What America needs desperately is a “re-set” button, just not one in flawed Russian.  We’re already being overcharged.  What would solve most of the problems (after some truly horrible tangles were unraveled) would be to go back a minimum of a hundred years and start over. 1909 would do quite nicely.

Did you gasp, “Are you mad woman?!  You would lose your right to vote!”  No, I am not insane at all.  If the price of restoring the gold standard, eliminating the Federal Reserve, dismantling the welfare state, getting rid of millions of pages of deleterious regulations, wiping out all the “laws” set by Liberal judges, and following the Constitution strictly is forfeiting my right to vote–take it with my blessing.  It would be the best trade of my life.

I’m a trader, not an “investor.”  Every time the government tells us it is “investing” in our future, the results are the same as holding stocks for the long term–with all the fun of margin calls, a thing no one with any regard for his skin would contemplate for a moment.  Hold stocks as “investments” and whatever increase you have will be eaten up by inflation or destroyed by business cycles or government actions.  Sometimes you don’t get out of Polaroid or Texas Instruments or the “war” on drugs in time.  In a moment of sentimental madness you might considered picking up some Flying Tigers or “Head Start.”

You can’t fall in love with stocks; pick ‘em up, ride ‘em up, cash ‘em out, Rawhide! and on to the next one.  It isn’t safe to fall in love with government programs, either.  They don’t pay dividends, you can’t get them out of your portfolio, and they proliferate like mongrel puppies, howling their ugly little heads off, messing on the floor, consuming ever-increasing amounts of resources, and repeating the cycle endlessly.

Making money in the stock market and running governments sensibly both need to be done cooly, intelligently, with a level head, firm principles, and a committment to getting out of anything that doesn’t work.

Regards,
Linda Brady Traynham

April 27, 2009

Obama and Clinton Are Right! was originally featured on Whiskey and Gunpowder

“Maestro…you hardly look yourself. It looks like twenty years have dropped from your face. It must be liberating not to have to worry about inflation anymore.”

“What’s inflation?”

“Ah yes. About that. Why haven’t we seen it yet? You’ve seen massive fiscal stimulus plans the world over, a huge increase in the monetary base, and lower interest rates. But no inflation. Bond traders don’t seem especially worried either. They are not demanding higher interest rates because they fear future inflation. And gold? Well, it’s plodding along. But shouldn’t it be going much higher as the supply of fiat money explodes?”

“You’re thinking is so old fashioned. It’s true. Or at least it used to be true. In the days when we had a gold standard, it was a great defense against government monetary fraud (that’s what I used to call inflation, before I became a central banker).”

“Oh. What do you mean?”

“If each unit of paper currency in your hand is redeemable for gold, then each holder of paper units has the power to hold the government accountable for its fiscal and monetary policy. If the government prints too much money to pay for its spending programs, unit holders can redeem their paper for gold. This draws down the governments stores of real gold, forcing it to either reduce the supply of paper money, or lose all its gold.”

“Why would it worry about that if it could just print more paper?”

“Because paper is not money. And your trading partners will not accept your paper if it is not backed by either real money or the ability to collect taxes from your people.”

“I’m not sure I follow. Back up a bit for me.”

“Okay. Back when everyone was on a gold standard, before the Great Depression, international accounts were settled in gold. It wasn’t just citizens who could demand gold for their units. Nation states could do it to. Governments who ran up fiscal imbalances would see international holders of their currency redeem those paper units for real gold. This encouraged a kind of competition among nation states, or at least a kind of accountability. If you ran up deficits and borrowed a lot of money, gold flowed out to pay your creditors and to pay for your exports. Your inflationary monetary policy cost you your national inventory of gold and silver.”

“So what happened?”

“My you ask a lot of questions.”

“Hurry up. I think I have to wake up soon.”

“Well, under a gold standard, governments are forced to manage their monetary system for the benefit of their people. You get a stable price level because the value of the money is not fluctuating constantly with changes in the money supply. Governments want to avoid causing a run on their gold supply that would result from fiscal and monetary mismanagement.”
“Why did the world go off the gold standard if it was so good? What changed?”

“Lots of things. For example, with a gold standard, governments and people must live within their means. This is deeply unpopular with politicians, who must bribe populations with bright new shiny things to get elected. Gold makes it harder to bribe your people and win an election.”

“Okay. What else?”

“For whatever reason, perhaps because it is in their nature, governments like to take their people to war. It keeps them distracted from other problems, usually caused by the government. But war is expensive. To pay for a war you must increase taxes or borrow money. If you increase taxes (directly or indirectly) you risk alienating your population and causing a tax revolt (and sending a lot of economic activity underground, out of the view of the tax collectors). So you have to borrow. It’s the only way to greatly expand spending without raising taxes to punitive or socially disruptive levels.”

“Ah. I see. Under a gold standard, you couldn’t borrow excessively without causing a run on your nation’s gold. So…a gold standard was a natural constraint on a nation’s ability to make war.”

“Yes. That doesn’t mean nations didn’t go to war before there was a gold standard. It just means that if you had to pay for your war with real money, it made it an expensive proposition. And if it undermined the value of the currency your citizens held, they were unlikely to support you. In a monarchy or dictatorship, that doesn’t matter so much. But in a democracy, it matters a lot.”

“If what you’re saying is correct, Maestro, then there’d be a clear connection between the creation of fiat money which is not backed by gold at all, and war between nation states.”

“There might be. But you’re still thinking too small.”

“What do you mean?”

“It’s true that most nations suspended the gold standard upon entering World War I. This allowed them to run up ruinous debts to private bankers. They tried reinstating it, but then the Great Depression hit. And more than ever, governments needed the ability to print money to pay for domestic ‘wars’ on poverty and unemployment.”

“Right. And then World War Two-which was partly a consequence of the ruinous debt and reparations Germany could not repay-came along and you saw a huge explosion in government debt, this time mostly through bonds.”

“That’s right. Which brings us back to inflation today. When the government finances exploding debts through the issuance of new bonds, investors typically demand higher interest rates to compensate for the inflation that results from the increase in the money supply. But today, in a kind of conundrum, bond investors are not demanding higher interest rates.”

“Why not?”

“Who knows? For one, they don’t see inflation. They see falling prices that come with a collapse in global demand. But it could be that they fear the worldwide recession more than they fear inflation. The contraction in global trade and national GDPs has investors fleeing for the safety of bonds. This allows governments to print money and expand the monetary base with apparent impunity.”

“Apparent?”

“Yes. Why, there in Australia where you’re sleeping, the government is going to announce a budget in May which may include a $50 billion deficit. This is a country that had a surplus just a short time before.”

“That’s not as bad as my home country. In the U.S., the government is going to run a trillion dollar deficit this year. And it’s told everyone that number will double. But it doesn’t seem to have dented demand for U.S. bonds yet.”

“No, it hasn’t. And that’s because without a gold standard, governments don’t have to compete for capital as fiercely as they used to. They can all sell bonds to investors to finance deficits, provided the deficits aren’t too jaw-dropping and provided they can continue to collect taxes to pay interest on the debt. Plus, they’re colluding with one another to eliminate tax competition among countries, which gives them an even stronger grip on your wealth.”

“I’m with you Maestro. But I don’t see where this is going.”

“Let me show you. Governments can only raise direct taxes (income taxes) so much before it negatively affects the economy (and social cohesion), which in turns lead to falling tax revenues as real economic activity slows. So a sure sign of governments that are getting desperate for revenue is an increase in indirect taxes.”

“You mean like the alcopops tax here in Australia?”

“I’ve never heard of that. But if it’s a tax that the supplier of a good or service passes on to the consumer then yes, that’s exactly what I mean. It’s an efficient way for the government to raise revenue without looking like it’s being grubby, desperate, or just plain greedy. It can also claim the taxes are being raised to discourage socially undesirable behavior, but this is generally just a lie to disguise the need to raise revenues.”

“Ah. I see. You know the alcopops tax is illegal anyway, by the way. The government collected revenue on a tax using a law that hadn’t been properly been passed by the Parliament. How is that possible? What about the Rule of Law?”

“What about it?”

“Never mind. You need to finish your lecture before I wake up. When will inflation result from the large increase in the monetary base?”

“I have no idea, my boy. You see at its core, fiat money greatly accelerates the rate at which scarce resources are depleted. Land, labour, capital, and raw commodities are allocated based on a demand that isn’t sustainable. If you do that long enough-let’s say for the last seventy years or so-you get an entire global economy (and population) that exists because of the increase in credit. That’s the world we live in. And it’s all falling apart with the credit depression you’ve been writing about.”

“Wait a second Maestro. Are you saying that the scope and scale of this economic contraction is a lot greater than anyone expects because the fiat money system itself is failing?”

“You said it. Not me. But it does make sense to say that the last twenty years or so of building national economies around the growth of residential real estate and the finance sector has greatly hastened us to a day of reckoning, as your friend Bill Bonner might say. We will find out if all that investment made by banks is merely ‘temporarily impaired,’ or if it represents an enormous misallocation of our collective resources and has made us poorer for years to come.”

“So what should we do?”

“This is your dream. You decide.”

Regards,
Dan Denning

April 16, 2009

Dreams of the Maestro, Gold and Inflation was originally featured on Whiskey and Gunpowder

By the time the War of the Spanish Succession was finished in 1715, the French King – who admitted that he “loved war too much” – owed the equivalent of £300 million.

Across the Channel, Great Britain owed only £49 million. Which might have looked a little like financial victory. But then, the United Kingdom’s population was only one-third the size of the French. And those debts – priced in “hard money” weights of gold or silver, both in even tighter supply than they are today – were almost 20 times the sum England had defaulted on four decades before.

But hey, that’s inflation for you! Or more properly, that’s inflation as it’s commonly understood – an absolute rise in the price level. In this case, the cost of running the state and murdering Frenchmen.

Whereas in 2009, three centuries later, the UK Treasury will extend its debts by £118 billion this year alone. That’s not only 2,500 times what it owed in 1715 in nominal pounds. It’s also twice the entire national debt that forced the last Labour government to beg an emergency loan from the International Monetary Fund (IMF) thirty-three years ago.

Now that’s real inflation for you! And for everyone else too, unfortunately.

“From the time the United States went off the Gold Standard in 1933 the wholesale price level has gone up by 760%,” noted Professor Roy Jastram, author of The Golden Constant, in December 1981.

“Since England abrogated the Gold Standard in 1931, her price index number has risen by over 2,000%.”

Both in the US and UK, the general price level since Jastram spoke to the Security Analysts Society of San Francisco has more than tripled again. All told, here in London, the British Pound has lost 98% of its purchasing power since that fateful September day when the UK government lost its nerve, and the world lost Sterling’s gold standard forever.

“Before that, the two countries had a combined history of 350 years of long-run price stability,” Jastram went on. “The price level was the same in the United States in 1930 as it had been in 1800. In England the price index stood at 100.0 in 1717 (the first year of her gold standard) and it was at that figure again in 1930.”

And all thanks to the magic of gold – that “golden constant.” Right?

To be sure, the gold-backed Pound did a phenomenal job of preserving its purchasing power for the 200 years starting when Sir Isaac Newton – he of the Laws of the Motion, but also Master of the Royal Mint in 1717 – established the Pound Sterling as a certain weight of silver.

Newton thus, since the two were interchangeable as cash payment, also set the Pound as a smaller weight of gold (”a pound weight of fine gold is worth fifteen pounds weight six ounces seventeen pennyweight & five grains of fine silver” to be precise) which over time, won out over silver as the arbiter of currency value worldwide.

As our chart shows (hat tip to Statistics.gov.uk for the long-run inflation data), tying money to gold delivered ups and downs in the price level. But overall, costs stayed remarkably steady for the 70 years starting in 1844 – back when the Bank of England was granted monopoly power to issue the currency.

Then the guns of August blew a hole in the Pound’s convertibility. Despite a brief rally after the ill-advised move to restore the old Gold Standard in 1926, Sterling’s long-run value just continued to tumble, as Jastram points out.

As for gold, its purchasing power also suffered during Europe’s second “Thirty Years War” (in Winston Churchill’s phrase), at least when held outside of government hands. Banned from owning it in the United States, private individuals could scarcely trade it for profit in London. Pretty much all of Britain’s bullion had already been nationalized long before (right as the Gold Standard Reached Its Zenith, in fact) and now it was needed to buy arms and munitions from across the water.

Don’t you know there was a war on? Or as Marc Faber put it in his Gloom, Boom & Doom Report last fall (Is there a way to preserve wealth?, Oct. 08), “I can see the gold bugs jumping off their seats and protesting that gold has kept its value (purchasing power) over the course of history. But the problem is that the owners of the gold also changed over time.

“So, when Timur sacked Aleppo and Damascus in A.D. 1400, it didn’t help to have your savings in gold,” the Swiss private-client fund manager adds. “You lost your life and your gold. Women had a better chance of survival and got a one-way ticket to Samarkand.”

Luckily for investors and savers with something less than their lives or liberty to lose 500 years later, the US and UK governments liberalized gold ownership just in time for gold prices to shoot higher on a tide of government-wrought inflation in the 1970s. (It’s also worth noting that, in line with how gold owners could survive the four-decade US ban starting at the depths of the Great Depression – and actually benefit from the revaluation of gold that accompanied it – Marc Faber advises holding physical gold overseas, free from the political and/or social risks of your own domestic jurisdiction.)

Finally cut free from artificial government values by Richard Nixon in 1971, gold broke back above its old Gold Standard par in terms of UK purchasing power in 1973. It then spent almost 16 years – after accounting for inflation and changes in gold prices – worth more than it had been throughout the late 19th century, the high-water mark of gold’s international power as the only true, single, irrefutable currency.

And amid the current bull market in gold, its real value for UK investors only just broke back above that level again, just as 2008 turned into 2009. For US investors, gold recovered its 1900 value at the start of 2007.

That’s the nature of a mean-reverting asset, of course. It reverts, if given time (and free ownership, priced in a free market) to its long-run average value. But that does also mean that the average itself will have to revert as well.

Because the starting point of any particular data series – not least if pegged by mankind, even the genius brain of Sir Isaac Newton way back in 1717 – might not necessarily be “correct” for the long run that follows. We can’t judge the “true” value of gold simply from its historical start.

What if that apple bruised more than Sir Isaac Newton’s head? Conclusions to follow in Part III…

Regards,
Adrian Ash
BullionVault

February 10, 2009

The Real Long-Run Value of Gold, Part II was originally featured on Whiskey and Gunpowder

It’s a story as old as human civilization. The humble village and modest republic eventually grows into a bumbling empire; death and taxes come along for the ride. We believe in the sovereignty of the individual over the state not because of slavish devotion to an ideal, but because it works best. We’re not ones to keep defending ideas that look good on paper, but ignore frivolous things like history, biology and reality.

Our job here is pretty straightforward; knowing that things tend to move away from their sustainable starts, we take stake in the opposite position when we see things heading toward extremes. A slight simplification of history would be to call it a series of stories in which over time otherwise rational individuals become dangerous mobs willing to plunder their neighbors, both foreign and domestic. We fully expect our society to follow suit and degenerate under the influence of growing government, growing debt, unbacked currency, interventionism, redistributive taxation and war. Does any of this sound familiar?

Our currency’s fiat status is old news; it’s been completely unfettered from the discipline of the gold standard for nearly forty years. A gold standard is one of the things that keep governments in check. Without it, governments tend to do really evil and stupid things…like setting up a central bank that creates “money” at will, simultaneously destroying the savings of the citizenry and subsidizing unproductive businesses, practices and people. OK, now this really is starting to sound familiar.

The bad news: Our currency is probably going to collapse completely and we are probably seeing the very first days of a very long, very severe economic depression. These things happen. They happen because people think that there is something magical about voting, that it can repeal the laws of physics and that despite the old adage, one really can get something for nothing. Or at least one can simply vote what’s in a neighbor’s pocket into one’s own. It’s like magic.

Before you know it, every humble republic gives way to a society of freeloaders, nannies, connivers and bums. One set of folks makes lifelong careers out of telling independent adults what to do with the fruits of their labor. And each person in the populace expects to get at least a few things at the expense of some other portion of the populace: Housing, healthcare, food… And they don’t stop at trying to pick each other’s pockets either. At fairly regular intervals a nation will cast a covetous eye abroad at another nation’s bounty.

It’s entirely natural for people to want more than they currently have…but actually believing one can have as much as one wants is a fantasy for children…actually trying to take as much as one wants is the province of criminals. Governments by their nature result from and promote this sort of infantile banditry.

That’s why we love gold so much…and why we hate taxes. Gold enforces a rigorous standard. Gold keeps governments from quietly stealing from individuals through inflation…and what they can’t steal they can’t use to finance invasions and land grabs. And what they don’t tax they can’t idiotically redistribute.

This country’s founders got it as right as any human beings ever could and the Constitution they produced indeed resulted in the most perfect union. We wish that document hadn’t been continually ignored almost immediately thereafter.

Just a few years after the founding of the Republic, the new federal government assumed the states’ debt from the Revolutionary War. Taxes were needed to pay this debt. Alexander Hamilton convinced Congress to approve a tax on whiskey, which had become the de facto currency for western settlers. These settlers were perennially short on cash, but long on grain that was very difficult to get to faraway markets over very poor roads. Fermenting and distilling the excess grain into portable spirits just made sense. These spirits became a medium of exchange along the frontier, in effect commodity money.

The whiskey tax led to protest and revolt. General Washington himself led the federal forces to Pittsburgh to suppress the rebellion. This was the very first time under the new United States Constitution that the federal government used military force to impose its will over U.S. citizens. You can see why we take inspiration from the rebellion’s name.

We’re not really counting on a taxpayer revolt this time around — as nice as that would be — and frankly we don’t expect things to work properly for very long even after they are set right. That’s just how it is. Nothing stays in whack. A nation, like the individual bipedal organisms that comprise it, moves from birth to a peak of vigor to frailty and senescence. Then it dies. Then something else comes along and goes through the steps again.

Just because the world gleefully marches into Hell on a regular basis doesn’t mean one should lose one’s bearings. In fact it’s vital for at least a few of us to be ready to put things back together after the mobs rip everything apart.

Whiskey & Gunpowder will merrily continue to explore the intersection of personal liberty, government, sound currency, commodities and encroaching commodity scarcity.  We hope you continue to join us as we wish for something better but plan for the worst.

Regards,
Gary Gibson
Managing Editor, Whiskey & Gunpowder
November 21, 2008

History Rhyming: Gold, Government and Taxes was originally featured on Whiskey and Gunpowder

In 1913, President Woodrow Wilson was successful in publishing the Federal Reserve Act through Congress. The act allowed the government to establish the third central bank in the nation’s history.

Think of the Fed as the bank of banks, and the government’s bank — the gatekeeper of the U.S. economy. The board, which is run by seven governors and presided over by a chairman and vice chairman, is charged with managing the supply of money and credit to the economy. By manipulating interest rates and creating money, the Fed can either stimulate or stifle the economy. The Federal Reserve is the primary force in determining our nation’s money supply. The Fed’s two main goals are (1) to help stimulate economic growth and (2) to try to keep inflation low. These goals often conflict.

The central bank Federal Reserve System has a tremendous amount of power and a monopoly control over money and credit. The chairman of the Federal Reserves is more powerful than even the president because he has so much control over the economy. The Fed is the key to how much money and credit is in the U.S. economy in any given time. This is due to the fact that the United States currency is a fiat money — in other words, it is not backed by anything tangible, and therefore it can be created out of thin air.

The U.S. dollar was not always a faith-based currency. There was a time when for every dollar in circulation, there was a coinciding amount of gold to back it up — a gold standard.

“In the nineteenth century, starting with the Napoleonic Era, all the major money systems of Europe were anchored by gold,” Bill Bonner explains. “All of these countries had gold lining their systems, so when they traded with one another they could either trade their gold, or if you traded paper money, it was certain that there was gold backing their currency.

“And that system was very, very successful. The prosperity of the nineteenth century was amazing,” Bonner continues. “But that system broke down in World War I; the governments, as they always do, spent too much money. Britain borrowed too much, the French borrowed too much, and then they couldn’t pay it back because they didn’t have enough gold to pay that kind of expense.”

Even so, that gold-backed system lingered on throughout the twentieth century — but not perfectly — and the last stage of this system was Bretton Woods, which lasted until 1971.

Bonner tells us: “Prior to 1971, we had the Johnson administration, we had the Great Society and the Vietnam War, and those things were very, very expensive. And somebody told Johnson, ‘Wait a minute, you can’t have both guns and butter. You can’t have a huge domestic spending program and the Great Society, at the same time that you have a huge war going on in Asia. That won’t work, we can’t afford that.’ At the time the Democrats, led by Johnson, said, ‘Oh yes we can; we’re a big rich country, we can afford both guns and butter.’ Well, sure enough it wasn’t true, and they couldn’t afford that much without raising taxes, and they didn’t want to raise taxes because then they wouldn’t be reelected. So they had this big problem. And what resulted from that was a run on America’s money.”

Other countries, especially the French, led by Charles de Gaulle, noticed that the dollar was weakening. So de Gaulle told then-President Nixon that he wanted to exchange the dollars France had for gold. Nixon examined the situation and realized that if France took all of that gold, the United States would not have much gold left, and in turn decided to close the gold window. That was August 15, 1971, and since then, no foreign government could trade dollars for gold.

Money Supply and Inflation

Now, with the Bretton Woods System a thing of the past, when the Fed determines that the economy needs a stimulus, interest rates are lowered, borrowing becomes easier, and more money flows into the economy. This is known as opening the Fed window, and the result is an increase in the money supply. If the money supply is increasing, consumers are feeling wealthier and more money is changing hands as they buy goods and services.

This puts a chain of events into motion. Businesses see increased sales and therefore order more materials and increase production. This, in turn, increases the demand for labor and goods. What happens after that, in a buoyant economy, is that prices of stocks rise and firms issue equity and debt. If the money supply continues to expand, the prices for these goods and services begin to rise, especially if output growth reaches capacity limits — in other words, a bubble is formed. As the public begins to expect inflation, lenders insist on higher interest rates to offset an expected decline in purchasing power over the life of their loans. When inflation is rising, the dollar is quickly losing value, and the Fed raises interest rates, which means borrowing becomes more expensive and money eventually flows out of the economy.

When the supply of money fails, or when its rate of growth declines, economic activity declines and either disinflation (reduced inflation) or deflation (falling prices) results. Closing the Fed window decreases the money supply.

In a worst-case scenario, the economy can become stagnant and inflation can rise simultaneously, a situation called stagflation. The Fed is then faced with an extremely difficult choice, because it can’t raise interest rates and lower them at the same time. It must choose either to stimulate the economy or to fight inflation. This last happened in the United States in the late 1970s, and it proved to be very difficult time for the country.

The forces of inflation had been picking up steam throughout the 1970s, and the prices of just about everything were hitting record highs. Pete Peterson, then secretary of Commerce under the Nixon Administration, remembers this period in U.S. history clearly. “I was in the Nixon White House,” Peterson recalls, “first as an economic adviser to President Nixon and then as secretary of Commerce. History will record the Federal Reserve was part of the problem. They let money supply get out of control. When Paul Volcker took over he realized he had to take truly courageous action. And he did.”

Dr. Volcker’s office in New York City is adorned with poster-size caricatures depicting the former Fed chairman as a warrior, battling runaway inflation. And these cartoons are hardly exaggerating. Over the din of the ice skaters enjoying themselves at Rockefeller Center, 20-odd stories below. Dr. Volcker told us the tough medicine he had to spoon-feed the United States when he took the helm of the Federal Reserve in 1979. Inflation had reached a “crisis point,” he said, and in less than a year, the Fed’s key rate rose from 10 to 19 percent.

“Inflation,” explained Dr. Volcker, “gets built into expectations, and when people think it’s going to happen it affects their wage demands, it affects pricing policies, and it has a certain built-in momentum, which clearly happened during the 1970s.”

While his raising rates to an all-time high certainly caused some controversy, Dr. Volcker did what was necessary to achieve and sustain stability in the U.S. economy — and found that, overall, the country was ready for him to step in.

“I think the mood of the country was willing to accept action, which ten years earlier they wouldn’t have been willing to accept,” he told us. “And once the country got caught up in an anti-inflationary effort, while they were difficult years, I think there was a certain acceptance of a willingness to take, among other things, very high interest rates and eventually a rather severe recession, [because] there was this underlying core that the country had not been on the right path economically and that it needed to be shaken up, in a sense, to restore stability. And that faith not only sustained me, it sustained the country.

“One of the lessons of the early 1980s is don’t let inflation get started because once it gets momentum it’s very difficult to deal with, but it’s also destructive for economic growth and prosperity. If that happens — and right now it seems like there is a little flavor of it — we will all find ourselves in the days of stagflation and unacceptable economic performance.”

As Dr. Volcker suggested, current economic indicators show we’re entering a similar cycle in the economy. In the second half of 2008, Americans’ inflation expectations have jumped to their highest level since 1981, according to the Reuters/University of Michigan Surveys of Consumers. Not only that, but growing concerns over the country’s two largest buyers of U.S. home loans, Fannie Mae and Freddie Mac, drag down the already hurting U.S. stocks; the price of crude oil hits a new high every day; and consumers are seeing their grocery and energy bills grow by leaps and bounds.

“With respect to the fiscal crisis looming out there in the future,” says Paul Volcker, “We’ll see whether a democracy can deal with an obvious problem that’s going to be present in not too many years. The earlier we take action to deal with it, the better.”

Addison Wiggin
Executive Publisher, Agora Financial
Executive Producer, I.O.U.S.A.
October 6, 2008

Greg’s Endnote: Addison and co-author Kate Incontrera have a lot more to tell us along with some fantastic interviews with Bill Bonner, Pete Peterson, Ron Paul, Paul Volcker, Alan Greenspan, Warren Buffett, and more. You can get your copy of I.O.U.S.A. at Amazon.com by clicking here.

“I.O.U.S.A.” Excerpts was originally featured on Whiskey and Gunpowder

Indeed, central bank gold reserves worldwide rose almost five-fold over the 50 years following the start of WWI in 1914 — the date traditionally given as the death of the international Gold Standard.

That system, running roughly between Bismarck’s defeat of France in 1871 and the bloody stand-off at Ypres a half-century later, saw nations settle their balance-of-trade debts with each other in bullion. Gold really was money, and only gold (and, progressively less, silver) would do in payment. And just like domestic cash transfers, the vast bulk of cross-border payments were made by private individuals using privately-held gold and fully-backed gold certificates.

But as governments worldwide set about nationalizing welfare, health provision, pensions, insurance and the “commanding heights” of industry, so their nationalized gold reserves were also growing apace. The Gold Standard collapsed not only into the mud of Verdun, but also into state-owned and state-controlled gold vaults.

Put another way — as Texas Congressman Ron Paul did before the U.S. House of Representatives in Feb. 2006 — “Though money developed naturally in the marketplace, as governments grew in power they assumed monopoly control over money.”

That monopoly power has only grown stronger now paper and photons have replaced gold entirely as the world’s means of exchange. Governments and their central bank agencies set the price — and thus value — of what we now use to buy and sell, invest and spend. And since this control over money rests with politicians and bureaucrats, it’s worth noting how the surge in nationalized gold reserves coincided precisely with the surge in nationalist politics, war-mongering and state controls that first sparked World War One, before leading to the horrors of Nanking, Auschwitz, Stalingrad, Dresden and Hiroshima.

Mass slaughter wouldn’t come cheap, after all.

Rewind to 1875, and central bank gold reserves “amounted to no more than 1,100 metric tons,” wrote Timothy Green in a 1999 research paper for the World Gold Council, “while gold coin in circulation was approaching 3,000 metric tons.” Private citizens, in other words, then held the vast bulk of the industrialized world’s wealth, and the international Gold Standard — “a symbol of sound practice and badge of honor and decency,” according to one historian — had begun by default, not design. It was simply the way private individuals the world over chose to meet and exchange wealth. Nationalized money, at this stage, remained but a twinkle in the eye of would-be technocrats and tyrants.

Come 1895, however, and “of the 6,100 metric-ton of monetary stock, central banks held around 2,750 metric tons,” writes Green. “By 1905 the balance had swung in favor of central banks, who then had 4,710 metric tons of the monetary stock against private holdings of 3,916 metric tons.” On the eve of World War One — after a three-year surge in government gold hoarding — sovereign states held some 8,100 tons in total.

This race to nationalize gold sped up again as the world struggled — and failed — to re-establish the classical Gold Standard after the big guns fell silent in November 1918. “The days of widely circulating [gold] coin were over,” as Green goes on. “By 1929, central banks held an estimated 92 percent of all ‘monetary’ gold.” The impact on politics, wealth and the world economy? It’s been little examined to date; today’s most ardent “gold bugs” fret more about central bank gold sales and loans than about how that gold ever wound up in government vaults in the first place. But nationalizing the world’s monetary gold stock saw governments take control of what had been freely exchanged as the final — and freely chosen — arbiter of wealth over more than 5,000 years.

And I don’t believe it was any coincidence that the “total war” of the 20th century first required a “total war” on freely held private wealth:

When the field guns withdrew and the poppies returned to north-eastern France in 1919, the economic disaster that followed only accelerated this nationalization of what had until then been privately-held money.

Gold was sucked into government vaults at an ever-increasing pace, while personal freedoms and liberty were vacuumed up by governments of all stripes — communist, socialist, national socialist and imperial. Mass unemployment, fascism and European re-armament saw a race to get gold and the power it brought under official control.

No bureaucracy seized control of this wealth more urgently than the United States. One evil day in 1933 — and just ahead of the Nazi government in Berlin annexing gold from the vaults of Czechoslovakia, Poland, Austria, Belgium and Holland, as well as from the Jews it murdered across central Europe — the U.S. government actually made private gold ownership illegal, forcing people to sell their gold to the Treasury on pain of a $10,000 fine or imprisonment.

Not content with the tonnage he’d prized from American citizens, President Roosevelt then devalued the dollar, slashing its value from $20.67 to $35 per ounce of gold and thus encouraging foreign-owned gold to pour into Washington’s hoard at the new, higher price. All told, during the final nationalization of privately held gold that swept the world during the 1930s, fully 60 percent of all new central bank gold ended up in U.S. reserves.

The United States then acquired yet more gold during WWII, taking it from the British and Soviet state vaults in return for ships, tanks, food, boots, gasoline and warplanes. Its acquisition of gold continued even after the war, when “European central banks sold what little gold they had left to the U.S. Treasury for badly needed dollars to rebuild their shattered economies,” as Timothy Green explains.

At high tide, in 1949, the Treasury held more than 70 percent of all nationalized gold. Thus did the United States achieve the near-total annexation of the world’s monetary gold stock. It coincided with America’s financial and political preeminence worldwide — a dominance that continues today.

Inside the U.S., privately held gold remained illegal until 1974. Outside it, central banks hoarded dollars — just as in 2008 — alongside their gold. The two were fully convertible, after all, under the post-War Bretton Woods settlement…if only for central bank ambassadors, rather than private citizens wanting to swap paper for gold.

John Maynard Keynes — chief architect of the new “Gold Exchange Standard” — was so pleased with the potential wonders of this dollar-gold system, he twice jibed that the metal represented a “barbarous relic,” a prehistoric superstition that mankind would do well to abandon.

The world very nearly achieved that feat as the 20th century drew to a close. But only nearly.

Conclusion to follow in Part III…

Regards,
Adrian Ash
September 8, 2008
BullionVault

Government Gold Control was originally featured on Whiskey and Gunpowder

LoCascio makes a compelling case that although it’s possible to maintain the integrity of money in a fiat system, historically only the discipline of a gold standard has succeeded in preventing massive abuses by the monetary elite.

Of course, the above should be painfully obvious to everyone by now, but unfortunately it is not. I offer as proof Congressman Ron Paul’s (R-Texas) final debate with Greenspan before the House Financial Affairs Committee, July 20, 2005:

Paul: “To me, this system that we have today is a convenient way to default on our debt – to liquidate our debt after the inflationary scheme.

“Even you, in the 1960s, described the paper system as a scheme for the confiscation of wealth.

“And in many ways, I think this is exactly what has happened. We have learned to adapt to deficit financing. But in many ways, the total debt is not that bad because it goes down in real terms.

“As bad as it is, in real terms, it’s not nearly as high.

“But since we went on a total paper standard in 1971, we have increased our money supply essentially 12-fold. Debt in this country, federal debt, has gone up 19-fold – but that is in nominal dollars, not in real dollars.

“So my question is this: Is it not true that the paper system that we work with today is actually a scheme to default on our debt? And is it not true that, for this reason, that’s a good argument for people not – eventually, at some day – wanting to buy Treasury bills, because they will be paid back with cheaper dollars?

“At the same time, it hurts the people who are retired and put their money in savings.

“And aligned with this question, I would like to ask something to dealing exactly with gold — is that: If paper money – today it seems to be working rather well – but if the paper system doesn’t work, when will the time come? What will the signs be that we should reconsider gold?

“Even in 1981, when you came before the Gold Commission, people were frightened about what was happening – and that’s not too many years ago. And you testified that it might not be a bad idea to back our government bonds with gold in order to bring down interest rates.

“So what are the conditions that might exist for the central bankers of the world to reconsider gold?

“We do know that they haven’t given up on gold. They haven’t gotten rid of their gold. They’re holding it there for some reason.

“So what’s the purpose of the gold if it isn’t with the idea that some day they might need it? They don’t hold lead or pork bellies. They hold gold.

“So what are the conditions that you might anticipate when the world may reconsider gold?”

“And the answer is: I don’t think so, because we’re acting as though we were there…

“So I think central banking, I believe, has learned the dangers of fiat money, and I think, as a consequence of that, we’ve behaved as though there are, indeed, real reserves underneath the system.”
As for me, I cannot believe Paul let Greenspan get away with that response so easily. Perhaps his time was up or perhaps he was too staggered by the silliness of Greenspan’s reply to fire off another round of questions.

No matter how one slices it, money supply going up 12-fold and debt 19-fold since Nixon defaulted on the gold standard is hardly acting as if we were still on the gold standard. Indeed, what little discipline we once had was thrown out the window long ago and has not been seen since.

LoCascio writes:

With debt up 19-fold in conjunction with Greenspan’s latest and all-time biggest bubble, otherwise known as housing, exactly where do we go from here? Given the illiquidity of housing, I am inclined to believe housing is the “bubble of last resort.” With global wage arbitrage, outsourcing, and rampant speculation in housing and the credit markets, this is the end of the line. There are no bigger bubbles to be blown.

The picture in my mind at this point is that of Greenspan playing The Sorcerer’s Apprentice. (If you have not yet seen Fantasia, I highly recommend doing so.)

At any rate, if you can relate to the scene in Fantasia where buckets of water were splashing around everywhere as the apprentice unleashed a “nightmare of liquidity,” then you have the right image in your head.

OK Mish, where to from here?

Vincent Locascio: The Wisdom of Ludwig von Mises

“The boom squanders through malinvestment scarce factors of production and reduces the stock available through overconsumption; its alleged blessings are paid for by impoverishment.”

“He does not blame the authorities for having fostered the boom. He reviles them for the inevitable collapse. In the opinion of the public, more inflation and more credit expansion are the only remedy against the evils which inflation and credit expansion have brought about.”

“Credit expansion is the governments’ foremost tool in their struggle against the market economy. In their hands, it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous.”

I had to laugh when I saw that Von Mises quote referring to “the magic wand.” Indeed, history will not be so kind to Greenspan. He will be not be remembered as “The Maestro,” but as “The Sorcerer’s Apprentice,” looking for the easy way out of every problem, to the point of his undoing.

Back to the book… LoCascio explains:

Obviously, LoCascio is an optimist. I think it is far too late to prevent a calamity that wipes out the malinvestments and excesses of a 20-year boom that were built upon bubble after bubble of reckless credit expansion.

Nonetheless, LoCascio attempts to address the challenge of creating a “moral monetary system.” He argues that the root of the current problem is that inflation is perverse because increases in the money supply are distributed unevenly and unfairly. Any solution must remove the ability of the Fed to create and distribute money. He also mentions two related problems that must be rectified: First, our monetary unit must be defined; second, money needs to be distinguished from credit.

I will save a discussion of money supply for a later date, but LoCascio, as others before him, have pointed out numerous flaws with current measures such as M1, M2, M3, MZM, etc. The preceding measures blur credit with money in varying degrees and have other flaws as well that will be a subject for further discussion at a later date. For now, let’s just say that credit is so often blurred with money in our current system that it is hard not to be confused.

The heart of his proposal is to use money that has 100% backing with no more fractional reserves on demand deposits (checking accounts). Thus, money cannot be at one’s disposal in a checking account while simultaneously being lent to someone else. “Money is only money if it is available to the owner on demand at face value.” Finally, money would once again be backed by gold.

To date, no one has put together a way to get from here to there. LoCascio attempts to do just that with an eight-step program in which:

1.) Credit is distinguished from money.

2.) A preliminary money supply figure, based on step 1, is determined and published.

3.) A day of reckoning (DOR) will be announced on which money supply would be “corrected.”

4.) Fractional reserve banks will cease to exist.

5.) Time deposits will be kept distinct from demand deposits.

6.) Leading up to the DOR, money totals and credit totals will be fine-tuned.

7.) On the DOR, existing Federal Reserve notes (dollars) will be replaced with Treasury certificates (TC) that are payable on demand in gold.

8.) Taking the number of ounces of gold held by the Treasury and dividing that by the TCs, one gets a price value for gold, and notes are redeemable at that price. A dollar once again has a value associated with it.

One such difficulty that LoCascio did not deeply delve into is the global problem required in getting all the central bankers to agree to carry out such a plan simultaneously. Also, given our current trade imbalances, there would be huge pains for the United States to go back to an honest system right now.

While I think LoCascio underestimates the theoretical difficulties of such an endeavor, it is very clear that the current system is broken beyond repair. In that regard, I am more of an optimist than LoCascio. Something will have to replace Bretton Woods II, given that the current system is clearly not sustainable. Why not use the ideas outlined in his book as a starting point?

Like it or not, the United States will have to start thinking about long-term consequences, or the markets will eventually force the issue. My guess by now should be obvious. Time will be ripe for a “fresh honest start,” after the repudiation of Greenspan’s wizardry comes via an enormous deflationary collapse. Unfortunately, that final collapse may be years away if we follow the Japanese model.

Regardless of whether or not one thinks it is either desirable or even possible to return to a gold standard as described, the book is a very good read on the problems of the current fiat system, in which money, backed by nothing, can be created at will by the elite for the sole benefit of the elite.

Regards,
Mike “Mish” Shedlock
August 16, 2005

Vincent Locascio: Gold’s Honest Discipline was originally featured on Whiskey and Gunpowder