everything possible is done to prevent the fraud of the monetary system from being exposed to the masses who suffer from it" or Judy Shelton's "Inflation makes suckers out of savers" are not merely true, but critical to a full understanding of today's political institutions, especially when combined with Jorg Guido Hulsmann's contention that inflation is always an imposed increase in the money supply. They help keep me focused and fired up. I hope they will do the same for you.

Here's the list.

From "golden fetters" to handcuffed investors

2011-06-07T06:44:00.001-07:00

"The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves." - Alan Greenspan, 1966

An NBER working paper by Carmen Reinhart and Belen Sbrancia describes how Western governments in the post-world war economies unloaded their debts on credulous citizens through a policy of financial repression. Because it is politically palatable (as opposed to outright default, hyperinflation, or overt tax increases) some analysts expect governments to try it again. One part of it - inflation - is already well-underway. Financial repression means savers (investors) will be forced to pay leviathan's debts, whether they like it or not.

The particulars of financial repression vary, but the general scheme is this: Using its power to violate private property rights, the government makes the domestic investment community a "captive audience." With central bank cooperation it mandates low nominal interest rates along with a higher inflation rate, resulting in negative real interest rates. The latter transfers wealth from, say, pension funds to the government, thus liquidating a portion of its debt. Since the bond holders are "captive," there is no ready remedy for investors wishing to preserve or grow their wealth. If investors attempt an alternative such as purchasing physical precious metals, the government will either restrict those activities or abolish them. One way or another it will see that it has the "captives" needed to pay its bills.

The working paper contains language suggesting the authors have accepted several monetary fallacies. For example, we read:

It is important to stress that during the period after WWI the gold standard was still in place in many countries, which meant that monetary policy was subordinated to keep a given gold parity. In those cases, inflation was not a policy variable available to policymakers in the same way that it was after the adoption of fiat currencies.

The post-WWI gold standard was a straw version of the classical gold standard, which itself was under government control. Yet it's true, holders of Federal Reserve Notes could, in theory, swap them for gold coins prior to Roosevelt's heist in 1933. "Monetary policy" (inflation) was indeed subordinated to gold, which is why government got rid of it, and the government-spawned gold-exchange standard of the 1920s served to set up gold, intentionally or not, to take the fall when the roof collapsed. As economist Joesph Salerno writes,

The end of the classical liberal era in 1914 caused the removal from government central banks of the "golden handcuffs" of the genuine gold standard. Were these "golden handcuffs" still in place in the 1920’s, central banks would have been rigidly constrained from inflating their money supplies in the first place and the business cycle that culminated in the Great Depression would not have taken place.

The fractional-reserve scheme began to cave, as it always had, when too many people attempted to claim their property at the same time. It exposed the essential fraud of the banking system, though few economists see it that way. Which is not surprising, given that most of them, directly or indirectly, feed at the Fed's trough.

In another section of the NBER paper, Reinhart and Sbrancia tell us,

World War I and the suspension of convertibility and international gold shipments it brought, and, more generally, a variety of restrictions on cross border transactions were the first blows to the globalization of capital. Global capital markets recovered partially
during the roaring twenties, but the Great Depression, followed by World War II, put the final nails in the coffin of laissez faire banking.

This is truly shameful scholarship. Banking was in no sense "laissez-faire." The Federal Reserve Act of 1913, establishing a government-enforced banking cartel, erased the last traces of freedom in banking. As we read in Wikipedia,

[Laissez faire] describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies.

The Fed is a monopoly money producer established by the state. As such it is in violation of capitalism's private property foundation, and its very presence creates distortions in market activities. (See The Ethics of Money Production, p. 170) It seems that the further we move away from laissez-faire the more it is blamed for the catastrophes that follow in interventionism's wake.

Still, the NBER paper has great value. The authors (rather tediously) document how Western governments from 1945-1980 used repressive financial schemes to pay down their debt relative to GDP. The great appeal of such schemes is their transparency to the general public, making them virtually irresistible to today's debt-choked governments.

Reinhart and Rogoff's This Time is Different: Eight Centuries of Financial Folly spells it out this way:

Under financial repression, banks are vehicles that allow governments to squeeze more indirect tax revenue from citizens by monopolizing the entire savings and payment system. Governments force local residents to save in banks by giving them few, if any, other options. They then stuff debt into the banks via reserve requirements and other devices. This allows the government to finance a part of its debt at a very low interest rate; financial repression thus constitutes a form of taxation. Citizens put money into banks because there are few other safe places for their savings. Governments, in turn, pass regulations and restrictions to force the banks to relend the money to fund public debt. (from Prudent Investor Newsletters) (emphasis mine)

It's an effective racket, almost as effective as the central banking - debt monetization schemes that brought us to disaster's door in the first place.

The Fed and gas prices

2011-06-02T20:55:00.000-07:00

Last week Austrian economist Robert Murphy testified before Congress on the Fed's role in raising gasoline prices. Here is part of what he had to say:

After hitting record highs in the summer of 2008, the price of crude oil crashed amidst the financial crisis and slowdown in world economic growth. After hitting a low of $33.87 per barrel on December 19, 2008, the benchmark price of a Cushing oil futures contract had risen to $96.91 by May 17, 2011. . .

There are two main routes through which Fed policy could have influenced oil prices (quoted in dollars). First, the Fed could have caused the dollar to depreciate against other currencies. Second, the Fed could have raised the price of oil relative to most other goods and services. In the remainder of this written testimony, I will first lay out the extraordinary interventions of the Federal Reserve in the wake of the financial crisis, and then turn to each of the two possible connections to oil prices.

The Extraordinary Interventions of the Federal Reserve

The Federal Reserve has engaged in several extraordinary measures since 2007 to deal with the developing financial crisis. The Federal Reserve Bank of New York has compiled a timeline of these specific interventions. In addition to cutting the federal funds target interest rate to virtually zero, the Fed has expanded its balance sheet by purchasing mortgage-related derivatives and Treasury debt. . . .

[F]rom the creation of the Fed in late 1913 up until September 2008, the monetary base grew by a little more than $932 billion. From September 2008 until the present, the monetary base has grown by an additional $1,595 billion. The Federal Reserve has clearly embarked on unprecedented injections of liquidity into the financial system during the last few years. . .

Crude oil is traded on a world market. If the dollar falls against another currency, such as the euro, then either the euro-price of oil has to fall, or the dollar-price of oil has to rise, to eliminate arbitrage profits. From its peak in March 2009, the dollar has fallen 17 percent against other major currencies. Therefore, holding everything else constant, the dollar deprecation alone from early 2009 can explain a 20.5 percent increase in oil prices (quoted in dollars). [Emphasis added] Put differently, the oil price quoted in (say) Japanese yen has not risen as much since early 2009 as it has in U.S. dollars. . .

In addition to causing oil prices (quoted in dollars) to rise because of a weakening dollar, Federal Reserve policy may also affect oil prices more directly to the extent that it has caused investors to shift some of their wealth into commodities as an “inflation hedge.” For example, since September of 2008, gold and silver prices have increased some 80 percent and 210 percent, respectively. A certain segment of investors and the general public are very concerned about the future purchasing power of the dollar, and have invested in the precious metals to protect themselves from potentially large future price inflation.

More generally, some investors may be turning to other commodities (including oil) thinking that they will provide a relatively safe store of value, in the event that the dollar and other paper currencies weaken in the future. However, although this theory has a surface plausibility, in practice it is difficult to distinguish it from an explanation that oil’s price rise is due to “the fundamentals,” i.e. a genuine growth in end-user demand for oil relative to the increase in output. . .

Conclusion

If policymakers want to lower the price of gasoline for American consumers, they have several options. Most obvious, they could reduce federal and state gasoline taxes. They could also expedite the regulatory and permitting process for the development of offshore and other domestic oil resources. Finally, with respect to the Federal Reserve, to the extent that a tighter monetary policy would strengthen the dollar and reduce investor concern about future price inflation, we would see lower crude oil prices and hence lower gasoline prices. It is notoriously difficult though to estimate the quantitative impacts of these policies, because market prices are influenced by so many different factors.

That Other Invisible Hand

2011-05-26T18:03:00.000-07:00

As Adam Smith explains, the free market brings its wonders to the world by virtue of an invisible hand. Individuals cooperating under the international division of labor and seeking generally to satisfy their own wants end up promoting the general welfare, often without intending to or without realizing it.

Not to be outdone, government too has developed a systemic hand that is usually not seen. Unlike the market, when this hand moves, we lose. Through inflation, government snatches the market’s bounty for its own purposes, enervating our lives accordingly.

As a “stealth tax,” inflation requires no legislation to impose, no agency to collect, and diverts responsibility for damages onto politicians’ favorite whipping boys. It gives government the ability to buy almost anything for nothing, while creating endless problems that serve as a pretext for intervention. Inflation is the foundation of arrogant government and a prescription for our own demise.

Government inflates through its central bank, the Federal Reserve System. The Fed does many other things, but its foremost responsibility is to make the dollar buy less without leaving a trail.

Central banks such as the Fed are engines of inflation. Inflation is not some curse of capitalism; it is government policy, and it destroys capitalism . Inflation, economist Judy Shelton explains, chisels

away at the foundation of free markets and the laws of supply and demand. It distorts price signals, making retailers look like profiteers and deceiving workers into thinking their wages have gone up. It pushes families into higher income tax brackets without increasing their real consumption opportunities. [1]

Inflation is alluded to in the Fed’s charter, which calls on it “to furnish an elastic currency.” [2] Ben Bernanke once boasted about it: “[T]he U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” [3]

If this sounds like counterfeiting, be advised that almost no one sees it that way, especially government and Fed officials. According to the MSN Encarta dictionary, a counterfeiter is a person who makes “a copy of something, especially money, in order to defraud or deceive people.” Does that shoe fit the Fed? You decide.

The Fed’s inflation is often part of a process called “monetizing the federal debt,” a stultifying expression describing the hocus-pocus used to cover government’s deficits. In simple language, government puts ink on pieces of paper and calls them “securities,” in response to which the central bank puts ink on pieces of paper, calls it money, and buys the securities (though indirectly).

Like magic, the federal government has new money to spend – thanks to the tooth fairy known as the Fed.

When government imposed its central bank on us in 1913, pulling money from a hat was more of a challenge than it is now. If the Fed printed too many paper tickets, people would begin to wonder if the banking system could redeem them in gold on demand, as stated on the tickets. The fear of a bank run acted as a brake on inflation.

Since inflation is the increase in the money supply, gold imposed a limit on the amount of government debt the Fed could buy, which in turn put restrictions on government spending. Restrictions on government spending put restrictions on government expansion. If gold could be eliminated, those restrictions would go away.

When the Fed was being sold to the public, its advocates told people it would prevent panics and recessions by virtue of its power to provide money and cheap credit on demand. Eight years after its inception the country slid into a recession (1921), and after another eight years the stock market crashed. By the time a new administration took power in 1933, the economy was on its knees.

Assured the free market had failed them, a bewildered public turned to government for deliverance. On April 5, 1933 President Roosevelt issued Executive Order 6102, in which he ordered all persons to turn in their gold or face a possible 10-year prison sentence and a $10,000 fine. He gave them until April 28 to comply. [4] For this and countless other New Deal interventions, most historians regard Roosevelt as a demigod for “saving” capitalism.

After the gold heist, dollars were no longer redeemable, at least domestically. Foreigners were allowed (though not encouraged) to swap their dollars for gold until August 15, 1971, when President Nixon repudiated the government’s redemption obligations.

With gold completely severed from the dollar, our monetary system lost its best defense against political caprice. Not surprisingly, inflation rose to double digits by 1973. As economist Ludwig von Mises tells us, the gold standard makes the supply of money depend on the profitability of mining gold. [5] The pure fiat dollar faces no obstacles to its production, other than the integrity of government and Fed officials.

Nevertheless, spokespeople for government’s monetary monopoly assure us the proliferation of printing press dollars helps the economy. As such, the Fed doesn’t inflate, it accommodates. Inflation is a dirty word for its “accommodative monetary policies.” [6]

Fed Accommodation

What happens when the Fed “accommodates” us by increasing the stock of money?

First, it reduces the value of the dollar. More dollars means each one buys less, putting upward pressure on prices. Technology and improvements in production tend to push prices downward, but because of inflation fewer people can afford admission to the market’s bounty.

As a rough idea of how far the dollar has plummeted, $5,000 in 1913 had greater buying power than $110,000 in 2011. [7]

Second, a depreciating dollar discourages savings. Why put money away if it’s going to lose value? Instead, millions of investment neophytes put their funds in the stock market in an attempt to protect themselves against Fed printing presses. Has this been a successful hedge?

During the biggest bull market in history – 1984 to 2001 – the S&P rose 14.5 percent a year. But frequent trading by fund managers and high fees reduced the average rate of return to 4.2 percent annually. According to Vanguard group founder John Bogle, if you include the results of 2002, the average return from equities was under 3 percent per year – less than the inflation rate. [8]

Third, new injections of money spur a tinsel prosperity, and the Fed keeps injecting new money to feed the boom. With so much borrowing and spending, prices may rise even faster than the rate of currency inflation.

As the public broods over higher prices, a semantic shift takes place. Inflation comes to mean not an increase in the money supply, but the rise in prices itself. [9] Thus, businesses that charge higher prices become the villains, while government officials that threaten price controls are the avenging angels. Most people have no idea what the Fed does, so government can scapegoat business and appear to be defenders of the public weal. Nor do most people understand that price ceilings create shortages, by encouraging consumption and retarding production. Shortages, in turn, bring on government-imposed quotas, which foster corruption, black markets, and violent crime.

Fourth, as the influx of dollars drives prices higher some industries find themselves at a disadvantage with foreign competitors, tempting them to lobby Washington for protection from imports. Protective tariffs and quotas, of course, push prices up further, while sometimes sparking trade wars as other countries retaliate on American exports. And trade wars can lead to shooting wars.

In June, 1930, with the economy fighting the recession brought on by Fed monetary policies, President Hoover signed the Smoot-Hawley Tariff Act, raising tariff levels to the highest in U.S. history. Other countries immediately retaliated, markets shut down, and economic conditions worsened worldwide.

Fifth, inflation raises nominal incomes, pushing people into higher tax brackets, which increases government tax revenue. As people’s wealth goes out the window in depreciating dollars, taxes consume more of what remains.

Sixth, inflation shifts wealth from people who can’t or don’t know how to defend themselves from monetary destruction to those who can. As a simple example, a person living on a fixed income may find his buying power so depleted he sells a family heirloom to pay for an unanticipated expense. Or a bank that was part of the lending spree that helped drive prices skyward may foreclose on the homes of some of its borrowers, whose incomes were ravaged by monetary debauchery.

Seventh, the Fed’s “accommodative” measures keep people working much later in their careers because they cannot afford to live off their deteriorating pensions. Dollar depreciation is a huge reason why both husband and wife work in many families.

Eighth, because government often gets the new money first, it can fund controversial measures such as war and bailouts without drawing taxpayer ire. Government simply puts the funding on its charge card, prompting the alchemy of Fed debt monetization. We get the bill, of course, but this way it’s spread over everything else we buy, so we never see it itemized.

Ninth, because inflation has an uneven affect on prices, raising some faster or sooner than others, people have a hard time distinguishing illusion from reality. As cheap credit abounds, business people, investors, and cube dwellers hear the siren call of can’t-miss profit opportunities. Fortunes are made then lost, and companies that lose money find it harder to keep employees.

Tenth, government may pose as the savior of a group of voters they’ve impoverished, such as the elderly, by subsidizing their medical expenses. New entitlements create the need for more revenue, which fuels more inflation, pushing the dollar closer to a complete collapse.

Eleventh, as Mises observed, “under inflationary conditions, people acquire the habit of looking upon the government as an institution with limitless means at its disposal: the state, the government, can do anything.” [10] Through deficit spending the state will devour limited resources trying to maintain this illusion.

If gold is the barbarous relic its many detractors claim it is, we might expect the Fed’s fiat currency to be a better deal. But even former Fed Chairman Greenspan admits that it isn’t, telling a New York audience in 2002 that prices soared in the decades following the gold heist of 1933. [11]

Lord Keynes, the 20^th century’s guru of deficit spending, never spelled out how deficits should be financed, admitting only that increased taxation was not the answer. [12] Perhaps he had pangs of conscience about calling for inflation outright, since he knew it would destroy society in a manner that not one man in a million could diagnose. [13]

Political issues dominate the news, but how little we hear about the policies nurturing those issues, one of which is government’s power to confiscate wealth with the Fed’s invisible hand.

We should wipe every trace of the Federal Reserve from our lives and allow the market to freely choose our monetary standard, which most likely would be gold. In the meantime, the FOMC should be prohibited from purchasing any more “assets.”

References:

1 “Capitalism Needs a Sound-Money Foundation,” Judy Shelton, The Wall Street Journal, February 11, 2009, http://online.wsj.com/article/SB123440593696275773.html

2 The Federal Reserve Act, http://www.federalreserve.gov/generalinfo/fract/

3 Remarks by Governor Ben S. Bernanke, November 21, 2002, “Deflation: Making Sure “It” Doesn’t Happen Here,”

http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm

4 Presidential Executive Order 6102, http://www.the-privateer.com/1933-gold-confiscation.html

5 Mises, Ludwig von, Economic Freedom and Interventionism, http://www.mises.org/efandi/ch43.asp

6 Remarks by Governor Ben S. Bernanke, January 4, 2004, “Monetary Policy and the Economic Outlook: 2004,” http://www.federalreserve.gov/boarddocs/speeches/2004/20040104/default.htm

7 Bureau of Labor Statistics, http://www.bls.gov/data/inflation_calculator.htm

8 Bonner, William and Wiggin, Addison, Financial Reckoning Day: Surviving the Soft Depression of the 21^st Century, John Wiley & Sons, Hoboken, New Jersey, 2003. p. 245

9 Sennholz, Hans F., Age of Inflation, Western Islands, Belmont, Massachusetts, 1979. p. 69

10 Mises, Ludwig von, Economic Policy: Thoughts for Today and Tomorrow, Regnery Gateway, Washington, D.C., 1979, p. 66

11 Remarks by Chairman Alan Greenspan, December 19, 2002, “Issues for Monetary Policy,” http://www.federalreserve.gov/boarddocs/speeches/2002/20021219/default.htm

12 Hazlitt, Henry, “Keynesianism in a Nutshell,” 1982, http://www.thefreemanonline.org/columns/keynesianism-in-a-nutshell/

13 Keynes, John Maynard, Economic Consequences of the Peace, 1919, http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/keynes/peace.htm#Ch6

The Triumph of the Bankers

2011-05-24T09:42:00.000-07:00

In spite of its success in bestowing wealth on some men while funding an unnecessary war, [1] the National Banking System proved unsatisfactory to financial leaders. (See “Who Paid for the Civil War?”) Even with laws discouraging or restricting redemption, crises still occurred, and banks had to contract and deflate to survive. They were unable to inflate their way out of recession because they lacked a centralized lender who could provide them emergency funding. In addition, people, especially those who kept their savings outside the banking system, generally saw the notes that circulated as mere substitutes for the real thing, which financier Jay Cooke disparaged as a “musty [relic] of a bygone age,” a sentiment no doubt shared by a certain Scottish adventurer of the early 18th century. [2] Even if the system had a centralized lender it would still be subject to market retribution because people cannot arbitrarily create gold or silver coin. Money was still the most marketable commodity, rather than tickets or digits a centralized lender could issue at will, as the Fed does today. [3]

Another problem the national banks faced was the growing competition of private and state banks, neither of which had the national system’s high capital requirements. After 1873, total bank deposits were shifting in favor of non-national banks, as were clearings outside of New York. Furthermore, in 1887, St. Louis and Chicago bumped New York from its monopoly position as the base of the National Banking System’s inverted pyramid, and the two newcomers gained an alarming share of the percentage of total deposits of all three cities from 1880 to 1912. [4]

For bankers and government alike, the ideal monetary situation would seem to be a permanent state of specie suspension; even better would be a world in which everyone thought of money as only paper or deposits redeemable in paper, with specie relegated to the status of a collector’s item. The ideal in banking would be a government-enforced banking cartel that would ensure a uniform rate of monetary inflation to prevent currency drains and bank runs. With this power it could inflate its way out of recessions and bail out the big commercial banks as an emergency lender. And for its part, the government would have a reliable market for its debt in peacetime and war.

To bring this about the big bankers leveraged the rising tide of Progressive ideology. They began by hiring agents to promote the idea that banking crises were the result of inadequate regulation and an “inelastic” currency. As Rothbard has written, they formed an alliance with trained economists and other opinion-molders, many of whom already favored bureaucratic control of business from their exposure to Bismarckian statism while acquiring their doctorates in Germany. In the U.S., the National Civic Federation, founded in 1900, became the chief forum for promoting the “the new ideals of civic cooperation and social efficiency” for the purpose of “correcting” the rampant individualism of American society.

The academics were eager to use the state to license membership into their own professional organizations and thereby restrict competition and raise members’ incomes. They also saw themselves acquiring lucrative grants and filling vital government posts in running the bureaucracies. The public already had a deep distrust of Wall Street’s enormous concentration of wealth, and the task facing J. P. Morgan and other banking elites was to get opinion-molders to convince everyone that the big bankers needed public-spirited bureaucrats to reign in their power. [5]

Their push for a central bank, initiated by Morgan and Rockefeller forces, began following Republican William McKinley’s defeat of Democrat William Jennings Bryan in 1896 and ended with passage of the Federal Reserve Act in 1913. Bryan expunged the laissez-faire heritage of his party with his opposition to sound money and his proposal for a bold inflation of silver, an inflation that circumvented the banking system. In his famous “Cross of Gold” speech, Bryan said his party was “opposing the national bank currency” and stood “against the encroachments of aggregated wealth.” McKinley campaign manager Mark Hanna had no trouble raising a record amount of money from the Morgan-Rockefeller alliance to defeat Bryan.

Though the McKinley victory secured the gold standard, gold served mostly as a camouflage behind which the elite bankers could set up a system of inflation they controlled. [6]

A Banker’s Dream Comes True

When the next fractional-reserve breakdown occurred in 1907, Thomas Woodrow Wilson, then president of Princeton, endeared himself to the banking movement by declaring that “all this trouble could be averted if we appointed a committee of six or seven public-spirited men like J. P. Morgan to handle the affairs of our country.” [7] Colonel Edward Mandell House, a close Morgan associate who served as shadow president when Wilson was elected to the White House, became the “unseen guardian angel of the [banking] bill” that emerged in 1913. [8] Originally drafted at a secret meeting of banking elites at Morgan’s hunting lodge on Jekyll Island, Georgia in November, 1910, the Glass-Owen Bill, as it was finally called, overwhelmingly passed the House and Senate on December 22, 1913 and was signed into law by Wilson the following day. [9] The Fed began operations in November, 1914, with Morgan men occupying key positions.

The new law gave the bankers what they wanted: a monopoly of the note issue. Commercial banks could only issue demand deposits redeemable in Fed notes or nominally in gold. National banks were compelled to join the System but had the legal option of becoming state banks, which were not required to join though many state banks chose to do so in 1917 when federal regulations were relaxed. [10] Critically, gold coin and bullion were moved further away from the public when member banks shipped their gold to the Fed in exchange for reserves. [11]

The inflationary potential of the system is revealed by its structure: The Fed inflated by pyramiding on its gold, member banks by pyramiding on its reserves at the Fed, and nonmembers by pyramiding on its deposits at member banks. Furthermore, after a few years the Fed began withdrawing fully-backed U.S. Treasury gold certificates from circulation and substituting Federal Reserve Notes instead. With Fed notes requiring only 40 percent backing of gold certificates, more gold was available on which to pyramid reserves.

Also, with the advent of the Fed, reserve requirements for demand deposits were cut approximately in half, moving from a 21.1 percent average under the National Banking System to 11.6 percent, then lower still to 9.8 percent in June, 1917, after the U.S. had joined the war. Reserve requirements for time deposits dropped from the same 21.1 percent average to 5 percent, then 3 percent in 1917. Commercial banks developed a policy of shifting borrowers into time deposits to inflate even further. [12]

Thus, the country now had a government-privileged central bank called the Federal Reserve. By hoarding gold as its pyramidal base, the Fed was weaning the public from the use of gold coins, making them easier to confiscate later on. Through the Fed, member banks would be inflating at a uniform rate to avoid trouble with redemption demands.

Did this new system bring the big bankers in line? Did the Federal Reserve Act provide “a circulating medium absolutely safe,” as the Report of the Comptroller of the Currency of 1914 stated? How accurate was the report’s claim that

Under the operation of this law such financial and commercial crises, or "panics," as this country experienced in 1873, in 1893, and again in 1907, with their attendant misfortunes and prostrations, seem to be mathematically impossible. [13]

Did the Morgan men running the banking cartel create a better world for most Americans?

They indeed have if you believe wars, depressions, massive debt, depreciating helicopter money, and unaccountable government constitute improvements in our quality of life.

References:
1. See Thomas J. DiLorenzo, The Real Lincoln: A New Look at Abraham Lincoln, His Agenda, and an Unnecessary War, Prima Publishing, Roseville, CA, 2002
2. Murray N. Rothbard, The Mystery of Banking, Mises Institute, Auburn, AL, 2008, p. 230
3. Carl Menger, Principles of Economics, Mises Institute, Auburn, AL, 2007, pp. 257-260; Ludwig von Mises, The Theory of Money and Credit, The Foundation for Economic Education, Inc., Irvington-on-Hudson, New York, 1971, pp. 30-33.
4. Murray N. Rothbard, “The Federal Reserve as a Cartelization Device,” from Money in Crisis: The Federal Reserve, the Economy, and Monetary Reform, edited by Barry N. Siegel, San Francisco, CA: Pacific Institute for Public Policy Analysis, 1984, pp. 91-93
5. Murray N. Rothbard, The Case Against the Fed, Mises Institute, Auburn, AL, 1994, pp. 84-90
6. Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II, Mises Institute, Auburn, AL, 2002, p. 189
7. G. Edward Griffin, The Creature from Jekyll Island: A Second Look at the Federal Reserve, Fourth Edition, American Media, Westlake Village, CA, 2002, p. 448
8. Ibid, p. 459
9. Ibid., p. 468
10. Rothbard, Money in Crisis, p. 112
11. The Case Against the Fed, p. 119
12. Mystery, pp. 238-239
13. Annual Report of the Comptroller of the Currency, December 7, 1914, Vol. 1, p. 10

Central banking quicksand

2011-05-20T11:09:00.000-07:00

In 1903, a lawyer in Germany took out an insurance policy and made payments on it faithfully. When the policy came due in 20 years he cashed it in and bought a single loaf of bread with the proceeds. [1] He was fortunate. If he had waited a few days longer, the money he received would have bought no more than a few crumbs.

Germany had been on the usual fractional reserve gold standard prior to World War I, with the Reichsbank, its central bank, expanding the money supply at a “mild” 1-2 percent inflation rate. When war broke out in 1914, government followed the standard policy of deficit spending rather than attempting to raise taxes. The Reichsbank’s role was to monetize the government debt – that is, pay for new treasury obligations by printing more money.

At the war’s end the number of German marks in circulation had quadrupled and prices had gone up 140 percent. [2] But the mark was no worse off than the currencies of other belligerents. It was weaker than the American dollar but stronger than the French franc, and about the same as the British pound.

Yet five years later, by December, 1923, Germans were paying trillions of marks for ordinary goods, an almost inconceivable situation in a country with a long tradition of education and scholarship, where Americans had once gone to study for advanced degrees. What happened?

In addition to carrying the economic burdens of the Armistice, the socialist German government had pushed ahead with state funding of health, education, and welfare. It also had to deal with astronomical deficits from its nationalized industries and demobilization expenses from the war. From 1914 to 1923, its tax revenues paid for only 15 percent of its expenses; by October, 1923 tax receipts covered only 0.8 percent of government expenditures.

Government’s choices throughout were either to cut spending, borrow from the public, raise taxes, or print more money. It pursued the latter policy, while vehemently denying it was inflating the money supply. To the government and its supporters, its paper inflation was a consequence, not a cause. The real culprit in Germany’s monetary meltdown were the impossible reparation payments and other burdens imposed by the Treaty of Versailles. Eventually, currency speculators shared the blame, but the official press never placed responsibility for the inflation on the institution actually printing the money.

In a fitting twist of justice, the government’s inflationary policies , in destroying taxable wealth, reduced its revenue. With the mark collapsing, mortgages, bonds, annuities, pensions and the like were virtually worthless, and tax authorities had almost nothing to tax. Savers, especially rich ones, had moved their savings to foreign bank accounts and foreign currencies in a massive “flight of capital” to escape the plunder. With inflation increasing hourly, overall tax revenue fell simply due to the time lapse between taxable transactions and tax payments. Meanwhile, government expenditures accelerated, pushing deficits higher. Government printed ever greater quantities of money to meet its liabilities, which created even higher deficits . Like a man caught in quicksand, each frantic struggle only moved it closer to the end.

As the hyperinflation accelerated people spent money as fast as they got it, on the most durable goods they could afford. The “flight of capital” was augmented and replaced by the “flight from currency.” Factory workers were paid twice daily in large bundles of cash, which their spouses or relatives took and rushed off to spend. People began by buying diamonds, gold, pianos, antique furniture, land and later bought just about anything to get rid of the currency. They gradually switched from money transactions to barter. Desperate people began to steal what they couldn’t obtain in trade. Gasoline was siphoned from cars. Prostitutes of both sexes walked the streets of Berlin. But some of the young people found the atmosphere exhilarating. Their parents had taught them to work hard and save, but clearly this was a time to spend and pay close attention to politics.

The Yugoslavia Meltdown

The German hyperinflation was one of many runaway inflations of the last century. Hungary, China, Bolivia, Argentina, Peru, Brazil, Russia, Austria, Poland, Greece, and the Ukraine, among others, all experienced hyperinflations in varying degrees. But the worst case of monetary destruction happened in Yugoslavia from 1993-1994. [3]

The Communist Party running the country had been financing government projects with printing press money, a tradition it inherited from the Tito regime but which it carried to a far greater degree. The government ran a network of stores that were supposed to sell goods below market prices, but the stores rarely had anything to sell. The government’s gasoline stations eventually closed, leaving people dealing with roadside vendors who sold gas at $8 a gallon from plastic cans sitting on the hoods of their cars. Car owners turned to public transportation but the Belgrade transit authority only had the funds to run 500 of its 1200 buses. The buses were so overcrowded the ticket collectors couldn’t get aboard to collect fares.

The entire infrastructure was in shambles. Streets were full of potholes, elevators stopped working, construction projects shut down. Unemployment rose to over 30 percent. The government tried to halt rising prices with price controls, but food producers refused to sell their products to the government at its artificially low prices.

The government modified its edict by requiring merchants to file paperwork every time they wanted to raise prices. But inflation got worse. Merchants increased their prices in bigger increments so they wouldn’t have to file forms again so soon. In October, 1993, in an effort to halt soaring prices, the government issued a new currency unit, the dinar, worth one million of the old dinars. By early 1995 prices had increased by five quadrillion (5,000,000,000,000,000) percent.

As in other super-inflated economies, people adopted new methods of survival. Thieves robbed hospitals and clinics of needed medicines then sold them in front of the places they robbed. People postponed paying their bills as long as possible so they could pay them in near-worthless currency. Postmen were responsible for collecting telephone bills but one postman found it cheaper to pay the bills of 780 customers himself rather than try to collect payment.

Fractional Reserve Banking

Hidden in all this gruesome detail is a quiet concept mentioned at the beginning, fractional reserve banking. Fractional reserve banking is the practice of creating money out of thin air, by expanding credit beyond what a bank has in cash holdings. It is the modern method of inflation.

It has its roots in the West in mid-17^th century England, where merchants began storing their gold with private goldsmiths, who would give them receipts in exchange. The receipts began to function as money substitutes, being used in daily transactions as if they were gold. People accepted the receipts because they had unfailing trust that the goldsmiths could redeem them on demand for the gold they represented.

Because of the convenience paper offered, people got into the habit of not redeeming the receipts. The goldsmiths noticed this. They always had gold on deposit that no one was claiming. Eventually they decided to lend out fake receipts for which no gold had been deposited. As long as they didn’t get too grabby and issue too many counterfeit receipts, they could usually meet the occasional demands for redemption.

The fake receipts circulated side-by-side with legitimate deposit receipts and gold coins. Not only was the issue of counterfeit receipts fraudulent, it also inflated the money supply.

Yet there were almost no laws to incriminate the goldsmiths – and the deposit banks that followed – for the practice of printing fake deposit receipts. The first test cases didn’t come until the early 19^th century in England, which ruled in favor of the banks. Though one of the counsel argued that “a banker is rather a bailee of his customer’s funds than his debtor,” the presiding judge (“Master of the Rolls”), Sir William Grant, ruled that no, that wasn’t true; money deposited with a banker becomes “immediately part of his general assets; and he is merely a debtor for the amount.” [4]

In 1848, in Foley v. Hill and Others, the English judge Lord Cottenham went further, saying that “the money placed in the custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases . . . he is not bound to keep it or deal with it as the property of his principal.” Thus, if banks are unable to meet their obligation to redeem on demand, they become merely a “legitimate insolvent instead of an embezzler,” as Murray Rothbard observes. [5]

American banking law has followed Foley faithfully in most key respects. Rothbard concludes: “To Foley and the previous decisions must be ascribed the major share of the blame for our fraudulent system of fractional reserve banking and for the disastrous inflations of the past two centuries.” [6]

Banks, of course, can pyramid fake receipts or credit on top of any kind of money – whether it’s gold, government fiat paper, or something more exotic. But their practice is perpetually shaky because they always have more liabilities than assets, more notes or deposits outstanding than they can redeem in cash. They are subject not only to depositor bank runs, but to daily demands for redemption from other banks.

The free market is very unforgiving of fractional reserve banking.

Central Banking Institutionalizes the Fraud

The ability to create money out of thin air is very heady – and enticing, if you’re the government in need of revenue. With banks periodically facing insolvency from their inflationary practices, they were in need of government-backed assistance. It is not surprising, then, that banks and government worked out a deal. Government gave banks the laws they needed in exchange for which banks would buy government debt – with money created from nothing.

The institution that made everything tidy and discreet for both parties was the central bank, which in the U.S. is called the Federal Reserve System.

A major function of the Fed is to monetize government deficits, thus avoiding the risky business of raising taxes or reducing spending. The Federal Reserve Act, passed by a short-handed Congress on December 23, 1913, endowed the Fed with a deeply inflationary structure so it could expand the money supply at a controlled, even pace at whatever level it wished.

Because of the Fed, the U.S. had the funds to send our boys into the slaughterhouse known as World War I. A little later it sponsored the boom that led to the Crash. Since it began operations in 1914, it has ripped away 95 percent of the value of the dollar.

Most people view the Fed as our tireless public servant promoting a stable economy and fighting the curse of inflation. The truth is the exact opposite. The Fed is solely responsible for inflation and has caused economic havoc since its inception. It has created what Rothbard describes as a “chronic, permanent inflation problem, a problem which, if unchecked, is bound to accelerate eventually into the fearful destruction of the currency known as runaway inflation.” [7]

References

1 The German Hyperinflation, 1923, excerpt from Paper Money by "Adam Smith," (George J.W. Goodman), pp. 57-62,

2 Hyperinflation in Germany, Hans Sennholz

3 Episodes of Hyperinflation, Thayer Watkins

4 Rothbard, Murray N., The Mystery of Banking, p. 61

5 Ibid., p. 61

6 Ibid., p. 62

7 Ibid., p. 108

Inflation, government's WMD

2011-05-17T10:21:00.000-07:00

Jorg Guido Hulsmann's 2008 masterpiece The Ethics of Money Production exposes the full extent of the monetary phenomena the Federal Reserve is solely responsible for creating. Gauging inflation on the basis of a price index is vastly misleading. Below is an excerpt from my review of Hulsmann's book:

Inflation’s legacy

Inflation’s standard definition is too narrow to provide an appreciation of the extent of its harm; it is far more than a deterioration of the currency’s purchasing power. It’s also much more than a “hidden tax.” Government’s perennial fiat inflation is a subtle WMD. Consider:

1. In funding wars, it allows government to ignore the fiscal resistance of its citizens.

2. It benefits the central government at the expense of secondary and tertiary governments.

3. It turns moral hazard and irresponsibility into an institution, and guarantees recurring economic crises.

4. By making credit cheap, it encourages businesses to finance their ventures through borrowing rather than equity. Because of market competition, few firms can resist the offer of low credit, making them more dependent on banks. As Pius XI noted in 1931, it puts a dictatorship in the hands of lenders who regulate the life-blood of the entire economic system.

5. Fiat inflation drives people to invest in capital markets where few will have the expertise, time, and inclination to monitor their investments properly. In former times people could save simply by holding gold and silver coins.

6. Under a perennially increasing price level, the average citizen finds his best strategy is personal debt, which weakens self-reliance and independence.

7. Under chronic fiat inflation, people will tend to choose their employment based on monetary returns. Money then becomes the prime or only consideration for personal happiness.

8. Perennial inflation deteriorates product quality. Industries that cannot overcompensate inflation with technological innovation turn to other means, such as producing an inferior product under the same name. Lying, which is bound up with fractional-reserve banking, tends to spread like a cancer over the rest of society.

9. By fueling the exponential growth of the welfare state, fiat inflation fosters the decline of the family. Families become degraded into “small production units that share utility bills, cars, refrigerators, and especially the tax bill.” The welfare state drives the family and private charities out of the “welfare market.”

As Hulsmann concludes, “fiat inflation is a juggernaut of social, economic, cultural, and spiritual destruction.”

Selling Fraud

2011-05-15T09:50:00.000-07:00

By most accounts, selling a central bank to an educated populace should be a daunting public relations task, if not an impossible one. Think of trying to convince the Pope to swear allegiance to the devil or getting a politician to resign and get a productive job. Yet selling lies, even Big Lies, is an area where power lovers have excelled throughout history with unsurpassed brilliance. Even after the Great Meltdown of 2008, which came as a shock to everyone except those annoying Austrians, the Fed is still regarded as our economic stabilizer and savior, the pacemaker keeping the capitalist system alive. Bernanke is not the villain, as a handful of troublemakers claim; he’s da Man, the Person of the Year in 2009. And it was a well-deserved award - it takes genius to dream up TARPS, TAFS, and massive taxpayer-provided bailouts to keep the house of cards standing.

Central banking is regarded as a natural process of evolution in the life-cycle of capitalist economies. As capitalism begins to collapse from inherent flaws, so interventionists of all stripes argue, it becomes necessary for the pristine state to step in to keep it from cannibalizing itself. One such intervention, invented by an Englishman, is the creation of a central bank to provide just the right amount of money for an economy to grow at the right pace. Once established, the need for a central bank is never again questioned, at least not by state-trained economists - central banking is as necessary and permanent as the sun in the sky.

Oh, sure, we find the occasional anomalies like the central bank of Zimbabwe and the two dozen or so central banks of the twentieth century that hyperinflated their economies into temporary barter societies and wiped out the savings of millions. But anyone can make mistakes, even central bankers. Imagine how much more Zimbabweans would have suffered if their central bank hadn’t raised the price of a hamburger to fifteen million dollars. Imagine if they'd developed a money on their own, as people once did in the Dark Ages of economic development -- or during the emerging prosperity following the central bank’s breakdown.

Recall for a moment what a central bank does. As a state-sanctioned banking cartel, it keeps alive the fraud of fractional-reserve banking by getting its member banks to create money out of nothing at the same rate. By keeping monetary inflation relatively uniform, the chances are slim that any one bank will experience an embarrassing currency drain and be forced to close its doors. Of course, by insulating bankers from market discipline, the boom period can last much longer than it would without central bank protection. A lengthy boom instills confidence in the claim that this time we’ve entered a new era of permanent prosperity. Debt is our friend, risk is passé, and saving is the enemy. All we have to do is believe, borrow, and spend to keep the good times alive. When the bust comes and the formerly attractive risks suddenly become a weight to bear, the big bank can team with government to intervene massively, as we’ve seen - and are paying for. Together, the team will prop up the biggest losers and start the process all over again. The little guys who saw their 401Ks shrink now see them come alive again. They feel thankful. Their attention turns to more pressing problems than the existence of the banking cartel. They come to accept things they feel powerless to change.

In 2006 Ron Paul told the House: “Everything possible is done to prevent the fraud of the monetary system from being exposed to the masses who suffer from it.“ The fraudulent system benefits the power-holders at the expense of everyone else. Those others will never get it until they learn to challenge the Establishment’s propaganda.

Will Krugman be the next pilot?

2011-04-29T11:23:00.000-07:00

In yesterday's column, "The Intimidated Fed," Paul Krugman bemoans the continuing plight of the unemployed and underemployed. Krugman is upset that Bernanke will not be flying his helicopter as much after June, bringing to a temporary end his massive monthly increases of the monetary base. At the Fed's first-ever press conference the day before, Bernanke, Krugman says, had argued that the program of monetary inflation called QE 2 "has been effective." Why not do more?, Krugman wants to know.

Perhaps because QE 2 has not been effective. Along with unemployment, business loans have been rising very slowly since QE 2 kicked in, and consumer loans have continued to fall. Might there be a causal connection among those facts? As Ron Paul has written,

The only success the Fed has had in maintaining full employment has been on Wall Street, where it props up crony banks and investment houses to protect them from going bankrupt as they should. Instead they survive to malinvest another day while their executives enjoy jackpot bonuses.

But therein lies the problem, according to Krugman - the "inflationista" Ron Paul, whose unflagging concern about inflation, corruption, debt, and government growth is intimidating the Fed and costing the country precious jobs. The underlying premise, it appears, is that the Fed can print jobs and prosperity. Of course, if that were true where would poverty be?

But inflation, to Krugman and Bernanke, is reflected in the government-managed CPI, and by that measure it's running low. Okay, so gas prices are soaring, but that can be explained by emerging markets and Middle East unrest. It can also be explained by the availability of more dollars for the trading of oil on international markets, though neither Bernanke nor Krugman mentioned this.

With CPI inflation low and unemployment high, Krugman finds it "deeply disheartening" that Bernanke is showing signs of cutting back on his helicopter drops. What's a little inflation compared to major unemployment? Bernanke knows better than to back off, so Krugman concludes he's scared of Ron Paul.

Perhaps Bernanke is afraid of something else, too, such as his own judgment. In spite of the accolades he's received, Bernanke still remembers his blindness about the housing debacle. All was well, he said, as the rafters above his head were splintering.

The housing mania was not something a trained economist should easily miss. It would be akin to a meteorologist missing a Cat Five hurricane. A man of his intelligence does not forget blunders of that magnitude. Nor do the many Fed watchers.

Krugman, though, is unmoved by Bernanke's gross negligence. Given that the Fed's primary purpose is to inflate, and given Krugman's utter fearlessness about confronting the inflationistas, he might be ready to take the pilot's seat if Bernanke has developed a fear of flying.

Can the economy withstand such a shock?

Gas Prices are Lower

2011-04-28T07:30:00.000-07:00

At the first-ever Fed press conference yesterday (thanks Ron Paul), Ben Bernanke referred to inflation only in the context of the managed Consumer Price Index. Never once did he utter the word "gold." Investors noticed the omission and expressed their concern acccordingly.

From the NY Sun, April 27, 2011:

Even as the chairman was speaking, the economist David Malpass pointed out in a telegram this afternoon, the dollar lost value, dropping to a 1,529^th of an ounce of gold. Yet not a word about gold at the press conference. Call it the dog that didn’t bark. The chairman spoke of the high cost of gas without once acknowledging that the price of gasoline is lower in value — meaning it takes less gold or silver to buy it — than it did at, say, the start of President Obama’s term. The president seemed oblivious to this irony when he spoke in his radio address over the weekend of how there is no “silver bullet” that will deal with the soaring gas prices.

What the silver price actual shows is that it’s not the gasoline that’s going up but the dollar that’s going down. So it’s just bizarre for Mr. Bernanke to be talking of a “strong and stable” dollar, which he did, Mr. Malpass pointed out, three times in the press conference. The result is what Mr. Malpass called “a disconnect between the rhetoric and the policy” because “the dollar is neither strong nor stable and the U.S. hasn’t supported it.” Said Mr. Malpass, a former official under President Reagan: “For years, Treasury and the Fed have acted as if the current value of the dollar qualifies as “strong and stable.” This severely undercuts the credibility of Treasury and the Fed on the dollar.”

The Case Against Gold

2011-04-27T11:50:00.000-07:00

What do critics say about gold as money? Here are a few of their claims, along with replies.

1. There’s not enough of it.

The total supply of money is not critical; changes in the supply are. In a growing economy with a constant money supply prices will tend to decline, as the same dollars bid against a rising level of productivity. The U.S. experienced this in the latter half of the 19th century, one of the most prosperous periods in history. Lower prices brings the benefits of prosperity to more people, especially those in low-income brackets.

2. It’s expensive to produce, and after it’s mined and minted it mostly sits idle in vaults. What's the point?

It makes it difficult and expensive for government to inflate the money supply.

3. It limits the spending proclivities of governments.

What the government doesn’t spend, we can. Or better, we can save and invest. The less government spends, the less it grows, and the more liberty we have.

4. Most economists - the “experts” - disparage gold.

Most economists are tax feeders.

5. It places severe limits on authorities in charge of monetary policy.

These are the same authorities who created and helped prolong the Great Depression and whose descendants created the most recent crisis and are busy building the next one.

6. The gold standard was one of the primary causes of the Great Depression.

It was the absence of a genuine gold standard that ignited and prolonged the Depression .

7. People find it more convenient to carry paper money than coins.

A genuine gold standard is compatible with money substitutes.

8. Money is too crucial for prosperity to allow policy to be determined by individual choices rather than government

See point 5.

9. Gold production cannot keep pace with productivity growth, and therefore we would be subject to devastating deflation.

See point 1.

Capes for the Unemployed

2011-04-26T18:52:00.000-07:00

Government has all kinds of wonderful ways for fighting unemployment, don't you know? With over one million Floridians currently out of work, Workforce Central Florida has launched a $73,000 tax-funded campaign called "Cape-A-Bility Challenge" that includes spending $14,200 to hand out roughly 6,000 red superhero capes to the unemployed and another $2,300 on foam cutouts of "Dr. Evil Unemployment." Executive Director of Workforce Central Florida, Gary Earl, defended the campaign with these words:

The plight of the unemployed is why we exist, and to help them, we have to engage them, introduce them to our services and connect them with job opportunities.

And Ayn Rand was accused of exaggerating the depravity of her villains.

Hoppe on Central Banking

2011-04-24T07:57:00.000-07:00

On Sunday March 27, 2011 The Daily Bell published an exclusive interview with Hans-Hermann Hoppe, professor emeritus of economics at UNLV. During the interview he addressed many topics. Here are some of his comments on central banking:

More paper money cannot make a society richer, of course — it is just more printed paper. Otherwise, why is it that there are still poor countries and poor people around? But more money makes its monopolistic producer (the central bank) and its earliest recipients (the government and big, government-connected banks and their major clients) richer at the expense of making the money's late and latest receivers poorer.

Thanks to the central banks' unlimited money-printing power, governments can run ever-higher budget deficits and pile up ever more debt to finance otherwise impossible wars, hot and cold, abroad and at home, and engage in an endless stream of otherwise unthinkable boondoggles and adventures. Thanks to the central bank, most "monetary experts" and "leading macro-economists" can, by putting them on the payroll, be turned into government propagandists "explaining," like alchemists, how stones (paper) can be turned into bread (wealth).

Garet Garrett's Review of Hazlitt's Primer

2011-03-16T07:41:00.000-07:00

Garrett's review of Henry Hazlitt's Economics in One Lesson appeared in the October, 1946 issue of American Affairs, My eternal gratitude to Mises Institute for making this and countless other free market publications available for free download.

Garrett's position reminds me of Ayn Rand's comment that people do not accept collectivism because the accept bad economics; they accept bad economics because they accept collectivism.

Economic Fallacy

HERE is Henry Hazlitt exercising his gift for lucidity to produce a book entitled *Economics in One Lesson. If there were such a book this would be it. It deals with those "economic fallacies that are at last so prevalent that they have almost become new orthodoxy,"—to the point that now there is not a major government in the world whose economic policies are not influenced or in fact determined by them. He undertakes to expose them by analysis and reason and to chase them into the ground.

But in the first place, how did they get abroad in this garb of respectability? How is their world-wide vogue to be explained? Mr. Hazlitt's explanation is that people have lost the habit of thinking beyond the present. They have been beguiled by the saying, "In the long run we are all dead." They want everything today; let tomorrow take care of itself. This will hardly answer the question. As one who wrote a book on thinking as a science Mr. Hazlitt would instantly concede that the behavior of the human mind has not changed in 2,000 years, whereas what he is talking about, namely, the rise of economic fallacy to a plane of orthodoxy, displacing axioms that had been unchallenged since Adam Smith, is an event of the last thirty years. Therefore, the probability is that it is a political event, with little or no relation to economic science or to the art of thinking.

For whom is this one lesson intended? If it is intended for those who believe, or who may be persuaded by argument to believe, in free competition as the right regulating principle for a free society, and the only regulating principle that may be trusted to keep it free, then it is wonderfully clear and still as sound as when Harriet Martineau was writing economics for children in Great Britain early in the last century.

But if it is intended for those who believe in another way of organizing society they will say, and say rightly, that there is no such thing as an economic system. There is first a political system and then the economics of it. So you may have a totalitarian system and its economics or a system of free private enterprise and the economics for that, or anything in between. Mr. Hazlitt says, in italics:

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Very good. But you may define economics also as the study of how people produce, exchange and consume wealth; and when you have so defined it you see at once that when, as in a free political system, people feed and clothe and house themselves, provide their own security, pursue their own profit and absorb their own losses, the economic canons will be very different from those of a totalitarian system in which people are fed and clothed and housed and minded in their work and in their play, by the omnipotent state.

Every fallacy that Mr. Hazlitt identifies is a fallacy on his own premise, and his own premise, as he says, is that of the traditional or classical economist, believing wholly in a free political system. If you change the premise, then what was a fallacy from that point of view may become logical from another.

One chapter is on the mirage of inflation. "The ardor for inflation," he says, "never dies. It would almost seem as if no country is capable of profiting from the experience of another and no generation of learning from the sufferings of its forebears." And this he thinks is owing to the fact that people will not consider the secondary consequences; they will look only at the "benefits for a short time to favored groups,"—benefits which are at the expense of others even while they are visible, and at the expense of all when the reckoning comes.

That is all true. But suppose you have those— and we do have them—who regard debasement of the currency as a weapon against the system of free capitalism which they wish to see destroyed. From that point of view is inflation logical or illogical?

In the same way and upon his own premise he comes to the subject of government debt. The fallacy there is the idea that government spending creates wealth. He shows, of course, that what the government spends it must first take, wherefore somebody has less to spend in proportion as the government has more; furthermore, that government debt can represent only postponed taxation because the borrowing must sometime be repaid and it can be repaid only out of revenues from taxation. That too is true. But again it is true only upon the assumption that you have still and will continue to have the kind of government that is appropriate to a free political system, a government of limited powers, one that borrows only in time of great emergency, intending to pay it back in a meticulous mannerand then balance its books again.

But suppose you have those—and we do have them—who regard borrowing, government spending and government debt as instruments of policy, the policy being to redistribute the wealth and income of a nation according to a social plan—the policy of a planned economy in which the government becomes responsible for full employment, full production and the stability of the total enterprise. On that premise a large government debt is an indispensable and powerful implement in the hands of the planners, because it enables them to manipulate the national income by fiscal and monetary measures. And so with wage fixing, price fixing, subsidies, ceilings, floors, and stabilization schemes—all fallacies from the point of view of a free economy but rational enough, almost too rational, if you want a planned economy.

Is the idea of a planned economy itself a fallacy? Will it work? The answer to that question is not what we might wish. The planned economy has a much longer history than the free economy. Is it not now working in a manner to threaten the peace of the world? Is not free capitalism on the defensive against it? But Mr. Hazlitt was not writing a political treatise. What he is saying is this: "If we want to keep our free political system, here are the economic principles to which we must return."

And he makes those principles very clear. G. G.

DiLorenzo's visit to D.C.

2011-02-11T09:18:00.000-08:00

Austrian economist Thomas J. DiLorenzo, who testified before Ron Paul's House Financial Services Committee on February 9, 2011, writes about his experience dealing with the liars, bigots, and murderers on Capitol Hill:

Fed apologists are apparently in a state of panic over the first sighting of two economists – Richard Vedder and myself – appearing before their committee to (horrors!) criticize the Fed. Rather than ask me a single question, Congressman William Lacy Clay decided to lie about my background with a libelous smear.

"When you constantly get bailouts . . ."

2011-01-31T07:09:00.000-08:00

. . . you can pretty much do whatever you want, as this xtranormal cartoon suggests.

Is the Fed dollar "safe and stable"?

2011-01-04T12:39:00.000-08:00

On the website of the Board of Governors of the Federal Reserve System, at the top of the home page, we find the following words:

The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible, and stable monetary and financial system.

Flexible? The dollar is a paper fiat currency, backed by nothing. Its flexibility is virtually infinite. Recently, we've seen how flexible the Fed has been with the American dollar, as Senator Bernie Sanders tells us:

We have learned that the $700 billion Wall Street bailout signed into law by President George W. Bush turned out to be pocket change compared to the trillions and trillions of dollars in near-zero interest loans and other financial arrangements the Federal Reserve doled out to every major financial institution in this country. Among those are Goldman Sachs, which received nearly $600 billion; Morgan Stanley, which received nearly $2 trillion; Citigroup, which received $1.8 trillion; Bear Stearns, which received nearly $1 trillion, and Merrill Lynch, which received some $1.5 trillion in short term loans from the Fed.

We also learned that the Fed's multi-trillion bailout was not limited to Wall Street and big banks, but that some of the largest corporations in this country also received a very substantial bailout. Among those are General Electric, McDonald's, Caterpillar, Harley Davidson, Toyota and Verizon.

Perhaps most surprising is the huge sum that went to bail out foreign private banks and corporations including two European megabanks -- Deutsche Bank and Credit Suisse -- which were the largest beneficiaries of the Fed's purchase of mortgage-backed securities.

Deutsche Bank, a German lender, sold the Fed more than $290 billion worth of mortgage securities. Credit Suisse, a Swiss bank, sold the Fed more than $287 billion in mortgage bonds.

Safe and stable? The Fed doesn't explain what they mean by these terms. Can we say that a currency is safe and stable if people use it in everyday transactions? If so, then there's no question the Federal Reserve Note is at least somewhat safe and stable, because people, in spite of their complaints, have not abandoned it for anything better. True, legal tender laws force Americans to accept the Fed's money regardless of what they might prefer, but history shows that people will abandon the legal tender currency if it becomes too worthless or inconvenient to perform its function as a medium of exchange. Though we're not to that point yet, we've been heading in that direction since the Federal Reserve first rolled up its sleeves.

It's also true that the government has placed mankind's money - gold and silver coins - at a severe disadvantage through its monopoly of minting and with regulations stipulating the coins are legal tender at face value only, not market value. Furthermore, most Americans alive today have never used gold and silver coins in everyday commerce. To them "money" is what the government issues, and the bullion coins minted by the government, though officially monetized, are a fool's token if they are exchanged at face value. Aside from a small minority of gold investors, most Americans have nothing to do with them; they stick with the paper dollar. The government, to sum up, has rigged the system in favor of its remunerative counterfeit currency but so far most people still use it with complete trust.

Is a currency safe and stable if it holds its value over many years? Savers certainly want their dollars to buy as much as they did when they were first hoarded or deposited in a bank. For many, their ideal is to have their savings appreciate merely by not spending it - store it under the bed or in a home safe then forget about it. Putting it in a fractional reserve bank runs risks they don't wish to bear.

The Fed's ideal is a depreciating currency. Its goal is to make the dollar buy less over time. The Fed thus creates premeditated price inflation, or rising prices. It is opposed to the interests of savers. People whose incomes don't keep pace with rising prices are hurt the most. People who are the early recipients of the newly created money have the same advantage any counterfeiter would have.

The St. Louis Fed publishes a month by month history of the CPI from January, 1913 to the present. Using their table of measures, we find that when the Fed opened its doors in October, 1914 the CPI was 10.1. By October, 2010 it stood at 218.711, representing a 2,065% increase in the consumer price level over 96 years. Leaving aside the ongoing CPI controversy, does a two thousand percent increase in prices over a period of a century represent a "safe and stable" currency?

A better way to consider the issue is to take another look at history - in the years before Congress and Woodrow Wilson chained us to the Fed and before Franklin Roosevelt made it a felony to own gold coins. Walker Todd, writing for the American Institute of Economic Research (AIER), states that

The first chart in every edition of The AIER Chart Book shows the purchasing power of the dollar since 1792, the first date from which relevant statistics can be calculated. Starting at a value of $1 in 1792, through many fluctuations both above and below that value during the 19th and early 20th centuries, a startling conclusion emerges: The price level always had a central tendency of $1 for as long as the United States was on a gold standard (1792-1933, with an 18-year hiatus during and right after the Civil War).

That is, an explicit link to a particular weight of gold per dollar tended to serve as a long-term guarantor of long-term stability of the purchasing power of the dollar.

According to the Measuring Worth website, $1.00 in 1792 has the same purchase power as $1.04 in 1913, a 4% increase over a span of 121 years. So we have four percent price inflation without the Fed vs. two-thousand percent with the Fed. Which do you consider safer and more stable?

Instead of a monetary system, we've been living with a counterfeiting system. When it's done legally, counterfeiting is a bonanza for the ones in charge. As evidence, we see the continuing flood of Wall Street profits and six- and seven-figure bonuses, trillion-dollar bailouts, and a mushrooming federal government in an economy where real private unemployment is around 25 percent.

If we want a safe and stable monetary system we need to eliminate the elements that make our current system grossly unfair and unstable. The Fed must be abolished, and the government must be excluded from monetary matters altogether. We need free market money - probably gold and/or silver - run by free market institutions. Government's one role would be to protect private property and uphold contracts, which would make it difficult, if not impossible, for banks to engage in the fraud of fractional reserve banking. Only then could we look to the future with realistic optimism.

Dave Barry Reflects on 2010

2011-01-02T14:14:00.000-08:00

Take a break and laugh with Dave Barry:

Meanwhile, Federal Reserve Chairman Ben Bernanke, speaking from his new office in Toronto, announces a plan to drastically increase the U.S. money supply by "quantitative easing," a controversial process involving what Bernanke describes as "a major job for Kinko's."

Richard Russell's Observations on the Current Gold Bull

2010-12-29T15:07:00.000-08:00

Today's gold bull market, Russell writes, is "one of the greatest and least appreciated bull markets in history. Take in this series, you may never see its like again.

2000 -- $273.60
2001 -- $279.00
2002 -- $348.20
2003 -- $416.10
2004 -- $438.40
2005 -- $518.90
2006 -- $638.00
2007 -- $838.00
2008 -- $889.00
2009 -- $1118.40
2010 -- ?

"I've been around a long time, and I've studied many primary bull markets. And now I want to venture a few of my observations.

"In markets, I have never seen a series like the above end with a whimper or a fizzle. The end or the wind-up of such a series usually arrives with an upside 'explosion,' as those who have failed to participate in the series finally rush in to join in the apparent endless advance. . . .

"A great primary bull market is an expression of something changing in a very fundamental and meaningful way. Following a great bull market, the world is never quite the same."

Read the rest.

Why Ron Paul? Krugman asks

2010-12-23T07:59:00.000-08:00

Paul Krugman's article When Zombies Win, published last Sunday, claims that free-market fundamentalists have been a dominant political force in D.C. In Krugman's words,

When historians look back at 2008–10, what will puzzle them most, I believe, is the strange triumph of failed ideas. Free-market fundamentalists have been wrong about everything — yet they now dominate the political scene more thoroughly than ever.

Krugman takes aim at Ron Paul, who is set to chair the congressional subcommittee that oversees the Fed. Krugman asks,

How did that happen? How, after runaway banks brought the economy to its knees, did we end up with Ron Paul, who says "I don't think we need regulators," about to take over a key House panel overseeing the Fed?

Krugman is not asking a serious question, but we can take him seriously for a moment. How did that happen?

The short answer is: By popular demand.

It happened because of growing distrust of the big banks and of the government that allowed them to be bailed out at the expense of taxpayers and dollar holders. It happened because many people have read Ron Paul's End the Fed and the countless articles he's written on money and banking, and have concluded he not only understands the issues, but has the political will to make things right. It happened because people are starting to accept the truth that central banking is a counterfeiting racket that benefits government and privileged insiders at the expense of the rest of us. It happened because people are sick of deficits and unsound money, which are inflating the power of the state over our lives, destroying what's left of the republic, and threatening to bring about a complete economic collapse. It happened because people are taking an interest in monetary issues for the first time since the Great Depression. And this time, they're not going to be suckered into accepting the notion that gold is our enemy and an elastic currency our savior.

For a more balanced assessment of Krugman's column, see Robert P. Murphy's article, "Rise of the Free-Market Zombies."

iPad & iPhone Christmas Concert

2010-12-15T08:24:00.000-08:00

Proof that Bernanke and pals can't stop youthful creativity:

Charlie Rose interviews three gold experts

2010-12-13T08:09:00.000-08:00

New York Times acknowledges Ron Paul

2010-12-13T07:07:00.000-08:00

Rep. Ron Paul, G.O.P. Loner, Comes In From Cold

By KATE ZERNIKE NY Times

Published: December 12, 2010

WASHINGTON — As virtually all of Washington was declaring WikiLeaks’s disclosures of secret diplomatic cables an act of treason, Representative Ron Paul was applauding the organization for exposing the United States’ “delusional foreign policy.”

For this, the conservative blog RedState dubbed him “Al Qaeda’s favorite member of Congress.”

It was hardly the first time that Mr. Paul had marched to his own beat. During his campaign for the Republican presidential nomination in 2008, he was best remembered for declaring in a debate that the 9/11 attacks were the Muslim world’s response to American military intervention around the globe. A fellow candidate, former Mayor Rudolph W. Giuliani of New York, interrupted and demanded that he take back the words — a request that Mr. Paul refused.

During his 20 years in Congress, Mr. Paul has staked out the lonely end of 434-to-1 votes against legislation that he considers unconstitutional, even on issues as ceremonial as granting Mother Teresa a Congressional Gold Medal. His colleagues have dubbed him “Dr. No,” but his wife will insist that they have the spelling wrong: he is really Dr. Know.

Now it appears others are beginning to credit him with some wisdom — or at least acknowledging his passionate following.

After years of blocking him from a leadership position, Mr. Paul’s fellow Republicans have named him chairman of the House subcommittee on domestic monetary policy, which oversees the Federal Reserve as well as the currency and the valuation of the dollar.

Mr. Paul has strong views on those issues. He has written a book called “End the Fed”; he embraces Austrian economic thought, which holds that the government has no role in regulating the economy; and he advocates a return to the gold standard.

Many of the new Republicans in the next Congress campaigned on precisely the issues that Mr. Paul has been talking about for 40 years: forbidding Congress from any action not explicitly authorized in the Constitution, eliminating entire federal departments as unconstitutional and checking the power of the Fed.

He has been called the “intellectual godfather of the Tea Party,” but he also is the real father of the Tea Party movement’s most high-profile winner, Senator-elect Rand Paul of Kentucky. (The two will be roommates in Ron Paul’s Virginia condominium. “I told him as long as he didn’t expect me to cook,” the elder Mr. Paul said. “I’m not going to take care of him the way his mother did.”)

Republicans had blocked Mr. Paul from leading the monetary policy panel once before, and banking executives reportedly urged them to do so again. But Republicans on Capitol Hill increasingly recognize that Mr. Paul has a following — among his supporters from 2008 and within the Tea Party, which helped the Republicans recapture the House majority by picking up Mr. Paul’s longstanding and highly vocal opposition to the federal debt.

Aides, supporters and television interviewers now use words like “vindicated” to describe him — a term Mr. Paul, a 75-year-old obstetrician with the manner of a country doctor, brushes off.
“I don’t think it’s very personal,” he said in an interview in his office on the Hill, where he has represented the 14th District of Texas on and off since 1976. “People are really worried about what’s happening, so they’re searching, and I think they see that we’ve been offering answers.”

If there is vindication here, Mr. Paul says, it is for Austrian economic theory — an anti-Keynesian model that many mainstream economists consider radical and dismiss as magical thinking.

The theory argues that markets operate properly only when they are unfettered by government regulation and intervention. It holds that the government should not have a central bank or dictate economic or monetary policy. Once the government begins any economic planning, such thinking goes, it ends up making all the economic decisions for its citizens, essentially enslaving them.

The walls of Mr. Paul’s Congressional office are devoid of the usual pictures with presidents and other dignitaries. Instead, there are portraits of Ludwig von Mises and Murray Rothbard, titans of the Austrian school. For years, Mr. Paul would talk about their ideas and eyes would glaze over. But during his presidential campaign, he said he began to notice a glimmer of recognition among those who attended his events, particularly on college campuses.

Mr. Paul now views his exchange with Mr. Giuliani in 2008 as a crucial moment in his drive for more supporters. “A lot of them said, ‘I’d never heard of you, and I liked what you said and I went and checked your voting record and you’d actually voted that way,’ ” he said. “They’d see that the thing that everybody on the House floor considered a liability for 20 years, my single ‘no’ votes, they’d say, ‘He did that himself; he really must believe this.’ ”

His campaign that year attracted a coalition that even he recognizes does not always stand together: young people who liked his advocacy of greater civil liberties and the decriminalization of marijuana; conservatives who nodded at his antidebt message; and others who agreed with his opposition to the Iraq war.

READ the rest.

Ron Paul Claims Chairmanship of Monetary Policy Subcommittee

2010-12-09T15:12:00.000-08:00

As reported by Mike Shedlock (Mish) with an accompanying YouTube video:

Proving that on occasion the little guy can indeed win, Ron Paul announced tonight that he will be named Chairman of the Monetary Policy Subcommittee.

When asked if he would take over chairmanship of the subcommittee, Paul replied "The chairman of the financial services subcommittee, Spencer Bachus, has told me today verbally that I will be the chairman of that subcommittee. He was the one who appointed me as the ranking member and he is sticking to his guns and that I will have responsibility of that committee."

When asked about subpoenas and "audit the Fed", Paul went on to say that he can issue subpoenas but would need agreement from the chairman [Bachus] as well as speaker.

Needing such agreement might render Paul's appointment toothless. But it's a move in the right direction.

Also from Mish: Bloomberg Poll Shows More Than Half of Americans Want Fed Reined In or Abolished

Obama cuts deal, offers to extend tax cuts

2010-12-08T10:42:00.000-08:00

From Bloomberg:

The dollar rose to near a 10-week high versus the yen as speculation that extended U.S. tax cuts will bolster the economy drove Treasury yields higher and boosted demand for assets denominated in the greenback.

The U.S. currency gained against most of its other major counterparts as 10-year Treasury yields surged to a six-month high after President Barack Obama late Dec. 6 agreed to extend tax reductions for two years. . . .

Obama said he would accept lower tax rates on high earners’ income, dividends, capital gains and multimillion dollar estates for the next two years in exchange for extending federal unemployment insurance. The tax rates, enacted in 2001 and 2003, were set to increase on Dec. 31.

Where are the spending cuts? Is Obama going to pay for all this with Bernanke's QE? This only guarantees more price inflation (i.e., dollar devaluation). Gold and silver may have dipped in recent days but long-range their trend is consistent with everything else denominated in dollars.

An Essay on Sound Monetary Policy

2010-12-03T16:52:00.000-08:00

This will be a short essay, appropriate to the topic at hand. It consists of a quote from Milton Friedman, found in Joseph Salerno's outstanding book, Money, Sound and Unsound, p. 366:

If a domestic money consists of a commodity, [such as] a pure gold standard or cowrie bead standard, the principles of monetary policy are very simple. There aren’t any. The commodity money takes care of itself. [emphasis added]

Imagine that. If we have sound money we don't need the Fed. Or Congress. We just need sound money.

End of essay.

Postscript:

Economist Nouriel Roubini recently attacked the gold standard.

Roubini raises the following question: If you are on a gold standard, or modified gold standard, what do you do in the event of a bank run—if you don't have enough gold to fully back the currency?

Translated: What happens if the banks have created bogus IOUs for their depositors' gold? Suggestion: Have them indicted as embezzlers. Gold doesn't "back" anything. It is the money. The banks issue IOUs for the money. When they issue more IOUs than they have gold on hand, they're cheating.

Roubini also says that a "gold standard limits the flexibility and range of actions that central banks can take." That alone should recommend it. He thinks it's a shortcoming.

A gold standard doesn't need Roubini. It doesn't need Bernanke. It doesn't need Congress. It doesn't need the World Bank or the International Monetary Fund. It just needs to be left alone.

The gold standard "requires nothing else than that the government abstain from deliberately sabotaging it," Ludwig von Mises wrote in The Theory of Money and Credit:

What all the enemies of the gold standard spurn as its main vice is precisely the same thing that in the eyes of the advocates of the gold standard is its main virtue, namely its incompatibility with a policy of credit expansion. The nucleus of all the effusions of the anti-gold authors and politicians is the expansionist fallacy. (p. 421)

Credit expansion - inflation - is indispensable to a growing government. Which is why every government hates the gold standard - especially an autonomous, market-controlled gold standard. From Human Action:

The gold standard removes the determination of cash-induced changes in purchasing power from the political arena. Its general acceptance requires the acknowledgment of the truth that one cannot make all people richer by printing money. The abhorrence of the gold standard is inspired by the superstition that omnipotent governments can create wealth out of little scraps of paper. (pp. 471-472)

If wealth could be created out of scraps of paper, world poverty would be a thing of the past.

Gold: Inflationary, Deflationary, or Something Else?

2010-11-30T07:45:00.000-08:00

From my article, "Government's Perennial Enemy":

It's very difficult to inflate sound money because sound money, by its nature, is difficult to create. It emerges in trade as a highly marketable commodity, but one that's also relatively scarce. Sound money starves the state but not the economy as long as prices are allowed to fluctuate. Yet there was once some confusion about gold's character. As Mises wrote in The Theory of Money and Credit (p. 416):

When in the 'fifties of the nineteenth century gold production increased considerably in California and Australia, people attacked the gold standard as inflationary. . . But later these criticisms subsided. The gold standard was no longer denounced as inflationary but on the contrary as deflationary.

It was considered insufficiently 'elastic' (deflationary) even during the period 1896-1914, when gold discoveries in Alaska and South Africa spurred an annual inflation rate of two percent. But clearly, the objections to a gold standard were not so much based on its alleged inflationary or deflationary tendencies but on the fact that the market controlled its supply, rather than politicians and their pals in the fractional reserve banking racket. Quoting Mises again:

It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights. [p. 414]

But constitutions and bills of rights are the products of government and are subject to government's shifting interpretations. We should never let politicians or central bankers 'interpret' anything for us, especially money. An authentic gold standard would be entirely removed from state influence, and for that reason would afford much-needed protection against government assaults on our liberty.

Bond Basics

2010-11-29T09:54:00.000-08:00

Understanding bonds is crucial if you are to understand the market's moves in response to Federal Reserve statements and actions. (For example, see Robert Murphy's article Can the Fed Become Insolvent?) Investopedia has a tutorial on bonds but it's spread over multiple pages with various "floating" pop-ups and animated ads that can be distracting. In the interest of education, I've combined the tutorial into one document, presented here.

Bond Basics: Introduction

The first thing that comes to most people's minds when they think of investing is the stock market. After all, stocks are exciting. The swings in the market are scrutinized in the newspapers and even covered by local evening newscasts. Stories of investors gaining great wealth in the stock market are common.

Bonds, on the other hand, don't have the same sex appeal. The lingo seems arcane and confusing to the average person. Plus, bonds are much more boring - especially during raging bull markets, when they seem to offer an insignificant return compared to stocks.

However, all it takes is a bear market to remind investors of the virtues of a bond's safety and stability. In fact, for many investors it makes sense to have at least part of their portfolio invested in bonds.

This tutorial will hopefully help you determine whether or not bonds are right for you. We'll introduce you to the fundamentals of what bonds are, the different types of bonds and their important characteristics, how they behave, how to purchase them, and more.

(Before proceeding, it would be helpful for you to know a little about stocks. If you need a refresher, see our Stock Basics tutorial.)

Bond Basics: What Are Bonds?

Have you ever borrowed money? Of course you have! Whether we hit our parents up for a few bucks to buy candy as children or asked the bank for a mortgage, most of us have borrowed money at some point in our lives.

Just as people need money, so do companies and governments. A company needs funds to expand into new markets, while governments need money for everything from infrastructure to social programs. The problem large organizations run into is that they typically need far more money than the average bank can provide. The solution is to raise money by issuing bonds (or other debt instruments) to a public market. Thousands of investors then each lend a portion of the capital needed. Really, a bond is nothing more than a loan for which you are the lender. The organization that sells a bond is known as the issuer. You can think of a bond as an IOU given by a borrower (the issuer) to a lender (the investor).

Of course, nobody would loan his or her hard-earned money for nothing. The issuer of a bond must pay the investor something extra for the privilege of using his or her money. This "extra" comes in the form of interest payments, which are made at a predetermined rate and schedule. The interest rate is often referred to as the coupon. The date on which the issuer has to repay the amount borrowed (known as face value) is called the maturity date. Bonds are known as fixed-income securities because you know the exact amount of cash you'll get back if you hold the security until maturity.

For example, say you buy a bond with a face value of $1,000, a coupon of 8%, and a maturity of 10 years. This means you'll receive a total of $80 ($1,000*8%) of interest per year for the next 10 years. Actually, because most bonds pay interest semi-annually, you'll receive two payments of $40 a year for 10 years. When the bond matures after a decade, you'll get your $1,000 back.

Debt Versus Equity

Bonds are debt, whereas stocks are equity. This is the important distinction between the two securities. By purchasing equity (stock) an investor becomes an owner in a corporation. Ownership comes with voting rights and the right to share in any future profits. By purchasing debt (bonds) an investor becomes a creditor to the corporation (or government).

The primary advantage of being a creditor is that you have a higher claim on assets than shareholders do: that is, in the case of bankruptcy, a bondholder will get paid before a shareholder. However, the bondholder does not share in the profits if a company does well - he or she is entitled only to the principal plus interest.

To sum up, there is generally less risk in owning bonds than in owning stocks, but this comes at the cost of a lower return.

Why Bother With Bonds?

It's an investing axiom that stocks return more than bonds. In the past, this has generally been true for time periods of at least 10 years or more. However, this doesn't mean you shouldn't invest in bonds. Bonds are appropriate any time you cannot tolerate the short-term volatility of the stock market. Take two situations where this may be true:

1) Retirement - The easiest example to think of is an individual living off a fixed income. A retiree simply cannot afford to lose his/her principal as income for it is required to pay the bills.

2) Shorter time horizons - Say a young executive is planning to go back for an MBA in three years. It's true that the stock market provides the opportunity for higher growth, which is why his/her retirement fund is mostly in stocks, but the executive cannot afford to take the chance of losing the money going towards his/her education. Because money is needed for a specific purpose in the relatively near future, fixed-income securities are likely the best investment.

These two examples are clear cut, and they don't represent all investors. Most personal financial advisors advocate maintaining a diversified portfolio and changing the weightings of asset classes throughout your life. For example, in your 20s and 30s a majority of wealth should be in equities. In your 40s and 50s the percentages shift out of stocks into bonds until retirement, when a majority of your investments should be in the form of fixed income.

Bond Basics: Characteristics

Bonds have a number of characteristics of which you need to be aware. All of these factors play a role in determining the value of a bond and the extent to which it fits in your portfolio.

Face Value/Par Value

The face value (also known as the par value or principal) is the amount of money a holder will get back once a bond matures. A newly issued bond usually sells at the par value. Corporate bonds normally have a par value of $1,000, but this amount can be much greater for government bonds.

What confuses many people is that the par value is not the price of the bond. A bond's price fluctuates throughout its life in response to a number of variables (more on this later). When a bond trades at a price above the face value, it is said to be selling at a premium. When a bond sells below face value, it is said to be selling at a discount.

Coupon (The Interest Rate)

The coupon is the amount the bondholder will receive as interest payments. It's called a "coupon" because sometimes there are physical coupons on the bond that you tear off and redeem for interest. However, this was more common in the past. Nowadays, records are more likely to be kept electronically.

As previously mentioned, most bonds pay interest every six months, but it's possible for them to pay monthly, quarterly or annually. The coupon is expressed as a percentage of the par value. If a bond pays a coupon of 10% and its par value is $1,000, then it'll pay $100 of interest a year. A rate that stays as a fixed percentage of the par value like this is a fixed-rate bond. Another possibility is an adjustable interest payment, known as a floating-rate bond. In this case the interest rate is tied to market rates through an index, such as the rate on Treasury bills.

You might think investors will pay more for a high coupon than for a low coupon. All things being equal, a lower coupon means that the price of the bond will fluctuate more.

Maturity

The maturity date is the date in the future on which the investor's principal will be repaid. Maturities can range from as little as one day to as long as 30 years (though terms of 100 years have been issued).

A bond that matures in one year is much more predictable and thus less risky than a bond that matures in 20 years. Therefore, in general, the longer the time to maturity, the higher the interest rate. Also, all things being equal, a longer term bond will fluctuate more than a shorter term bond.

Issuer

The issuer of a bond is a crucial factor to consider, as the issuer's stability is your main assurance of getting paid back. For example, the U.S. government is far more secure than any corporation. Its default risk (the chance of the debt not being paid back) is extremely small - so small that U.S. government securities are known as risk-free assets. The reason behind this is that a government will always be able to bring in future revenue through taxation. A company, on the other hand, must continue to make profits, which is far from guaranteed. This added risk means corporate bonds must offer a higher yield in order to entice investors - this is the risk/return tradeoff in action.

The bond rating system helps investors determine a company's credit risk. Think of a bond rating as the report card for a company's credit rating. Blue-chip firms, which are safer investments, have a high rating, while risky companies have a low rating. The chart below illustrates the different bond rating scales from the major rating agencies in the U.S.: Moody's, Standard and Poor's and Fitch Ratings.

Notice that if the company falls below a certain credit rating, its grade changes from investment quality to junk status. Junk bonds are aptly named: they are the debt of companies in some sort of financial difficulty. Because they are so risky, they have to offer much higher yields than any other debt. This brings up an important point: not all bonds are inherently safer than stocks. Certain types of bonds can be just as risky, if not riskier, than stocks.

Bond Basics: Yield, Price And Other Confusion

Understanding the price fluctuation of bonds is probably the most confusing part of this lesson. In fact, many new investors are surprised to learn that a bond's price changes on a daily basis, just like that of any other publicly-traded security. Up to this point, we've talked about bonds as if every investor holds them to maturity. It's true that if you do this you're guaranteed to get your principal back; however, a bond does not have to be held to maturity. At any time, a bond can be sold in the open market, where the price can fluctuate - sometimes dramatically. We'll get to how price changes in a bit. First, we need to introduce the concept of yield.

Measuring Return With Yield

Yield is a figure that shows the return you get on a bond. The simplest version of yield is calculated using the following formula: yield = coupon amount/price. When you buy a bond at par, yield is equal to the interest rate. When the price changes, so does the yield.

Let's demonstrate this with an example. If you buy a bond with a 10% coupon at its $1,000 par value, the yield is 10% ($100/$1,000). Pretty simple stuff. But if the price goes down to $800, then the yield goes up to 12.5%. This happens because you are getting the same guaranteed $100 on an asset that is worth $800 ($100/$800). Conversely, if the bond goes up in price to $1,200, the yield shrinks to 8.33% ($100/$1,200).

Yield To Maturity

Of course, these matters are always more complicated in real life. When bond investors refer to yield, they are usually referring to yield to maturity (YTM). YTM is a more advanced yield calculation that shows the total return you will receive if you hold the bond to maturity. It equals all the interest payments you will receive (and assumes that you will reinvest the interest payment at the same rate as the current yield on the bond) plus any gain (if you purchased at a discount) or loss (if you purchased at a premium).

Knowing how to calculate YTM isn't important right now. In fact, the calculation is rather sophisticated and beyond the scope of this tutorial. The key point here is that YTM is more accurate and enables you to compare bonds with different maturities and coupons.

Putting It All Together: The Link Between Price And Yield

The relationship of yield to price can be summarized as follows: when price goes up, yield goes down and vice versa. Technically, you'd say the bond's price and its yield are inversely related.

Here's a commonly asked question: How can high yields and high prices both be good when they can't happen at the same time? The answer depends on your point of view. If you are a bond buyer, you want high yields. A buyer wants to pay $800 for the $1,000 bond, which gives the bond a high yield of 12.5%. On the other hand, if you already own a bond, you've locked in your interest rate, so you hope the price of the bond goes up. This way you can cash out by selling your bond in the future.

Price In The Market

So far we've discussed the factors of face value, coupon, maturity, issuers and yield. All of these characteristics of a bond play a role in its price. However, the factor that influences a bond more than any other is the level of prevailing interest rates in the economy. When interest rates rise, the prices of bonds in the market fall, thereby raising the yield of the older bonds and bringing them into line with newer bonds being issued with higher coupons. When interest rates fall, the prices of bonds in the market rise, thereby lowering the yield of the older bonds and bringing them into line with newer bonds being issued with lower coupons.

Bond Basics: Different Types Of Bonds

Government Bonds

In general, fixed-income securities are classified according to the length of time before maturity. These are the three main categories:

Bills - debt securities maturing in less than one year.

Notes - debt securities maturing in one to 10 years.

Bonds - debt securities maturing in more than 10 years.

Marketable securities from the U.S. government - known collectively as Treasuries - follow this guideline and are issued as Treasury bonds, Treasury notes and Treasury bills (T-bills). Technically speaking, T-bills aren't bonds because of their short maturity. (You can read more about T-bills in our Money Market tutorial.) All debt issued by Uncle Sam is regarded as extremely safe, as is the debt of any stable country. The debt of many developing countries, however, does carry substantial risk. Like companies, countries can default on payments.

Municipal Bonds

Municipal bonds, known as "munis", are the next progression in terms of risk. Cities don't go bankrupt that often, but it can happen. The major advantage to munis is that the returns are free from federal tax. Furthermore, local governments will sometimes make their debt non-taxable for residents, thus making some municipal bonds completely tax free. Because of these tax savings, the yield on a muni is usually lower than that of a taxable bond. Depending on your personal situation, a muni can be a great investment on an after-tax basis.

Corporate Bonds

A company can issue bonds just as it can issue stock. Large corporations have a lot of flexibility as to how much debt they can issue: the limit is whatever the market will bear. Generally, a short-term corporate bond is less than five years; intermediate is five to 12 years, and long term is over 12 years.

Corporate bonds are characterized by higher yields because there is a higher risk of a company defaulting than a government. The upside is that they can also be the most rewarding fixed-income investments because of the risk the investor must take on. The company's credit quality is very important: the higher the quality, the lower the interest ratethe investor receives.

Other variations on corporate bonds include convertible bonds, which the holder can convert into stock, and callable bonds, which allow the company to redeem an issue prior to maturity.

Zero-Coupon Bonds

This is a type of bond that makes no coupon payments but instead is issued at a considerable discount to par value. For example, let's say a zero-coupon bond with a $1,000 par value and 10 years to maturity is trading at $600; you'd be paying $600 today for a bond that will be worth $1,000 in 10 years.

Bond Basics: How To Read A Bond Table

Column 1: Issuer - This is the company, state (or province) or country that is issuing the bond.

Column 2: Coupon - The coupon refers to the fixed interest rate that the issuer pays to the lender.

Column 3: Maturity Date - This is the date on which the borrower will repay the investors their principal. Typically, only the last two digits of the year are quoted: 25 means 2025, 04 is 2004, etc.

Column 4: Bid Price - This is the price someone is willing to pay for the bond. It is quoted in relation to 100, no matter what the par value is. Think of the bid price as a percentage: a bond with a bid of 93 is trading at 93% of its par value.

Column 5: Yield - The yield indicates annual return until the bond matures. Usually, this is the yield to maturity, not current yield. If the bond is callable it will have a "c--" where the "--" is the year the bond can be called. For example, c10 means the bond can be called as early as 2010.

Bond Basics: How Do I Buy Bonds?

Most bond transactions can be completed through a full service or discount brokerage. You can also open an accountwith a bond broker, but be warned that most bond brokers require a minimum initial deposit of $5,000. If you cannot afford this amount, we suggest looking at a mutual fund that specializes in bonds (or a bond fund).

Some financial institutions will provide their clients with the service of transacting government securities. However, ifyour bank doesn't provide this service and you do not have a brokerage account, you can purchase government bonds through a government agency (this is true in most countries). In the U.S. you can buy bonds directly from the government through TreasuryDirect at http://www.treasurydirect.gov. The Bureau of the Public Debt started TreasuryDirect so that individuals could buy bonds directly from the Treasury, thereby bypassing a broker. All transactions and interest payments are done electronically.

If you do decide to purchase a bond through your broker, he or she may tell you that the trade is commission free. Don't be fooled. What typically happens is that the broker will mark up the price slightly; this markup is really the same as a commission. To make sure that you are not being taken advantage of, simply look up the latest quote for the bond and determine whether the markup is acceptable.

Remember, you should research bonds just as you would stocks. We've gone over several factors you need to consider before loaning money to a government or company, so do your homework!

Bond Basics: Conclusion

Now you know the basics of bonds. Not too complicated, is it? Here is a recap of what we discussed:

Bonds are just like IOUs. Buying a bond means you are lending out your money.
Bonds are also called fixed-income securities because the cash flow from them is fixed.
Stocks are equity; bonds are debt.
The key reason to purchase bonds is to diversify your portfolio.
The issuers of bonds are governments and corporations.
A bond is characterized by its face value, coupon rate, maturity and issuer.
Yield is the rate of return you get on a bond.
When price goes up, yield goes down, and vice versa.
When interest rates rise, the price of bonds in the market falls, and vice versa.
Bills, notes and bonds are all fixed-income securities classified by maturity.
Government bonds are the safest bonds, followed by municipal bonds, and then corporate bonds.
Bonds are not risk free. It's always possible - especially in the case of corporate bonds - for the borrower to default on the debt payments.
High-risk/high-yield bonds are known as junk bonds.
You can purchase most bonds through a brokerage or bank. If you are a U.S. citizen, you can buy government bonds through TreasuryDirect.
Often, brokers will not charge a commission to buy bonds but will mark up the price instead.

Give gold & silver coins this Christmas

2010-11-26T09:20:00.000-08:00

For those on your shopping list who seem to have everything, consider giving them gold or silver coins. Even if they have nothing, giving them gold and silver would be thoughtful, though they might appreciate getting something useful as well. I have experience with only one company, but compared to the rules others have imposed on sales of gold & silver this one I can recommend for people who don't have a lot of money to invest. The company I've dealt with is Camino Coin of Burlingame, California. Call them at (800)-348-8001 and ask to speak to someone about buying bullion coins. Once you reach an agreement about what to buy, they will give you a total price, including any shipping charges, along with a contract number. You then write a check for that amount and get it in the mail within 24 hours. Once it clears they will fill your order and ship it registered mail in thoroughly secure packaging.

Not many people alive today have held real gold or silver coins in their hands. If your gift recipients need educating on the significance of commodity money, consider giving them a book or two to go along with the coins. See my home page for recommendations.

Fifth Edition of "The Creature"

2010-11-21T12:32:00.000-08:00

The fifth edition of G. Edward Griffin's masterpiece, The Creature from Jekyll Island, will start shipping Monday, November 22, 2010.

According to Mr. Griffin's website, Reality Zone,

The 5th Edition includes a no-holds barred analysis of bank bailouts under the Bush and Obama Administrations that are shown to be nothing less than legalized plunder of the American people. Many other updates have been added, including a revision to the list of those who attended the historic meeting at Jekyll Island where the Federal Reserve was created.

Originally published in 1994, Creature has undergone 26 printings. If you have not read the book, your Federal Reserve education is incomplete. It is a compelling read throughout - except for his use of intrinsic value. He says gold possesses intrinsic value. I disagree. Value is in the beholder of the thing valued, not the thing itself. It is subjective.

There is nothing mystical about gold, he writes on page 145 (fourth edition, hardbound). "It is merely a commodity which, because it has intrinsic value and possesses certain qualities, has become accepted throughout history as a medium of exchange." Those certain qualities, along with its scarcity, are the reasons people have valued it. As Gary North has written,

It was Carl Menger's profound insight in 1871 to recognize that economic value is imputed by each individual. The value of the tools of production, the value of land, and the value of labor expended in the creation of a final consumer good do not move forward in time from the value of the inputs. They move in response to entrepreneurs' estimates of future value imputed by customers. This was Menger's great discovery. . . .

When people speak of gold's intrinsic value, this reveals their realization of gold's historic value. Gold has had long historical value, as Roy Jastram's book, "The Golden Constant," revealed over three decades ago. But this constancy is over decades or even centuries, not mere years.

Gold's startling fall in price from $850 to $250, 1980–2001, reveals just how non-intrinsic gold's value has been. The money supply doubled, prices doubled, and gold's price fell by 70%. . . .

The defender of intrinsic value is relying on a pre-1871 theory of economic value. He is claiming that there is objective value out there somewhere. The last major economist who defended such a theory of economic value was Karl Marx. He defended the labor theory of value. His economic analysis could never escape the problem of the waterfall. No one made it through human labor, but it can have high economic value. Why?

Menger would have answered: "Because people value it." But why? "That is for them to say. It is not for an economist to say."

The "intrinsic value" issue is minor, and whether you agree with the author or not, it does not seriously impact the rest of his book. Creature is priceless, a must-read.

Is the Fed a Great Success Story?

2010-11-16T10:34:00.000-08:00

As a public cartel, the Federal Reserve can count on the government to protect it from competition and to shield it from legal action. The purpose of a cartel is to create above-market rates of return for its members, in this case the largest commercial banks. The justification given for cartels is that competition would thwart the higher standards sought by cartel members. Since the goal of higher standards is supposed to benefit the public, the public will pay a high price. In asking if the Federal Reserve has been successful, therefore, we also need to ask: From whose perspective? Has the Fed made life better for the general public?

The answer can only be: Are you kidding?

1. The Fed was sold to the public as a means to eliminate recessions and depressions, which prior to 1913 were called Panics. Recessions have their origins in fractional reserve banking. Far from eliminating this practice, central banks were created to protect it. Why do they protect it? Because it provides above-market rates of return during the inflationary boom the Fed creates.

2. One of the Fed's stated goals is to preserve price stability. In seemingly innocuous increments, the Fed has debased the dollar with reckless abandon while telling us this is the path it must follow to assure prosperity and full employment. In the 1880s, the U.S. experienced one of the most prosperous periods in mankind's history, while the dollar actually appreciated in value.

3. Earlier generations of Americans debated monetary policy, but the Fed, through its secrecy and mind-numbing obfuscations, has taken monetary matters out of the arena of public debate. People are more interested in who will win the Heisman than in the counterfeiting cartel draining their wealth and making them more dependent on government. Even with Ron Paul exploding on the scene, mention the words "Federal Reserve" to almost anyone and brace yourself for a blank stare.

4. As society's sole engine of inflation, the money cartel is funding the creation of a debt-laden super-state over a debt-burdened populace whose forerunners basked fat and prosperous under a smaller government and no Fed.

5. During the 1920s, as a favor to special interests, including the Bank of England, the Fed inflated the economy into a crisis that led to the abandonment of the market's choice of money: gold coins. Leading experts blame the "mentality of the gold standard" for causing the Great Depression because it "limited the ability of governments and central banks to respond to adversity." And what, one should ask, brought on this adversity?

The crisis was not caused by sovereign individuals engaging in voluntary trade with their preferred choice of money, but by the state-run gold standard and the banking cartel. The state failed to protect depositors by failing to uphold contract law.

The public had been persuaded to deposit their gold coins in banks in exchange for IOUs, which circulated alongside the coins. The banks promised to redeem their IOUs on demand, a promise they could only keep for relatively few depositors because most of their reserves were loaned out. In June, 1917, the Fed began the process of centralizing the public's gold. The public was being acclimated to using IOUs instead of coins, a circumstance they would be comfortable with when confiscation arrived. As Gary North points out, trust moved from the people to the banks, then from the banks to the central bank under state protection.

The transfer of trust moves from economics to political sovereignty. But a system based on political sovereignty is not trustworthy. It has the ability to cheat, and no agency can bring charges. No agency of appeal exists.

And none exists today as we witness pirates in fine clothes looting our capital to boost the economy. Since 1933 Americans have been forced to use "IOU nothings" for money. Such a system produces winners and losers, with the winners being those who control the money. The losers are the ones with blank stares.

6. The Fed recently made news when it celebrated the 100th anniversary of its founding at Jekyll Island, Georgia. Ben Bernanke told the gathering that "We are committed to our price stability objective. I have rejected any notion that we are going to raise inflation to a supra-normal level." Perhaps he really believes his policies won't reach a "supra-normal" level of inflation. He once believed the Fed's policies wouldn't cause a housing market meltdown, either.

7. In his myth-shattering account of the Federal Reserve, G. Edward Griffin wrote this about the Fed's founding (p. 23):

What emerged [from the secret Jekyll Island meeting of 1910] was a cartel agreement with five objectives:
Stop the growing competition from the nation’s newer banks;
Obtain a franchise to create money out of nothing for the purpose of lending;
Get control of the reserves of all banks so that the more reckless ones would not be exposed to currency drains and bank runs;
Get the taxpayer to pick up the cartel’s inevitable losses;
Convince Congress that the purpose was to protect the public.
It was realized that the bankers would have to become partners with the politicians and that the structure of the cartel would have to be a central bank. The record shows that the Fed has failed to achieve its [publicly] stated objectives. That is because those were never its true goals. As a banking cartel, and in terms of the five objectives stated above, it has been an unqualified success.

If central banks are such pariahs, why do they continue to exist? Gary North offers this explanation:

The collapse of the Soviet Union brought derisive laughter from academia, worldwide. The Marxists have never recovered, nor is it likely that they will. The emperor had no clothes. No similar derisive laughter has greeted central bankers after their centrally planned disasters have brought economic devastation to tens of millions. On the contrary, politicians call for more of the same. The voters are somewhat skeptical, more ready to cry out, "The emperor has no clothes!" Politicians are not. They know where their bread is buttered, and with what: fiat money for their political action committees.

So, yes, the Fed has been a success - if you're a Fed insider.

Still Have Faith in Interventionism?

2010-11-09T07:32:00.000-08:00

The government "bubble" has grown quite a bit over the last two years, as Steve Saville reminds us. Drawing on an article by Robert Murphy and adding some points of his own, he notes:

The government seized Fannie and Freddie, thereby effectively nationalizing a large portion of the entire US housing market
The Fed nationalized AIG
The treasury secretary told everybody that he needed $700 billion pronto to patch up the financial sector or the world would end; the treasury secretary then proceeded to partially nationalize the US financial sector
The federal government took over two of the Big Three car companies and threw traditional creditor rights out the window
The Fed more than doubled the monetary base in six months' time
The new Obama administration borrowed almost $800 billion to spend on "stimulus"
The federal government has taken a giant leap forward to socialized medicine
The federal government also banned offshore drilling (though the rules are yet again undergoing revision)
The $8000 tax credit and other subsidies designed to encourage greater spending on houses
The "Cash For Clunkers" program designed to encourage greater spending on cars
The push for "Cap and Trade" and other legislation designed to address the imaginary hobgoblin that was originally known as "Global Warning" and is now known as "Climate Change"
The altering of accounting rules that miraculously transformed insolvent, loss-making banks into highly profitable enterprises

But wait - according to government statistics U.S. employers added 151,000 jobs during October. Maybe that number as well as other economic indicators would be far better if the interventions had been far more intense. Hasn't that been Paul Krugman's complaint all along, that the government's not spending enough?

And that's the part you take on faith - assuming you don't understand Austrian economics or economic history. Consider (from the Economic Collapse Blog):

Over 42 million Americans were on food stamps during the month of August, an all-time record and 17% higher than August, 2009.
The "official" unemployment rate in the United States has been at nine and a half percent or above for 14 consecutive months.
In the past 60 days alone, the price of cotton is up 54%, the price of corn is up 29%, the price of soybeans is up 22%, the price of orange juice is up 17%, and the price of sugar is up 51%.
The American Bankruptcy Institute says that there will be about 1.6 million consumer bankruptcies in 2010. That would represent a huge increase over 2009.
U.S. states are mostly flat broke. The biggest ones are.
With a "fiscal gap" of $202 trillion (by one economist's calculations), the U.S. government is completely broke.
Major U.S. trading partners are seeking ways to protect themselves against the Fed's latest round of monetary inflation, euphemistically labeled quantitative easing.

From Gary North:

David Stockman, who was briefly Reagan's budget director before he resigned, recently wrote an article on the gargantuan size of the Federal deficit. He made an important but neglected observation. Ever since the third quarter of 2008, the nation's nominal GDP has increased by a tiny $100 billion, but the Federal debt has increased by 25 times the GDP increase.

It has taken $25 of Federal deficits to produce $1 of GDP growth.

And Howard Katz gives us a little background on GDP:

Members of the paper aristocracy measure the nation’s economy by a statistic called Gross Domestic Product. Gross Domestic Product was invented in the 1930s by a Russian national who worked his way into the New Deal and devised the formula for GDP. He presented this without proof that it actually worked and measured the real economy. Hardly any American can pronounce his name.

For example, if a man invents a thermometer, he is obliged to show that it actually does measure the real temperature. If he takes it outside in January and it measures hot and in July measures cold, then his thermometer does not work, and he is a failure.

This is the case with GDP. For example, a very poor period in the American economy was the early 1940s. This should not be a surprise because the world was at war, and everyone was engaged in the destruction of goods. One could not buy a new house in the early 1940s because none were being built. One could not buy a car for the same reason. Gasoline was rationed to 3 gallons a week. Butter and many food items were also rationed. You would walk into a store and find that it did not have the item you wanted to buy. But real GDP rose sharply during this time. This is the thermometer which reads hot in January.

Keep in mind that the price of gold, the canary in the coal mine, keeps inching up, too, along with silver and other precious metals. And we have not yet reached critical mass, when the public suddenly realizes the Fed's paper dollar is a means of looting them, by design, and they panic to buy anything of value in an effort to preserve what wealth they have left.

How Americans Gave Up Their Gold

2010-11-05T10:58:00.000-07:00

Have you ever wondered how the American people could surrender their one means of keeping government at bay? Garet Garrett gives us some details in his 1953 book, The People's Pottage (pp. 33-41):

In view of further intentions not yet disclosed it was imperative for the government to get possession of all the gold. With a lot of gold in private hands its control of money, banking, and credit could have been seriously challenged. All that the government asked for at first was possession of the gold, as if it were a trust. For their gold as they gave it up people received paper money, but this paper money was still gold standard money—that is to say, it had always been exchangeable for gold dollar for dollar, and people supposed that it would be so again, when the crisis passed. Not a word had yet been said about devaluing the dollar or repudiating the gold standard. The idea held out was that as people surrendered their gold they were supporting the nation's credit.

This decree calling in the gold was put forth on April 5 [1933]. There was then an awkward interlude. The Treasury was empty. It had to sell some bonds. If people knew what was going to happen they might hesitate to buy new Treasury bonds. Knowing that it was going to devalue the dollar, knowing that it was going to repudiate the gold redemption clause in its bonds, even while it was writing the law of repudiation, the government nevertheless issued and sold to the people bonds engraved as usual, that is, with the promise of the United States Government to pay the interest and redeem the principal "in United States gold coin of the present standard of value." . . . .

By resolution June 5, 1933, the Congress repudiated the gold redemption clause in all government obligations, saying they should be payable when due in any kind of money the government might see fit to provide; and, going further, it declared that the same traditional redemption clause in all private contracts, such, for example, as railroad and other corporation bonds, was contrary to public policy and therefore invalid. . . .

[What eventually followed] was a modern version of the act for which kings had been hated and sometimes hanged, namely to clip the coin of the realm and take the profit into the king's revenue. . .

At the President's request the Congress, on January 30, 1934, passed a law vesting in the Federal government absolute title to all that gold which people had been obliged to exchange for gold standard paper dollars the year before, thinking as they did that it was for the duration of the emergency only and that they were supporting the nation's credit. They believed the statement issued at the time by the Secretary of the Treasury, saying : "Those surrendering the gold of course receive an equivalent amount of other forms of currency and those other forms of currency may be used for obtaining gold in an equivalent amount when authorized for proper purposes."

Having by such means got physical possession of the gold, it was a very simple matter for the government to confiscate it. All that it had to do was to have Congress pass a law vesting title in the government.

The following day, on January 31, 1934, the government devalued the dollar and pocketed the roughly $2 billion in profit. Relying on Americans' trust, Roosevelt had accomplished a revolutionary feat in four steps:

1. Give us your gold so we can build up the nation's credit. In exchange, we'll give you receipts you can later turn in to get your gold back. Incidentally, if you don't cooperate we'll hit you with a heavy fine and throw you in prison.

2. We've decided not to honor the gold clause in the bonds we've sold you. In other words, your bonds will be redeemable in paper money rather than gold. The same goes for private contracts that stipulate payment in gold. You can only use government paper money to meet contractual obligations.

3. Remember that promise we made about exchanging your paper gold for the gold you turned in? We've decided to break that promise. We're keeping the gold.

4. We hereby declare gold to exchange for more dollars than it did when we took it from you. We'll keep the profit. It will help the recovery.

In ruling on the subsequent "gold cases," the Supreme Court said yes, it was all done legally, if perhaps underhandedly. How could government get away with an immoral act? No one had the power to stop it.

Garrett later concludes (pp. 103-104):

Those who take the New Deal to have been the beginning of revolutionary change in the character of government are wont to cite its laws, and its many innovations within the law and to forget that if it had been without the means to enforce them all of its intentions would have died in the straw. It had to have money; and not only a great deal of money, but freedom from the conventional limitations of money. It knew that. [Emphasis added]

Name the Party, Candidate, and Election Year

2010-11-05T09:30:00.000-07:00

Excerpts from the Party platform:

"1. An immediate and drastic reduction of governmental expenditures by abolishing useless commissions and offices, consolidating departments and bureaus and eliminating extravagance, to accomplish a saving of not less than 25 per cent in the cost of Federal government. . .

"2. Maintenance of the national credit by a Federal budget annually balanced. . . .

"3. A sound currency to be maintained at all hazards."

In his campaign for the presidency, the candidate said:

"I accuse the present Administration of being the greatest spending Administration in peace time in all American history—one which piled bureau on bureau, commission on commission, and has failed to anticipate the dire needs or reduced earning power of the people. Bureaus and bureaucrats have been retained at the expense of the taxpayer. . . . We are spending altogether too much money for government services which are neither practical nor necessary. In addition to this, we are attempting too many functions and we need a simplification of what the Federal government is giving to the people."

For the answer, see this.

Policies are made for the sheppards, not the sheep

2010-11-05T06:17:00.000-07:00

The Fed exists to keep the big banks profitable and to help fund government's massive spending programs. QE II is an open policy of monetary inflation to help achieve these ends, but the Fed has been QE'ing all along. Andy Sutton reports:

The Fed has been backdoor monetizing for some time now. There are many different ways they’ve done this such as using currency swaps with the ECB, and other ‘facilities’ in foreign jurisdictions like the UK to make their purchases for them. Notice at around the same time China started cutting back on its exposure that Great Britain, broke as a stone, started ramping up bond purchases. It is a pretty safe bet that this is none other than Mr. Bernanke and Co. at work.

This has been going on and will continue. However, the shift towards overt monetization should tell us that the Fed is stuck and is beginning to panic. The stimulus didn’t work. The last round of asset purchases, totaling nearly $2 Trillion that we know of, only fattened bank balance sheets and did almost nothing to help Main Street. I am inclined to believe that was the whole idea though since the Fed has been incentivizing the banks NOT to expand lending.

One of those incentives is the interest the Fed pays banks on their reserves.

What about consumers? Won't some of this new money help them out? More money in the economy usually means higher prices, the very reason the Fed is inflating, making it more difficult for consumers to maintain their lifestyle without borrowing. Banks love it when you borrow.

. . . much of our ‘growth’ the past few decades has been derived from a service oriented, consumption driven model. The fuel for that growth has been the expansion of consumer credit, so much that consumer credit outstanding and GDP have marched in near lock step since the turn of the century. This tells us that our ‘growth’ has been borrowed, and is in fact, not growth. Throw in the inflation of the early part of this decade and there has been negative growth across the board. The prosperity has been put on plastic and now hangs like a boat anchor around the necks of most Americans.

Graphically, it looks like this:

Sutton adds:

The current contraction, which is showing signs of exhaustion, has only clipped 6.49% off the total consumer debt outstanding. While this is significant in that it is unprecedented, it is not enough to substantially decrease the costs of servicing the debt for consumers. Since being bailed out, banks have continued to raise rates on many forms of revolving debt to keep profits steady.

The Experts Give Us QE II

2010-11-04T12:39:00.000-07:00

The Fed's $600 billion promised purchase of Treasury bonds over the next eight months gathered the headlines, but the fine print adds an additional $35 billion per month to purchase more Treasury debt with proceeds from mortgage bonds the Fed plans to retire. Total money created from nothing for the next eight-month period: $900 billion.

The stock market is trying to figure out if this is good or bad. On Wednesday the Dow rose 26 points, and so far today it's up 188.83 points, currently sitting at 11,403.96 as of 3 PM. EDT.

But gold buyers reacted with horror to the Fed's plans. Adrian Ash reports:

THE PRICE OF GOLD in wholesale dealing lept at the start of US trading on Thursday, extending an overnight rise to within 0.5% of last month's record highs – and gaining $50 per ounce inside 21 hours – as the US Dollar sank in response to the Federal Reserve's hotly-anticipated "QEII" asset purchase program.

"Currency devaluation remains firmly en vogue," said one London bullion dealer this morning.

Currently, gold is selling for $1,384 per ounce, according to Kitco.

In a Washington Post Op-Ed piece, Ben Bernanke justified QE II this way:

Today, most measures of underlying inflation are running somewhat below 2 percent, or a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run. Although low inflation is generally good, inflation that is too low can pose risks to the economy - especially when the economy is struggling. In the most extreme case, very low inflation can morph into deflation (falling prices and wages), which can contribute to long periods of economic stagnation.

Even absent such risks, low and falling inflation indicate that the economy has considerable spare capacity, implying that there is scope for monetary policy to support further gains in employment without risking economic overheating. The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed. With short-term interest rates already about as low as they can go, the FOMC agreed to deliver that support by purchasing additional longer-term securities, as it did in 2008 and 2009. The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August.

And Mish's Global Economic Trend Analysis mentions the views of Dr. El-Erian, CEO and co-CIO of PIMCO, who predicts QE II will fail for at least three reasons:

1. The Fed is going it alone, without meaningful structural reforms
2. Emerging economies burdened by capital inflows in the wake of QEII will react with currency wars, protectionism, and capital controls
3. Resultant commodity price increases will increase input costs and reduce earnings of American companies

The only structural reform that would help us would be to de-structure the Fed entirely, along with every other organization in Washington. Mish offers his own analysis:

Add a junk bond bubble to the list of consequences (unintended or otherwise).

Bernanke is clearly misguided enough and arrogant enough to purposely blow a junk bond bubble as an "intended consequence", even though the housing bubble bust proves without a doubt the asininity of such policies.

Thus, it's hard to say if Bernanke wants a junk bond bubble or is merely willing to live with one.

Then again, Bernanke is dense enough to not have any clues about what is happening. He did not see the housing bubble, the recession, the huge rise in unemployment, and any number of other things that happened. In fact, he even denied there was a housing bubble.

In the academic wonderland in which Bernanke lives, it is perfectly possible he is oblivious to the bubbles he is creating.

However, looking at things from every angle, given that Bernanke Admits Targeting Stock Prices, I am leaning towards the first option: Bernanke is misguided enough and arrogant enough to purposely blow more asset bubbles as an "intended consequence", hoping he can deal with them later.

A Cross of Gold

2010-11-02T14:03:00.000-07:00

This is a long read - 23 pages - but a very worthwhile one. Edwin Vieira clarifies many ideas about money, both sound and unsound.

Astute Americans need to envision, and then to bring about, a new monetary system in which no one talks about “the price of gold”, but only of “prices in gold”. No “price of gold” exists when a fixed weight of gold is the actual unit of money. Under those circumstances, all prices are stated in terms of gold. When a fixed weight of gold is the unit of money, “the price of gold” is a meaningless concept, or at best a tautology: namely, “the price of a unit of gold” is precisely “a unit of gold”. In that context, asking what is “the price of gold” would be as sensible as asking today what is “the price of a nominal 'one-dollar' Federal Reserve Note”.

Who Will Pay for ForeclosureGate?

2010-10-29T07:30:00.000-07:00

Is that really a question?

Is Deflation the Danger?

2010-10-29T04:40:00.000-07:00

According to the Bureau of Labor Statistics the official inflation rate (CPI) from August, 2009 to August, 2010 was 1.1%. Conclusion: prices haven't risen much, and in fact we could be in a deflationary spiral, which Chairman Bernanke and other Keynesians view with horror and which is why it's a virtual certainty the Fed will try another round of aggressive counterfeiting known as Quantitative Easing Two - QE2.

But does the official inflation rate mean the cost of living has only gone up 1.1%? Only if you don't count food and energy, which the government excludes as too volatile.

Jake Weber, editor of the Casey Report, has produced a chart that shows how much prices have risen for things people actually buy, year over year to October, 2010.

On average, our basic food costs have increased by an incredible 48% over the last year (measured by wheat, corn, oats, and canola prices). From the price at the pump to heating your stove, energy costs are up 23% on average (heating oil, gasoline, natural gas). A little protein at dinner is now 39% higher (beef and pork), and your morning cup of coffee with a little sugar has risen by 36% since last October. . . .

It is because stashing wheat and cotton in the garage is an impractical way to protect purchasing power that investors are increasingly looking to protect themselves with the monetary metals – a trend that is now very much in motion.

Beware of "Paper Gold"

2010-10-28T07:25:00.000-07:00

Fractional-reserve banking is not limited to national currencies. The London Bullion Market Association (LBMA) runs the biggest "physical gold" market in the world. But at least one expert on the LBMA, Jeffrey Christian of the CPM Group, filed a report in 2000 that the "London bullion market is actually a fractional-reserve gold banking system built on the presumption that most gold buyers will never take delivery of their metal but rather leave it on deposit with the LBMA members from whom they bought it." GATA's Chris Powell explains:

GATA board member Adrian Douglas has studied the LBMA statistics and Christian's work and estimates that the great majority of gold sold by LBMA members doesn't exist -- that most gold sales by LBMA members are highly leveraged. How leveraged? How much gold is due from LBMA members that doesn't really exist? The LBMA doesn't report that. Like the Fed's gold swap arrangements, the world mustn't be permitted to know. The consequences might be catastrophic for the banking interests that run the world.

For then the world might understand why even at its recent price above $1,300 per ounce gold has not come close to keeping up with the inflation, the currency debasement, of the last few decades, why gold has not fulfilled its function of hedging against inflation. That is, gold's enemies figured out how to increase its supply by vast amounts without going through the trouble of digging it out of the ground. They invented "paper gold" -- gold that doesn't exist but that many buyers accepted, never suspecting that major financial institutions might deceive or defraud them.

Adrian Douglas adds:

I have recently written a series of exposes of the LBMA (see References 1-4 below) using the association's own data to show that the LBMA's bullion banks are operating on a "fractional reserve" basis. My analysis indicates that the bullion banks are holding only 1 real ounce for about every 45 ounces of gold that they have sold, a reserve ratio of just 2.3 percent.

When will the currency wars end?

2010-10-28T06:59:00.000-07:00

Bloomberg reports:

Finance chiefs from South Korea to South Africa signaled they may act to slow gains in their currencies, just four days after the Group of 20 vowed to soothe trade tensions in the $4 trillion-a-day foreign-exchange market.

Asian currencies fell to a one-week low after Bank of Korea Governor Kim Choong Soo said today that measures to mitigate capital flows could be “useful.” Hours later, the rand dropped as South African Finance Minister Pravin Gordhan said his government will use part of higher-than-expected tax revenue to build foreign reserves as it attempts to weaken the currency.

The shifts suggest G-20 members will keep trying to defend their economies from the slide of the dollar and capital inflows even after the group promised Oct. 23 to refrain from “competitive devaluation” and to increasingly embrace market- determined currencies.

This is politics-as-usual. As the central banks of the world engage in a race to the bottom, you should protect your wealth with investments that are racing the other way.

Did the Cream Rise to the Top - or Something Else?

2010-10-27T12:44:00.000-07:00

Economics has been called the “dismal science” for over 150 years. This is unfair. Outside of the Austrian school, economics, in parroting the methodology of the hard sciences, has forfeited its claim to being “scientific.” [here, here, and here] Since World War II especially, economists have been mostly apologists for government growth and propagandists for more of the same. [Also here, here, and here]

A panel of distinguished economists recently deadpanned that the recession ended in June, 2009. And it did end, if you believe in the power of free lunches and consumption multipliers.

Just don’t count the unemployed and underemployed and people who have given up trying to get employed - or the long-employed incubating ulcers about pink slips. Don’t get upset with the legions of college graduates who have moved back in with their parents or are waiting tables while a staggering student loan hangs over their heads.

Never mind that the world is running out of suckers to buy government debt. Pay no attention to the decade-long rise in the price of gold, forget that Alan Greenspan told a meeting at the CFR that "Our choice is not between good and bad. It's between terrible and worse,” and that gold’s rise in price is like the dead canary in the coal mine, signaling “a problem with respect to currency markets globally,” forget that currencies will continue their plunge because new Fed policymaker Janet Yellen is yet another believer in the power of quantitative easing, that in terms of real debt the U.S. is the most insolvent nation among developed Western nations, that according to John Williams of ShadowStats.com, on the basis of Generally Accepted Accounting Principles, “total federal obligations as of September 30, 2009, stood at $70.7 trillion“ - nearly five times the GDP reported for fiscal 2009.

Never mind all this. If we want to be part of the Establishment’s solution, we need to embrace the Keynesian belief that national politicians can create prosperity with more easing and spending.

What might be the outcome of a continuation of government and Fed salvos? Making it easier for people to spend money will likely get them spending money. As retail sales pick up more temps will be hired. GDP figures will expand, and the government will issue assurances about possible controls should prices rise too much. The economy will flash like a hypernova, and Krugman and his Keynesian allies will glitter for awhile.

As shelf prices begin to shoot up, the government will threaten selected wealth producers about various cards it could play, none of them pleasant for such a small voting bloc. Backstage at the local market, highly depreciated federal reserve notes will be swapped for whatever people can get their hands on. Spending, in other words, will become a desperate act of saving. There will be arguments in the media about whether we’re experiencing inflation or mass inflation, with general agreement that other than the usual loons, no one saw it coming because the Fed is doing what it pledged it would do, create more inflation, which is not the same as real inflation or mass inflation.

Bargain stress-relief solutions will thrive as more people feel poverty closing in on them. Fat-cat federal spokespeople will deplore the spike in street crime. International tensions will increase as governments continue playing beggar thy neighbor or in some cases bully thy neighbor. The CIA might even start another war. The usual suspects will get blamed for everything. Throughout all this the do-something gang will be undeterred because whatever losses they might suffer are discounted by the fact that they’re still in charge. And the “experts” who never see a crisis coming will tell us we must once again abandon free market principles to save the free market system.

What form will the abandonment take? Whatever is politically expedient. Americans could end up shackled to a one-world super-bank manufacturing meal tickets at will, though with everyone looking for a free lunch the meals might become indistinguishable from the tickets themselves.

Of course, none of this has to happen.

Kris Kringle? No, Ben Bernanke

2010-10-27T10:52:00.000-07:00

Kris Kringle? No, Ben Bernanke

SATIRE by

George F. Smith

What will Ben Bernanke do to restore economic growth? He’s probably wondering the same thing. Since he holds our future in his hands, it can be helpful to think through some of the politically-acceptable options he has, to see where they might lead.

Everyone is speculating on QE2 - Quantitative Easing Two. Will he or won’t he, and if he will, how will he implement it - all at once or gradually? The financial press is convinced QE2 is a done deal in some form. They’re probably right -- aren’t they usually? -- but if I were Ben Bernanke, I would think about it extra hard. QE1 was not an American success story. You don’t improve a gross blunder by repeating it. The monetary base is at an all-time high, banks are risk-averse, corporations are loaded with cash, and the mortgage industry is in trouble again because of sloppy or fraudulent foreclosure practices. Pouring more fiat money into the banking system, therefore, would have the same effect as setting the stuff on fire. Bernanke would seem to be trapped. He can print money all he wants but if the usual beneficiaries sit on it, what good will it do?

According to my understanding of Keynesian theory, Bernanke has to get the money into the pockets of people who will spend it. He needs to identify the spenders and make sure they go to their favorite retail outlets and buy things.

Who are the spenders? You and me. But Americans are too much in debt, and there’s always the chance that if he writes them a check they will use most or all of it to pay creditors. How can he get people spending on stuff that’s sitting on store shelves?

How about a free Christmas - for starters?

The holidays are almost here, and people won’t be paying down debt for the next two months. They will spend, but they will be frugal. Frugality is a mortal sin in the Keynesian religion. Frugality belongs to the same family as hoarding, and hoarding is public enemy number one to central planners.

Some people think of Bernanke in a helicopter dropping money on the masses to get them to spend. He would probably enjoy doing it - after scattering the loot, he could hover overhead and watch the action. He would be witnessing one of those rare moments in the life of a leading economist, the confluence of theory and reality. It would sure beat watching a rat navigate a maze. Moreover, he could attach sales fliers to the money, to further reinforce the idea of spending it. Imagine: From his perch low above the ground he could see unsold inventories gathering dust, then watch those inventories being whisked away in a cloud of dust as consumers went on a spree.

Would this work? Maybe, but while we wait for the econometric models to tell us for sure, we can dream up other possibilities.

In my opinion, Bernanke needs to think like the father of teenage daughters. What is their ideal world? One or more credit cards with astronomical spending limits -- credit cards that daddy takes care of when the bills come due. Bernanke could issue Fed credit cards and scatter them over the American landscape. Take a card to Macy’s, buy what you want, and Macy’s sends the receipts to the Fed. Drawing on his capacity to produce digits and dollar signs with a few keystrokes, Bernanke prints Macy’s a check, Macy’s orders more inventory, and the cycle begins anew. As the Mogambo Guru might say, “Whee! This economics stuff is easy!”

You say, fine, but who would do the work in this scenario? Who would produce the goods, and who would man the stores to sell them? We already know the answer to the first part - foreigners would make the goods. We’re still the world’s only superpower, right? As for retail clerks and such, Bernanke could call on the military or hustle up prison inmates. Soldiers would be well-suited to instill order in a frenzied crowd of shoppers, and prisoners would welcome a break from their confinement, while it would help acclimate them to rational society.

Not only will massive spending boost GDP, it will eliminate the nagging unemployment problem by bringing new meaning to the idea of work. Inflation fears? Who cares about inflation when you have unlimited credit? Crime would plummet because there would be no need for private citizens to rob or steal. People would have their faith restored - yes, indeed, there is a Santa Claus. And that bad ol’ government that libertarians love to skewer - why, they’re wrong, it truly is our servant. Man of the Year? Ben Bernanke would be a shoo-in for the White House.

We don’t need another QE. We need Fed credit cards. If the Fed is generous enough, Christmas 2010 will be the best, and quite possibly the last, on record.

Are we destined for Third World status?

2010-10-26T08:20:00.000-07:00

We will only reach Third World status if we don't stop the planners and spenders who rule us. It is up to you, it is up to me. The Left-Right agenda of big government has brought us close to collapse, and there are no indications of a trend reversal. On the contrary, the government acts as if everything else is the problem, as it spends and regulates us into oblivion. ActivistPost.com documents: 10 Signs The U.S. is Becoming a Third World Country.

"Keep Quiet About Your Gold"

2010-10-25T16:34:00.000-07:00

Let's say you've purchased some physical gold and/or silver. You paid for it in cash from a local dealer who doesn't know you, thereby assuring your privacy. You bring it home and then . . . you do what with it?

Jeff Clark of Casey Research offers some suggestions.

1. Put it in a safety deposit box - This is the easiest method, but it compromises your privacy. Plus, with a safety deposit box you don't have access to your metals 24/7.

2. Bury it - Advantages: "You don’t have to worry about losing your gold to a burglar or having it damaged in a fire. A lot can happen in the world that won’t disturb buried gold." Be sure to bury it someplace inconspicuous where you can get to it easily. Also, put it in a protective container first.

3. Hide it in your house or put it in a home safe - Don't hide it anyplace obvious, and consider storing it in a home safe, preferably a floor safe that can't be easily moved. I know someone who stores his valuables in a 700-pound safe he keeps in the basement.

However you store your gold, let exactly one person know the details. It needs to be someone in whose honesty and discretion you have complete confidence. It will be that person’s job to access the gold if you are incapacitated or die. If you are using a safe deposit box, his or her name should be included in the box registration, and they should know where to go to get the key.

Tell one person, but only one. No one else should know. This is especially important if you are using home storage. You don’t want to come home someday to find your house turned upside down because someone heard you’re living in a treasure chest. Even worse would be to come home and find your friendly local looter waiting to have a chat with you.

There’s just no other way to say it: keep quiet about your gold.

Stronger Yuan No Threat to Gold

2010-10-25T15:26:00.000-07:00

Last week China said it would boost the lending rate on the yuan by 25 basis points. Contrary to expectations the dollar got stronger. What does this mean for gold? Rick Ackerman writes:

Gold and silver came down because speculators believe that China, the world’s remaining economic engine, will continue to tighten in the months ahead. That would be deflationary, the thinking goes, and bullion prices should ease in anticipation.

The thinking is wrong, however, for the simple reason that the move toward fiscal austerity around the world, especially in euroland, is no match for the rampant monetary stimulus that is being used to counter the worst global recession since the 1930s. Beggaring-thy-neighbor via currrency devaluations is not merely in vogue, it is the Tulip-o-mania of these times.

If this trend is capable of causing the price of gold and silver to fall, then pigs can fly and the world is entering a period of unprecedented peace, prosperity, harmony, with high-paying jobs for everyone. If you believe this, then you should be hoarding all the paper money you can get your hands on, stuffing it in your mattress, and in Treasury Bills and Notes that yield almost nothing.

For our part, we’ll put out trust in gold and silver, which for the last decade have steadily climbed in value no matter what investment story was in vogue; regardless of whether it was inflation or deflation that we feared; and even as the world’s financial system has edged toward the deepest imaginable abyss.

Gold-to-Go coming to US

2010-10-25T06:42:00.000-07:00

A hostess in Berlin buys gold from an ATM

From the Sidney Morning Herald, October 23, 2010:

Apart from the gold-plated exterior - and the fact that they are bulletproof - they seem much like any other vending machine. But instead of chocolate bars, a network of ''gold-to-go'' machines dispenses 24-carat bullion.

Originally designed as a marketing device for an online gold trading business, the machines have become such a success that their inventor plans to build a global network, installing them everywhere from fitness centres to cruise ships.

The German businessman behind the machines, Thomas Geissler, said their success was the result of a rush on gold, the price of which has risen from $US250 an ounce in 1999 to about $US1330 an ounce.

''Ordinary people are starting to see its real value,'' he said.

Since the first machine was installed in May, in the lobby of Dubai's Burj Khalifa hotel, 20 gold-to-go machines have been installed across Europe. Next month the first machines will open in the US.

Mr Geissler is also meeting representatives of Harrods department store in London to discuss launching the first British machine. He plans to have launched 45 worldwide by the end of the year.

''We notice the sales peak whenever there are signs that the markets are wobbling. When the Greek crisis was revealed in its entirety, our sales went up tenfold. With the current troubles in currency markets, gold becomes even more attractive.''

It was no accident that the machines had taken off so well in Germany. ''Germans are still traumatised by the hyperinflation [of the 1920s], when people walked around with wheelbarrows full of notes, while Americans are still traumatised about the Depression.''

Mr Geissler said most customers of the vending machines were women, who tended to buy in smaller amounts. The larger pieces - it is possible to buy up to 250 grams for about €8,000 ($11,350) - are bought by ''well-off men, of on average 55 years of age''. The bullion are sold in smart presentation boxes.

The machines are monitored from Geissler's company headquarters in Reutlingen, Germany, and the price of the gold is updated every 10 minutes, according to the market price.

The company says its gold is cheaper than that available from the banks because its overheads are lower and the machine gold is available immediately, unlike at banks where customers have to wait for days.

Foreclosure-gate

2010-10-22T14:52:00.000-07:00

The latest unintended consequences of the Federal Reserve-fueled housing boom is the wave of foreclosure problems sweeping the mortgage industry. When someone takes out a mortgage on a house, they sign an endless stack of papers. The mortgage company then sells the mortgage, including the papers, to a bank like Bank of America or JPMorgan Chase. The bank bundles the mortgage with other mortgages and sends it through a depositor to a trust such as Deutsche Bank. The trust then hires a servicer to collect the monthly mortgage payments.

So, the mortgage moves from a mortgage company to a bank, to a depositor, to a trust, to a servicer. At each step of the process the appropriate papers should have accompanied the mortgage to identify who owns the house and who pays the mortgage.

Now suppose the original buyers can't make their mortgage payments. After six months the servicer comes calling and says pay up or vacate the house. This is entirely legal, as long as the servicer can prove that the trust for which it is collecting payment is the real owner. Trouble is, with all the mortgages created and now with mounting foreclosures nationally, such proof is in question.

The original paperwork was transferred to a computer system called MERS, for Mortgage Electronic Registration System, and though the paperwork should still be available, it quite often isn't.

As Elizabeth Shell explains:

To support the complaint that the mortgage hasn't been paid, the servicer must have an affidavit that verifies the trust actually does own the mortgage, and thus is owed six months of payments.

And that means someone at the servicing company had to personally swear on a affidavit in front of a notary that the note's ownership had been verified and that the homeowners owed back mortgage payments. This process is supposed to be done for each and every foreclosure.

With all the foreclosures from the financial downturn, critics claim "robo-signers" from the banks were robotically signing off on literally hundreds of thousands of affidavits.

This is where the waters can get incredibly muddy for that verification process. First, the servicer's robo-signer signing off on these affidavits may not have been checking every single one to see that the trust indeed owned the mortgage note. Second, the notary (which is required for affidavits) was often done at a later date than when the robo-signer signed off on the complaint. Sometimes months later.

With accusations of robo-signing, judges have become reluctant to accept affidavits in lieu of a printed note. As an Associated Press article reports:

Though some have chalked up the foreclosure debacle to an overblown case of paperwork bungling, the underlying legal issues are far more serious. Yes, swearing that you've reviewed documents you've never seen is a legal offense. But at the center of the foreclosure scandal looms something much larger: the question of who actually owns the loans and who has the right to foreclose upon them. The paperwork issues being raised by lawyers and attorneys generals have the potential to blight not just the titles of foreclosed properties but also those belonging to homeowners who have never missed a mortgage payment.

Trashing the dollar to pump stocks

2010-10-22T10:30:00.000-07:00

Graham Summers writes:

What’s truly worrisome is that the Fed is hell bent on enacting the exact same policies that have created the Dollar collapse (and the rally in stocks) over the last few months, namely, additional Permanent Open Market Operations (POMO) ramp jobs. The name sounds clever, but it really just consists of the Fed buying US debt from the large private banks, which in turn take the Fed’s money and buy stocks.

Indeed, the Fed just announced it will be monetizing an additional $32 billion worth of US debt in the next few weeks. The schedule for these ramp jobs is as follows:
October 15:
October 18:
October 20:
October 22:
October 26:
October 28:
November 1:
November 4:
November 8:
In plain terms, the Fed is going to keep doing what it’s been doing: trashing the US Dollar to pump stocks. And it’s going to do this to the tune of some $10 billion per week over the next month.

Thus, as ridiculous as it sounds, the stocks up/ US Dollar down trend of the last two months is likely to continue into early November. But if the US Dollar doesn’t bounce soon and start rallying with force, we’re heading into a VERY nasty period.

The Campaign Against Gold

2010-10-21T08:18:00.000-07:00

From The Gold Wars by Gary North:

The State has adopted several strategies in undermining the use of gold as coinage. Here are a few of the more common strategies.

1.    Issue paper IOU’s for gold, called gold certificates.

2.    Issue more of these certificates than there is gold to redeem all of them on demand on the same day. “Suckers!”

3.    Allow commercial banks to do the same thing. “Suckers!”

4.    Create a central bank that stands ready to issue gold to bail out any bank that experiences a gold run.

5.    Allow commercial banks to suspend redemption of gold during a national emergency. “Suckers!”

6.    Allow the central bank to confiscate the gold of the now- protected commercial banks. “Suckers!”

7.    Make the ownership of gold illegal for citizens.

8.    Create a gold-exchange system internationally in which foreign central banks buy interest-bearing bonds from one or two countries that back their currencies in gold: IOU’s for central bankers.

9.    Create a central bank for central banks that will lend gold during a national bank run. Call it something other than a bank, such as the International Monetary Fund.

10.    Suspend gold payments to foreign central banks when too many of them catch on that there are more IOU’s out there than gold to redeem them. “Suckers!”

11.    Persuade all of the other central banks to store their gold in the senior branch of a central bank whose nation used to redeem gold on demand by foreign governments, but which defaulted decades ago. “Suckers!”

12.    If the price of gold rises, calling attention to the monetary fraud of legalized counterfeiting, sell some of this gold to the grandchildren of those trusting citizens from whom you stole the gold. But call the sales something else, such as gold leasing. Don’t reveal a reduction in the official reserves of gold.

13.    Allow central banks make a substitution: written promises to pay gold, issued by private organizations called bullion banks, instead of actual gold.

14.    Wait for the price of gold to rise, thereby bankrupting the bullion banks, which will not be able to repay. These are all corporations, and so enjoy limited liability benefits. No one goes to jail.

In this final scenario, who wins? All those people who bought gold while the gold- leasing operations lowered the market price of gold.

Today, the central banks’ gold is steadily being repatriated to private owners. The central banks are subsidizing the future net worth of gold buyers.

When there is finally no more gold to lease, or when central bankers at long last figure out that IOU’s issued by recently bankrupted gold bullion banks are not really what central bankers need to establish public confidence in their forecasting abilities, the price of gold will skyrocket. At that point, the public will decide it’s time to buy -- at high and rising prices.

Those who have already bought will then look at the rest of the population, which failed to buy while the buying was good, and very quietly, in private circles, issue their unofficial assessment: “Suckers!”

Government and gold

2010-10-21T08:04:00.000-07:00

From The Gold Wars by Gary North:

Political rulers throughout recorded history have asserted a monopoly over money. They have argued that the State possesses legitimate authority over the creation and distribution of money. Because gold and silver have been widely used as money metals, the State has asserted control over the monetary uses of these two metals.

This is the origin of the war against gold. Gold is widely recognized and desired as an investment. It is a highly marketable commodity. This was far more true in 1913 than it is today. Prior to the de-monetization of gold, which began in 1914, a person could take a gold coin anywhere where international trade was common and buy just about anything. It did not matter which ruler’s image was on the coin. The coin was valuable because of its gold content. The image may have helped to convey information about the coin -- so much gold of a certain fineness -- but the face on the coin had merely a brand-name recognition effect. The British gold sovereign was so widely recognized that James Bond carried sovereigns as late as the mid-1960s. In From Russia With Love, the coins were in the booby-trapped briefcase. The ruler’s image verified the quantity of gold in the coin. It did not add value except as a kind of Good Statekeeping Seal of Approval.

Gold’s value is not independent of governments. This is because governments buy and sell gold. This activity affects its price. Gold’s value is also affected by laws against the circulation of gold coins. The Soviet Union had such laws. So did the United States, 1933-1974. But gold’s value as a money metal can exist independently of a government’s actions to subsidize or stigmatize gold’s use as money. Gold circulates as money precisely because it has a value independent of government policies. Or it did. It no longer does. Gold has been de-monetized by governments and their acolytes, the economists.

As with any scarce resource, gold moves to those holders who bid highest. The more widespread gold’s use as money becomes, the more likely that trade will accompany gold. Gold reduces risk by reducing the likelihood of default or fraud on the part of the State or its licensed agents, fractional reserve banks. A government can go bankrupt, but its gold coins will still circulate at gold’s market value. The same is true of any coin-issuing agency. The gold may be marginally more or less valuable in a particular form because of the degree of recognition of the producer, but a government that accurately certifies its gold coins will find that its coins circulate at full value even if the government itself faces bankruptcy or extinction.

Gold’s independence from the fate of governments points to a political truth that governments despise: governments are not the source of the value of gold. To the extent that gold is money, gold testifies against the sovereignty of the State in the realm of money. It testifies to the sovereignty of consumers in a free market. The free market, not the State, is the primary source of gold’s exchange value.

This means that consumers can escape from the State’s anti-consumer policies. They can buy gold. This provides them with international money, black market money, and “hoard it and spend it later” money. It provides one group of citizens with the personal escape hatch from the effects of government power-seeking. Which group? Political skeptics who do not trust the government’s money.

In olden days, this escape hatch was an insult to a king, whose face was on the coins that he was debasing by adding metal of lower value. The king wanted to increase his spending, but there was tax resistance. So, he would call in the old coins, melt them, add cheap metal, and try to spend them into circulation at the old rate for coins with higher gold content. The plan never worked. The new coins would always fall in value.

This enraged the government. It made theft through deception less effective. The citizens who spotted the fraud early would buy gold by exchanging the debased new coins for old gold coins, leaving the less perceptive, more trusting citizens holding depreciated new coins. Private citizens did what the king was trying to do, and this invasion of the king’s asserted prerogative to steal enraged kings for centuries.

Today, there are no kings, other than “King” Farouk’s famous kings of clubs, diamonds, hearts, and spades. But politicians still play the old games, and play it much better. They want the monopoly of theft that comes from passing the new, counterfeit money to the suckers (citizens) at yesterday’s lower prices. So, when a few of the recipients of the new, phony bills and credit money start unloading them to buy gold, the politicians take action. They do not want to share the benefits of being able to buy at yesterday’s prices with today’s more plentiful money.

When gold’s price rises steadily when there seems to be no war imminent or other international disaster, people start looking for a reason. The main reason is that the government is inflating. If gold’s price is rising in one currency but not others, this is additional evidence of policies of monetary inflation.

The government wants people to believe in “something for nothing.” It wants people to believe that digital money creates wealth. But if one group seeks to gain a disproportionate share of wealth by exchanging fiat money for gold, only to see gold’s price rise, the politicians try to stop this. They cry out against “speculators” who are “acting against the public interest” by “profiting at the expense of widows and orphans.” This is a more acceptable way of saying: “These private amateurs are invading our turf in the ever-profitable business of looting widows and orphans.”

A rising price of gold is like a trip-wire alarm that announces: “The politicians are at it again. Bolt down the furniture.” It is a signal, published in the newspapers, that there is something untrustworthy about the central bank’s monetary policies. It alerts entrepreneurs to start buying goods before prices rise further. So, prices rise even faster. This makes it even more expensive to buy votes with fiat money. The new money buys fewer of the goodies that politicians hand out to buy votes.

The skeptics who say “the government should never be trusted” get rid of the new money and buy at yesterday’s prices. The trusting souls who say, “The government is our friend” hang onto the money, only to see it fall in value. The skeptics win; the State- trusting citizens lose. This is an affront to the politicians. It raises the cost of trust. Economic law then takes over: “At a higher cost, less will be supplied.” More citizens begin to distrust the government.

The politicians deeply resent this aspect of gold, for the same reason that a burglar resents the widespread installation of burglar alarms.

Home prices and government credit

2010-10-14T09:34:00.000-07:00

According to Robert Schiller in his book Irrational Exuberance, between 1900 and 2000 home prices in the U.S. increased by an average of 3.4 percent annually, slightly above the average inflation rate. Prices were firmly tied to people’s ability to pay, which is a function of income and credit availability.

From 1997-2006, home prices gained an astounding 19.4 percent annually on average, yet incomes stayed mostly flat. How could people pay so much? The difference was credit. Government made credit cheaper and easier to get.

Cheap credit today is made possible by our unsound monetary system.

--- From How an Economy Grows and Why It Crashes by Peter Schiff and Andrew Schiff, Chapter 15

Gold surges as Fed releases September FOMC minutes

2010-10-13T10:49:00.000-07:00

"In minutes of the its last policy-setting session held September 21, the Fed said officials discussed several approaches to aiding the economy but focused on buying additional longer-term Treasury securities and ways to nudge the public into expecting higher levels of inflation in the future," Reuters reports.

Guess what happened to the price of gold?

"Gold sets record as Fed easing hopes hit dollar" - Reuters

"Gold Prices Rise to Record as Demand Mounts for Alternative to Currencies" - Bloomberg

“Both gold and the dollar agree that Ben Bernanke will be victorious in his quest to foment a robust rate of inflation,” said Michael Pento, a senior economist at Euro Pacific Capital in New York. . . .

Gold for immediate delivery reached a record $1,374.35.

Investors should be prepared for a correction in prices, Adam Sieminski, a Deutsche Bank analyst, said in a report. The 14-day relative-strength index for gold futures has been above 70 for the past three weeks, a signal to some traders that prices may decline.

Investors ‘Wary’

“Investors need to be wary of a short-term correction in the U.S. dollar during October, and with it, a possible setback to recent price advances” in gold, Sieminski said. “We view any correction in gold prices over the next three weeks as yet another buying opportunity. The next hazard for bullish gold investors will be the first four weeks of next year, which has seen the dollar strengthen nine out of the last 12 years.” [Emphasis added]

FRBNY and PPT President Bill Dudley Guarantees QE2

2010-10-05T15:38:00.001-07:00

The Fed claims to have a dual mandate: promote prosperity and keep prices stable. In the nearly 100 years of the Fed's existence it has done neither. The Fed works against prosperity and against stability. Fed inflation keeps prices rising and keeps the market chasing after projects that don't make economic sense. The pseudo-boom it creates results in a recession which it attempts to fix with more monetary inflation. At Fed headquarters the way to dig yourself out of a hole is to dig the hole deeper. And dig deeper still when that doesn't work. The Fed is poised to open the monetary floodgates again by buying more assets, a move it calls "quantitative easing 2," or QE2.

How close they are to executing QE2 was signaled by Bill Dudley last Friday, October 1, 2010, in a speech at the City University of New York's Graduate School of Journalism:

Currently, my assessment is that both the current levels of unemployment and inflation and the timeframe over which they are likely to return to levels consistent with our mandate are unacceptable. In addition, the longer this situation prevails and the U.S. economy is stuck with the current level of slack and disinflationary pressure, the greater the likelihood that a further shock could push us still further from our dual mandate objectives and closer to outright deflation.

The key word is "unacceptable." That's strong language for a FOMC official like Dudley. According to former St. Louis Fed president William Poole,

It is hard for me to imagine a stronger statement that Dudley will be arguing for the Fed to buy more assets—the policy discussed at some length earlier in his speech. “Unacceptable” is a pretty strong word.

The Fed's greatest fear is deflation. It will avoid it at all costs, even if the cost is the destruction of the currency.

Gold reached a new nominal high of over $1,340 today.

Why gold and silver are on the rise

2010-10-04T14:15:00.000-07:00

Peter Degraaf explains why gold and its little brother are doing so well. In a word, government. In his words,

The upward pressure on price is due to fundamentals for gold that are extremely bullish and these include:

·         The US money supply is today twice as large as it was just a few years ago.
·         The Obama administration is without a clear economic policy – three out of four members of the economic team have just resigned - and the fourth, Tim Geithner, has never held a position in the business world aside from being involved in the banking business at Goldman Sachs. The man can’t even keep correct personal income records.
·         Worldwide money supply is expanding at an average rate of 10%.
·         The US dollar is in a long-term decline against gold (see chart below).
·         The Euro is in a long-term decline when measured in gold (see chart below).
·         Gold is rising not only in US dollar terms but also as expressed in a number of currencies – this reflects a ‘flight to safety from fiat currencies.’
·         Gold production is declining, despite higher prices.
·         It takes longer (due to regulations) to build a gold mine than ever before, and the rising cost of materials and fuel makes it very expensive to build a mine.
·         The period between US Labor Day and Christmas is usually the most gold-bullish period of the year. In seven of the last eight years gold rose during this period.
·         The expiration of options on August 26th did not have a negative effect on the gold price, compared to options expiration days in June and July.   This proves strong underlying physical demand.
·         China is buying up local gold production, thus withholding it from the market.
·         Russia is buying up local gold production, thus withholding it from the market.
·         Gold ETFs are more popular than ever before, drawing bullion away from the market.
·         The US gold supply that is stored at Fort Knox has not been audited since 1953 and is most likely all or partly gone.   It has either been sold or leased.
·         Central banks have stopped selling gold and some have become buyers.
·         Gold thrives when ‘real interest rates” (US T-bill rate less CPI) is negative - as now. (People who are earning less than 7% per year on an investment are actually going backwards because of the inflationary effect which is currently 7% and rising!)   Gold on the other hand has been rising at an average +20% per year for the past five years. Since 2001 gold has risen 400%!
·         Gold thrives during periods of price inflation and we are witnessing the beginning of increased price inflation: Wheat, corn, oats, barley, oranges, cattle, hogs, salmon, copper, iron ore, cotton, sugar, coffee, palm oil, health care, education are just some of the categories that are rising in price.

Are There Any Doors Open for the Fed?

2010-09-23T12:44:00.000-07:00

Jim Willie, AKA the Jackass, thinks we're like Japan only worse.

Japan has proved without confusion that 0% is a permanent stuck position. The United States will repeat the path, but with a vast mudslide. Japan has had the advantage of a strong industrial base, a sizeable trade surplus, and no war budget. Thus it has been capable of funding much of its own deficits. It does possess a big debt burden. But the US has $1 of new debt for every $1 in government revenue. The US war budget is almost as large as its total revenue. The US depends upon foreign creditors, many of whom have been thoroughly alienated.

Read the rest.

Where is gold going in the near term?

2010-09-22T11:45:00.000-07:00

No one knows for sure, of course, especially in the case of gold, since there is evidence of and rational grounds for suspecting government price suppression of both gold and silver.

In attempt to anticipate where gold might go, Jeff Clark of Casey's Gold and Research Report has looked at some possibilities. If the price of gold matches the 23.5% average of price surges since 2001, gold would hit $1,428 in the current run-up. If it matches the maximum surge of 35.5% since 2001, it would settle at around $1,567.

Regardless of what gold does over the next few months, I think 20%+ surges will continue throughout this bull market, with the occasional 30% punch. And a doubling of the gold price in a matter of months is also likely in our future, a sure sign of the Mania phase. Gold surged 128.5% from October 8, 1979, to January 21, 1980. A similar vault today would have the price jumping from, say, $2,400, to $5,484 in less than four months. Yes, I think that's entirely possible and perhaps probable.

How high will gold ultimately go? I look at it this way. The sovereign debt crisis in Europe isn't over. The sovereign debt crisis in the U.S. hasn't started. We will almost certainly see more quantitative easing (i.e., money printing). We have artificially low interest rates. The U.S. dollar is basically at the same level it was two years ago. We have no official inflation and certainly no big inflation. Less than 5% of U.S. citizens own any form of gold. Central banks are widely expected to be net buyers of gold again this year. Investment demand for gold is still only 32% of all uses of gold, a far cry from the 54% level reached in 1979. I could go on, but you get the idea.

The only way you can benefit from these surges is to be long gold. If you haven't been a part of one, I guarantee you it's a lot of fun. Gold is more important than that, of course; it's your personal safe-haven asset. Buy on pullbacks, slowly increasing your holdings so that what you own makes a difference in your portfolio, both for asset protection and profit potential.

And then, hang on.

How much gold and silver do you own?

Fighting Your Enemy by Building Him Up

2010-09-18T13:54:00.000-07:00

As Adrian Ash notes, countries that wanted to destroy their enemies would secretly inflate their enemies' money - printing tons more of it - to ruin their economies and thus impair their ability to defend themselves. The British did it to the infant U.S. states, you will recall, during the American Revolution.

Weakening the enemies' currency is out in this Alice in Wonderland fiat world. Now the strategy is the exact opposite.

Japan is seething over China's recent mass-purchases of the Yen. Quoting Peking's finance minister, Michael Pettis, Ash writes that "China's Yen purchases this year equal $27 billion, more than six times China's combined Yen buying in the previous five years."

"Everyone is playing the same game," says Pettis – "trying to force the brunt of the adjustment abroad...and here we have China and Japan squabbling over Chinese attempts to recycle its trade surplus into Japan rather than into the US or Europe."

China buys the Yen, thus hurting Japanese exports...and so Japan buys up Dollars...which are already devalued by the US Fed's zero-rate policy, and are now pulling ahead of the Yen in the race to the bottom. Over in Europe, the Swiss National Bank sold its own Francs for Euros in the spring of this year, while the Bank of England's photon forgery team finished flooding the City of London with Pounds, creating enough money to fund an entire year of government borrowing and pushing consumer-price inflation above its own "upper tolerance" in 19 of the last 36 months with its own near-zero rates.

"The intervention is positive for the [US] Treasuries market, especially short-dated issues which Japan will likely focus on," Reuters quotes one market strategist today. Which sounds a sweet deal for the Fed's campaign to destroy Dollar savers. But nobody wins this war of attrition, however much money they print up and spend.

Rumor says Tokyo threw ¥500bn or perhaps ¥1 trillion at the Dollar on Wednesday. At that rate, it's got another 34 days to go before matching the 2003-2004 campaign, when Japan tried to defend the Dollar above ¥100. It's since slipped a further ¥17 regardless, and ¥80 has become the "line in the sand" according to currency traders.

There's money to be made here, of course, either fighting the Fed or supporting the rear-guard action in Tokyo. But in the absence of strong consumer demand at home, central-bank policy the world over is dead set on weakening the local currency – wherever you live – in a bid to win market-share in exports, no matter the cost.

Investors and savers wanting a flak jacket just pushed gold to new Dollar highs, with silver hitting its best level in almost three decades. No, they're not guaranteed to keep rising, but it's hard to see them falling too far when policy worldwide turns to actively denting the value of cash. At least no one can create precious metals at will – unlike the Yen, Dollar or Swissie – simply to shell them into the market in a war everyone loses.

Gold: Demand Growing, But Not Supply

2010-09-18T13:26:00.000-07:00

In a weekend commentary, Przemyslaw Radomski writes:

Gold prices are rising from the long-term perspective and it’s no wonder. Central banks that had one time liked nothing better than to get rid of their gold reserves, are amassing major gold positions. The International Monetary Fund said last week that it sold 10 metric tons of gold to the central bank of Bangladesh raising $403 million. The IMF has already sold 212 tons of gold to the Reserve Bank of India, the Bank of Mauritius and the central bank of Sri Lanka, all in November last year.

So far in 2010 Russia has increased its gold holdings by 2.8 million ounces, $3.6 billion at current prices giving the Russian government a total of almost $30 billion. Saudi Arabia and the Philippines have disclosed new gold buying in 2010, plus India, Sri Lanka and Mauritius bought gold in 2009. We know that the People's Bank of China is also is a major accumulator of gold, gobbling up its local mining production in hopes of having a hedge for its huge mountain of fiat currency reserves.

It seems that demand for gold is rising faster than supply. Mine production has remained flat even as investor demand more than doubled so far in 2010 compared to a year earlier.

Looking back at recent history the best year for mine production was in 1999 when 83.69 million ounces of new gold came out of the ground. Keep in mind that in that year the price of gold was under $300, hitting a low of $256. (That was the year that the luckless former British Prime Minister Gordon Brown ordered the sale of Britain’s gold reserves.)

It doesn’t take a degree in economics to understand that if the price of something soars by some 350% you would want to dig more of it out of the ground and sell it. But last year’s mining production hit only 74.46 million ounces, still not enough to surpass 1999's output. So we’re not seeing dramatic increases in mine production. Central banks around the world who were permitted under an international agreement to sell a combined 200 tonnes per year, are not even selling an ounce. Just the opposite--they are net buyers rather than sellers.

Scrap gold (people’s old jewelry etc.,) is another source of gold coming to the market.

Over the last few years, since the financial crises unfolded and gold prices have gone up, people have been lured by advertisements on late-night television to take out their old gold jewelry and sell it for a profit. So that in 2008, while new mine production barely inched up by 1.38%, scrap gold soared by 34%.

But is scrap gold a never ending supply? There is a limit to the number of grandma’s old gold rings people can sell. World Gold Council figures for the first quarter of 2010 show that scrap sales for this period were 11.03 million ounces, a 43% fall from the first quarter of 2009. Demand is growing but supply isn’t. Again, you don’t need an advanced degree in economics to understand the long-term implications for the price of gold.

Dan Winters Shoots Bernanke

2010-09-11T19:54:00.000-07:00

Who is this man with a vault door fronting his palatial office?

Why, of course - Time's Person of the Year, 2009. The man who saved the world from financial ruin.

And here at work we see the secret to his success.

Photos from Dan Winters, celebrity photographer.

The War on Wealth Generators

2010-09-03T08:50:00.000-07:00

In his August 2 NY Times Op-Ed "Welcome to the Recovery," Timothy F. Geithner, head bureaucrat of the government's Treasury Department, claimed that

the recession that began in late 2007 was extraordinarily severe, but the actions we took at its height to stimulate the economy helped arrest the freefall, preventing an even deeper collapse and putting the economy on the road to recovery.

That's half-true. The actions of the government and Federal Reserve did prevent a deeper collapse. The false part is the claim that the economy is on "the road to recovery." The economy needed to correct the mistakes of the preceding boom, and the various stimulus programs only prevented this from happening.

Today's Labor Department employment figures are surprisingly good, considering the determination of the government and Federal Reserve to keep the recovery from happening. The LA Times reports that

Nearly 15 million workers were counted as jobless last month. Including people too discouraged to look for work and the nearly 9 million workers who have little choice but to work part-time, the rate of the nation's unemployed and underemployed stood at 16.7% last month, up from 16.5% in July.

Equally discouraging is the commentary by pundits. The article quotes the chief economist at the Conference Board, a business research group based in New York, who said that "The economy as a whole has been weakened by a dismal housing market and slow consumption."

Consumption does not build sound economies - savings and investment do. Before something can be consumed it must be produced, but production requires savings. What we need now is a high savings rate. It was unbridled consumption that helped fuel the collapse. Savings provides the capital needed to start new projects, which means new jobs. The economy needs to generate more wealth to employ people productively (as opposed to the Keynesian prescription of having people dig holes and fill them back in), but as Frank Shostak has written,

Over time a situation can emerge where, as a result of persistent loose monetary and fiscal policies, there are not enough wealth generators left. Consequently, generated real savings are not large enough to support an increase in economic activity.

Once this happens, the illusion of loose monetary and fiscal policies is shattered; real economic growth must come under pressure. Even in terms of GDP, it will be difficult to show economic growth.

Gary North, Bernanke Translator

2010-08-30T09:10:00.000-07:00

If you haven't read North's translation of Ben Bernanke's August 27th speech in Jackson Hole, WY, do yourself a favor and check it out. Fed chairmen have an important job: to deceive the public. Greenspan did it with "verbal obfuscation," North writes in Part I, while Bernanke achieves his aim with boredom. In Part II, North reveals what only futures traders and a few others seem to know, that the Fed has been deflating since March. But fear not. As a central bank, the Fed exists to inflate, and when all else fails, we can count on it do its job.

Greenspan's Speeches and Testimonies

2010-07-16T10:13:00.000-07:00

Covering the years 1998-2002, The Privateer has links to all of Alan Greenspan's speeches and testimonies, including excerpts and brief commentary.

Eat pork, get thinner

2010-07-10T06:40:00.000-07:00

Brian Bolduc writes in the WSJ:

When [Robert] Byrd became senator in 1959, West Virginia ranked No. 39 in median family income, and No. 42 in per capita income. Today, it's No. 48 in both categories.

True, Byrd was never a governor of the state even if he was its political patron. Also true is that mining companies developed more efficient techniques for extracting coal and natural gas, which eliminated the need for many blue collar jobs. Laid-off workers lacked the skills to attract other types of businesses and college students couldn't find jobs after graduation, so they left. Such dramatic changes would be serious obstacles for any politician.

But other states learned to cope with similar economic change. Take North Carolina, a state West Virginia beat in the rankings in 1959. Back then, the Tar Heel state lacked a skilled work force. But it kept taxes low and regulations light, allowing private actors to harness the state's resources. . . .

Byrd's supporters point to Interstate 68. In 2003, the federal government built a penitentiary in Hazleton, W.Va., precisely because the highway made it an ideal spot—sparsely populated yet accessible. But in both cases, the government made the development, not private investors. In fact, 51.3% of the state's economy relies on spending by the local, state and federal government—the highest level of any state. "We've created this culture of dependency," warns [Russell Sobel, a professor of economics at West Virginia University], "Our human capital is not good at competing in the marketplace; it's good at securing federal grants."

Government once took sound money seriously

2010-06-30T15:45:00.000-07:00

In the beginning the United States government made a good faith effort to establish a sound currency. The Coinage Act of 1792 established a mint and held it responsible for coining money according to rigorous standards. Gold Eagles, for example, were to "contain two hundred and forty-seven grains and four eighths of a grain of pure, or two hundred and seventy grains of standard gold." What we call pennies were to "contain eleven penny-weights of copper."

And what if the mint failed to produce coins of this caliber? Section 19 of the Act addresses this situation:

Penalty on debasing the coins

And be it further enacted, That if any of the gold or silver coins which shall be struck or coined at the said mint shall be debased or made worse as to the proportion of the fine gold or fine silver therein contained, or shall be of less weight or value than the same out to be pursuant to the directions of this act, through the default or with the connivance of any of the officers or persons who shall be employed at the said mint, for the purpose of profit or gain, or otherwise with a fraudulent intent, and if any of the said officers or persons shall embezzle any of the metals which shall at any time be committed to their charge for the purpose of being coined, or any of the coins which shall be struck or coined at the said mint, every such officer or person who shall commit any or either of the said offenses, shall be deemed guilty of felony, and shall suffer death.

Can you imagine the Fed being threatened with death if it debauched the fiat currency it has monopoly power over? The Founders understood what we do not, that civilization itself depends on sound money.

Gold to Go

2010-06-25T13:44:00.000-07:00

Maintaining that gold is emerging as money, Paul Nathan writes:

At a time when government debt, currencies, and financial institutions are all under suspicion, is it any wonder that the market demands an historic form of money, devoid of government influence and promises? That demand is being sought out and satisfied daily.

Many investors look at the price of gold and claim it is in a bubble. But it is not a matter of price -- it is a matter of possession. If only a fraction of individuals around the world posses gold today, what would a future price of gold be when almost everyone wanted gold? . . . .
In my opinion the private market is in the process of developing a private competing money. No one can predict where this will lead us, but it is happening as we speak. We are seeing the emergence of gold ATMs whereby individuals can convert dollars for gold on demand. If those machines eventually are equipped to also accept gold for paper money, we will have the specter of convertibility on street corners everywhere.

"We are going to make gold public with these machines," said Thomas Geissler, CEO of Ex Oriente Lux AG, which owns “GOLD to go." Fifty thousand machines are being produced to be placed in countries all over the world. And retailers such as Sears and K-Mart have announced they will now be dealing in gold. Companies that buy gold are everywhere, and companies that sell gold are increasing. Convertibility is becoming an industry. This is a further sign of the establishment of the "new" private money.

And why would "almost everyone" want gold? As Jeff Clark at Casey Research notes: Price inflation has not kicked in yet, even though monetary inflation has. According to the World Gold Council (WGC), more countries are buying gold and moving away from the dollar. The Chinese government encourages its citizens to buy gold. China, the world's largest gold producer, already consumes all the gold it mines. But within the next decade the WGC estimates the Chinese demand for gold will double. With war likely between Israel and Iran, and the U.S. certain to be involved, fiat currencies the world over will endure even more depreciation.

For these and other reasons a number of analysts (including Peter Schiff) foresee gold climbing as high as $10,000.

If you thought iPhone sales were hot . . .

2010-06-25T13:21:00.000-07:00

Wait 'til you see the rush to buy gold and silver coins when price inflation kicks into high gear. Gary North's 101 Thoughts on America's Economy touches on this:

63. Few Americans understand that monetary inflation produces price inflation.

74. Most Americans believe that a little price inflation is preferable to a recession.

75. So do most economists.

76. Some Americans are beginning to doubt that Federal deficit spending on stimulus programs will restore economic growth.

77. Hardly any economists have doubted this.

89. Few Americans understand the logic or history of the gold coin standard, 1815–1933.

90. Few Americans have ever seen a gold coin.

91. There are very few retail coin companies that sell gold coins.

92. In a monetary panic, their toll-free lines will be busy.

And my thought: There will be a monetary panic.