Eat pork, get thinner

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

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

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 . . .

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.

The never-ending saga of economic crises

Austrian economists place the blame for the crisis of 2008-2009 on the Federal Reserve, in particular, for creating the money needed to keep interest rates low to fund the housing bubble. The federal government's policies that aimed to put every American into a house regardless of credit-worthiness was a major contributing factor. But without a seemingly endless amount of credit that only the Fed could provide, those policies would've arrived stillborn.

More crises are guaranteed because the root cause has not been addressed. It is not even discussed, yet it is well-known, at least among bankers, politicians, and economists. The source of the crises is our rejection of market money - a medium of exchange freely chosen by market participants. Market money was rejected to protect the practice of fractional-reserve banking, the practice of banks loaning, and thereby creating, more money than they actually have.

Fractional-reserve banking created the crises of the 19th century, called panics, when depositors in large numbers came running to banks to withdraw their money. Since the banks didn't have the money - most of it had been loaned out - they would either fail or seek protection from the government. The protection took the form of allowing banks to tell depositors they couldn't have their money, even though it had been promised to them "on demand." The banks, though, were still permitted to collect from their debtors.

Few people thought to ask why depository institutions were in the business of loan banking. The answer, of course, was that it was profitable - to the banks. They could literally create money ex nihilo - out of nothing - following the age-old principle of counterfeiting. When they created too much of it their depositors panicked and came running. This had to stop.

By no means did this mean giving up the practice of fractional reserve banking. Rather than abandon a practice that in any other industry would be regarded as fraudulent, bankers and politicians formed a cartel called a central bank that would impose a uniform rate of monetary inflation on all its member banks. Uniformity meant that one bank wouldn't over-extend its loans and be unable to clear its checks with other banks - and thus run the risk of alerting the public to its perpetual insolvency.

As originally devised in 1910, the solution was not perfect - from the perspective of its creators. Many in the U.S. still objected to concentrating power in a single, D.C.-located institution, such as a central bank would do. And if for some reason a member bank found itself needing emergency credit, the central bank would need to create it on the fly -- become the lender of last resort, as the textbooks say. But how could it lend money if it didn't have any? More to the point, how could it create real money by an act of will?

Politicians and bankers circumvented the first problem by establishing a central banking system with twelve regional reserve banks, telling the public their proposal was really a decentralized organization. The public bought it. The second problem required a major crisis to overcome.

To the public gold was real money, but gold was in limited supply. The public had been using paper money mostly for its convenience, but they assumed real money stood behind it, that every paper dollar they held was covered by 1/20th of an ounce of gold in a bank vault. When the inflationary spree that helped fuel the Roaring Twenties came to an abrupt end, scapegoats had to be found. In addition to the usual culprits - speculators - money itself was brought into question, at least by the inflationists. What the country needed, they said, was more money, enough to reflate the stock market, and that meant gold had to go.

When the man who "saved capitalism" came to power he ordered U.S. citizens to turn in all their gold in exchange for government paper notes, as if a market economy could function best without market money. In 1936 the Treasury Department built Fort Knox to secure the people's confiscated gold. A soothing voice convinced the public this arrangement was for their own good.

From that point on, government, through its proxy the federal reserve, could create paper claims to economic goods without concern about redeeming it for a unique kind of economic good: gold. By government fiat, real money was no longer money. By government fiat, paper money and bank deposits redeemable in paper money were now real money. The federal reserve could create money at will without worrying about an equivalent amount of metal on deposit. Member banks could continue making loans on small fractions of their deposits without worrying about suspicious depositors suddenly rushing madly to the banks for gold coin redemption.

Since the banking cartel needs government sponsorship to work, it ensures that the government is kept happy by purchasing its debt. Politicians can buy votes with spending based on debt rather than taxes, and the banks can loan more money because of the increase in their total reserves made possible by the Fed's act of magic. Except for those outside the circle of power, everyone is happy.

The man considered the greatest cheerleader for debt and inflation, J. M. Keynes, clearly understood the mechanism of currency debasement and its effects on society. As he wrote in 1919:

[T]he best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers,' who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the
ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Monetary inflation did not begin with paper money; it only made it much easier. The kings of old debased their coins to loot their subjects. Modern welfare states could not loot to the degree necessary if they had to rely on coin debasement for inflating the money supply. With a market money like gold, though, the people could prosper nicely.

Ron Paul on the Greek Riots

Monetary theory is boring to most people, but when the world gets it wrong, as it has, the results make headlines. What we're seeing, says Ron Paul, is the inevitable currency crisis following the financial crisis. The fiat money producers of the world have solved the financial problems with counterfeit money - i.e., with money created out of thin air, as any private counterfeiter would do. Why are so many people surprised that it hasn't worked? The DJIA is down nearly 400 points the last few days. The dollar remains strong, but only against other counterfeited currencies. Against gold, it's dropping sharply.

Wow! GDP is on the rise!

The Mogambo Guru notes that, according to a recent Bureau of Economic Analysis report, “Real gross domestic product – the output of goods and services produced by labor and property located in the United States – increased at an annual rate of 3.2 percent in the first quarter of 2010, (that is, from the fourth quarter to the first quarter)."

The Guru notes

that merely computing 3.2% of our $14 trillion GDP, we get the $448 billion dollar figure of the quarterly “growth” in GDP, which comes out to roughly $2 trillion per year, which is – surprise! – roughly approximately nearly exactly precisely how much money the federal budget-deficit spending is now pumping into the economy.

In short, it looks like the entire growth in GDP is due solely to – dollar for dollar! – the deficit-spending by the federal government! Hahaha! “Growth!” Hahahaha!

And this is before another large item is included in the calculation of GDP, which is exports, which are a subtraction from GDP, which means that since we had a $532 billion annual trade deficit (a negative number) in the last 12 months, subtracting a negative number from GDP magically results in an annual addition to GDP of $532 billion – or $133 billion quarterly – just like that! Hahahaha! “Growth!” Hahaha!

You’d never know it from the Bureau, which admitted that “The increase in real GDP in the first quarter” was influenced by “exports”, although it did not say that the trade deficit increased, but, instead, said only that “Imports, which are a subtraction in the calculation of GDP, increased”, although it did not mention, for the benefit of us math-impaired guys out here, that their calculation of GDP was thus increased by a math trick.

Smoke and mirrors can only last so long. Buy commodities, particularly gold and silver.