You’ve been told that nation-states, democracy and socialism are good. You’ve been told our monetary system prevents instability. And — while the government and central banks put your unborn children or grandchildren into debt for life — they’ve been telling you that there will be a socialist safety net to protect you and that the “American dream” includes retiring in your 50s or 60s to a wonderful life of golf and lying on the beach.

As part and parcel with the bill of goods you’ve been sold telling you that you need to go to 16 years of indoctrination training (school and college), work forty years in a cubicle and not ask questions, they needed to come up with something that made it all seem worthwhile. That carrot is the concept of “retirement”.

You see, if you can get through the nearly 20 years of child slave camps and 40 years of slavery where the majority of your income is taken and the rest is eaten up in interest costs for mortgages and loans so you can have a house and car, then you need a reason to do it all.

It even appeared to work for a short while thanks to demographics and the greatest advances in human history.

The baby boom was ultimately caused by the nation-state (which created World War II). Central banking (which created the Great Depression and funded World War II) was truly a boom that created a once-in-a-lifetime chance to make it appear as though some of these inane socialist theories could actually work.

A look at the number of workers per retiree in the US shows this plainly.

And, with the advent of the internet, productivity also increased massively in the 1990s and 2000s, further obscuring the collapse to come. And it is coming. In fact, it’s already started. So, if you are basing your future retirement plans on what has happened in your living memory you better snap out of it.

SOCIALIST SECURITY – THE ULTIMATE PONZI SCHEME

A ponzi scheme is defined as “a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation”. By this definition, the Socialist Security system in the US is a ponzi scheme.

The end of a ponzi schemes always end when net payments outstrip net income. This occurred in 2010 and there is no end in sight even under the US Government’s own heavily massaged and always underguesstimated projections.

There is only one reason it and the US Government hasn’t gone bankrupt yet. It’s because they can still print dollars to cover all these deficits. But how much longer can that realistically last before hyperinflation sets in and the dollar becomes worthless? We can’t see any way it goes more than five more years from here… and that’s pushing it.

IF YOU DON’T HAVE TO PAY, DON’T

Obviously, you are forced at gunpoint to pay into the Socialist Security system so long as you are a worker (entrepreneurs can avoid payments) or live/work in your home country in the Western world. So, as long as you live and work in the West this is unavoidable.

Other tax-sheltered retirement plans can sometimes be avoided, however. IRA’s (Individual Retirement Accounts in the US) are usually optional. In Canada, plans called Registered Retirement Savings Plans (RRSPs) are also optional. If you have the option, do not bother paying into these type of plans.

Your government registered financial advisor (at least the great majority of them) will try to persuade you to do so. But he is running on the premise under which he was trained which states things like “stock markets always go up in the long run” and the belief that the current fiat monetary system is a permanent fixture for eternity. He is wrong.

Under his thinking it makes sense to shelter some of your income now to get a tax break in the present and to delay paying those taxes in the future. But, with the coming bankruptcy of socialist styled fascist democratic nation-states and the collapse of the entire fiat monetary system this plan makes no sense. In fact, what is the most likely thing to happen is that as western governments collapse they will look at funds in accounts like IRAs and RRSPs as lucrative spoils by which they can confiscate or tax to stay alive a little while longer.

As well, most retirement savings plans (not all, see below) restrict you on your choice of investments and so you are limited and not able to invest in things like gold or silver bullion held abroad… so by putting funds into these accounts you are often stuck with investing in asset classes that will collapse in the coming years, such as the entire bond market.

And, even in the off chance that somehow these nation-states and their currencies can stay alive for another decade or two until you “retire” they will be in such a tattered state of affairs that the tax rate will be extraordinarily higher than it is today… so paying less tax now at lower rates in order to pay a higher tax rate in the future also makes no sense.

So, if you have yet to contribute to these kind of funds and have the choice to not participate, don’t do it.

WHAT IF YOU ALREADY HAVE FUNDS IN IRA’S or RRSP’s?

Every country is different and has different plans and tax laws so it is difficult to get into exact details for each. But, let’s take the US as an example.

In the US there are two main types of tax-sheltered retirement plans: 401k’s and IRA’s. Often with a 401k there are severe penalties if you withdraw the money while you are still working for the company in which you were employed when the funds were contributed or before a certain age. Depending on the penalty, each individual needs to make their own decision on whether to withdraw the funds. Keep in mind that many of these funds are invested in assets that can and will go to zero so even a severe penalty may be worth getting the funds out and invested into something safer such as precious metals or other hard assets that will not become worthless in a fiat currency system collapse.

In the case you wish to keep the funds in the plan then sometimes there are options to have ownership and control over what the funds are invested in. In the US this is called a Self-Directed IRA (see TDV’s Self-Directed IRA here). This enables you to invest the funds in almost any asset on Earth so it is much better than the majority of IRA plans where you are severely restricted as to what asset class and what geopolitical region you can invest in. Once you have a self-directed IRA set-up you can get:

(a) your assets outside of your home country to make it difficult to seize them and

(b) can invest in asset classes like gold bullion which will survive your country’s financial and monetary system collapse.

A BETTER WAY

So ignore that mouldy carrot state propaganda has been using on you. Forget the idea that once you hit 65 you can stop going to work and can lie on the beach everyday. (Of course, most people soon find out that lying on the beach everyday is fairly boring… and the lifestyle change is so great that many people have heart attacks in the weeks and months after “retirement” anyway.)

A much better way to live is to realize that all of this apparatus built up around us is mostly false. So avoid public schools (home school or unschool) and socialist colleges (all info is freely available on the internet with no massive student debts or being pepper sprayed) as much as possible. Start up your own business or become an independent contractor – preferably in one of the dozens of countries that has no noticeable taxes, regulations, and licenses that squeeze the incentive out of everyone. And, with all the money you make and the millions you will save from not having to pay egregious amounts of tax in the Western world you can afford to do whatever you want whenever you want.

Here’s the thing. You’ll probably never want to “retire” because you’ll be having such an enjoyable time doing what you are doing.

Regards,

Jeff Berwick

Forget Retirement And Retirement Savings was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

This was clearly a public relations stunt. Why would the head of the world’s most powerful central bank lecture to 30 undergraduates? This was not quite the equivalent of George W. Bush reading “My Pet Goat” to third graders, but it was close. Think of it as “My Pet Peeve.” His first speech was an overview of central banking. He used PowerPoint to create slides. The presentation had 49 slides.

Any experienced lecture listener, had he known of this in advance, would have headed toward the exit. Here is the man whose verbal skills produce narcolepsy in normal people who have slept at least 10 hours. To this he added 49 slides. This violated Guy Kawasaki’s 10-20-30 rule: 10 slides, 20 minutes, 30-point font. The slides are here.

UNDERGROUND GOLD

In his speech, he introduced some of the classic arguments of the fiat money advocates. Warren Buffett has invoked it:

Gold gets dug out of the ground in Africa, or someplace. “Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

This was Buffett’s reply to his father’s policy of defending the gold standard in Congress in the late 1940s. His father had far greater understanding of the gold standard than he does.

The thought of all those itching Martian heads apparently bothers Bernanke, too. So, he repeated the argument.

“Now, unfortunately, gold standards are far from perfect monetary systems. One small problem which is not on the slides but I’ll just mention is that there’s an awful big waste of resources. I mean, what you have to do to have a gold standard is you have to go to South Africa or some place and dig up tons of gold and move it to New York and put it in the basement of the Federal Reserve Bank in New York, and, that’s a lot of effort and work and it’s a, you know, it’s a – Milton Friedman used to emphasize that that was a very serious cost of a gold standard that all this gold was being dug up and then put back into another hole. So there is some cost to having a gold standard.”

There is “some cost” to having a gold standard. This means that we must pay for services rendered. Will wonders never cease! There are costs in this life! I’m telling you, this fellow Bernanke is on the cutting edge of economic science.

It’s a shame that he did not have a slide for this, even though that would have meant 50 slides.
Back in 1969, I dealt with this argument. Bernanke was 15 at the time. He must have missed it.

I begin with his first statement: “Now, unfortunately, gold standards are far from perfect monetary systems.” So, let me assure you, is central banking.

****

We live in an imperfect universe. We are not perfect creatures, possessing omniscience, omnipotence, and perfect moral natures. We therefore find ourselves in a world in which some people will choose actions which will benefit them in the short run, but which may harm others in the long run. The gold miner, by diluting the purchasing power of the monetary unit, achieves short-run benefits. Those on fixed incomes are faced with a restricted supply of goods available for purchase at the older, less inflated, price levels. This is a fact of life.

Nevertheless, Professor Mises has defended gold as the great foundation of our liberties precisely because it is so difficult to mine. It is not a perfect mechanism, but its effects are far less deleterious than the power of a monopolistic state or licensed banking system to create money by fiat. The effects of gold are far more predictable, because they are more regular; geology acts as a greater barrier to inflation than can any man-made institutional arrangement. The booms will be smaller, the busts will be less devastating, and the redistribution involved in all inflation (or deflation, for that matter) can be more easily planned for.

Nature is niggardly; that is a blessing for us in the area of monetary policy, assuming we limit ourselves to a monetary system tied to specie metals. We would not need gold if, and only if, we could be guaranteed that the government or banks would not tamper with the supply of money in order to gain their own short-run benefits. So long as that temptation exists, gold (or silver, or platinum) will alone serve as a protection against policies of mass inflation. . . .

Money, it will be recalled, is useful only for exchange, and this is especially true of paper money (gold, at least, can be made into wedding rings, earrings, nose rings, and so forth). If there is no reason to mistrust the American government, the paper bills will probably be used by professional importers and exporters to facilitate the exchange of goods. The paper will circulate, and no one bothers with the gold. It just sits around in the vaults, gathering dust. So long as the governments of the world refuse to print more paper bills than they have gold to redeem them, their gold stays put. It would be wrong to say that gold has no economic function, however. It does, and the fact that we must forfeit storage space and payment for security systems testifies to that valuable function. It keeps governments from tampering with their domestic monetary systems.

****

I used paper money as my example. Of course, digital money is what we have today. Still, a major function of gold in the vault is that it tells us if the monetary authorities are cheating.
Once the gold standard is renounced, we know the monetary authorities are cheating.

IN DEFENSE OF CHEATING

Bernanke was forthright about this. He defended cheating.

“But there are some other more serious financial and economic concerns that practical experience showed were part of a gold standard. One of them was the effect of a gold standard on the money supply. Since the gold standard determines the money supply, there’s not much scope for the central bank to use monetary policy just to stabilize the economy.”

As the Head Cheater in Charge, the Prince of Greenness himself, he proclaimed the wisdom of legalized counterfeiting. Why? Because the gold standard produces high interest rates.
And in particular, under a gold standard, typically the money supply goes up and interest rates go down in periods of strong economic activity. So that’s the reverse of what a central bank would normally do today.

Excuse me? The money supply goes up under a gold standard? When did that happen, and for how long? When did this happen when it was not followed by a run on the nation’s gold supply? That is what the gold standard does. It gives holders of fiat money the power to force the central bank or treasury to cease inflating. The run on gold forces the monetary authorities to stop inflating.

FIXED EXCHANGE RATES

Then he offered this reason for not establishing a gold standard.

“There are other concerns also with the gold standard. Now, one of the things that a gold standard does is it creates a system of fixed exchange rates between the currencies of countries that are on the gold standard. So for example, in 1900, the value of a dollar was about 20 dollars per ounce of gold. At the same time, the British set their gold standard in saying, roughly, roughly 4 pounds, 4 British pounds per ounce of gold. So 20 dollars equals 1 ounce of gold, 4 pounds equals 1 ounce of gold, so 20 dollars equals 4 pounds. So what that’s saying is basically that a pound is 5 dollars. So essentially, if both countries are on the gold standard, the ratio of prices between the two exchange rates is fixed. There’s no variability as we see today when the Euro can go up and the Euro can go down. Now, again, some people would argue that’s beneficial, but there is at least one problem which is that if there are shocks or changes in the money supply in one country and perhaps even a bad set of policies, other countries that are tied to the currency of that country will also experience some of the effects of that.”

He argued that a bad policy in one nation forces the other nation to mimic the bad policy. This is Bernanke’s version of Gresham’s Law: bad policies drive out good policies.
How is it that a bad policy on a free market is so successful in spreading to other free markets? The traditional defense of free markets is that good policies prevail. Wise monetary policies triumph. But Bernanke does not believe this. Under a gold standard, such benign results turn malign. How, he did not say.

What is wrong with his argument? This. A bad economic policy in one nation produces inflows or outflows of gold. If a nation inflates, holders of its currency demand payment in gold. The gold flows out of the central bank or treasury. Soon, the authorities must change the policy.

Then there might be a policy of monetary deflation. The nation’s goods become cheaper. Residents in other nations turn in gold at the fixed rate and buy the deflationary nation’s currency. Why? To buy the nation’s cheaper goods. This raises the monetary base (gold) and reverses the monetary deflation.

Bernanke mistakes cause and effect. The fixed currency exchange rate system is not fixed by law under a gold standard. The currency exchange rates fluctuate in terms of domestic monetary policies and the currency speculators’ expectations. What is fixed is the price of gold as denominated in each domestic currency.

Currency exchange rates can and does fluctuate. But if one nation’s policies deviate from another nation’s policies, gold flows in or flows out. Good policies drive out bad policies, as is true under a free market. This is because Bernanke has this backwards. He is a Keynesian. He has economic cause and effect backwards across the board, not just in monetary theory.

The fixed exchange rate system was not a factor in the era of the international gold standard, 1815-1914. There were no exchange rate agreements. Fixed exchange rates set by governments began in 1922 at the Genoa Conference, where governments agreed to the phony gold standard known as the gold exchange standard. Here, fixed currency exchange rates by government agreement were substituted for gold coin redemption on demand, which had prevailed prior to World War I.

Fixed exchange rates among currencies have never existed. What existed from 1815 to 1914 was a system of fixed exchange rates between a national currency and the price of gold in that currency. The moderately fluctuating currency rates were an effect of the legally fixed exchange rate between gold and each national currency.

Bernanke does not understand the difference between legally fixed exchange rates among currencies and fixed exchange rates between a specific currency and gold, That is to say, he does not understand the 19th-century gold standard.

This seems inconceivable. But Keynesians do not understand prices and markets, so I suppose it should not be surprising that Bernanke does not understand the traditional gold standard that he adamantly rejects.

POWER TO THE PEOPLE – NOT!

Central bankers do not like their judgments called into question by the rabble – “rabble” being defined as people who hold a nation’s currency. These people may decide that central bankers are following policies that put their money at risk. So, they demand gold. This is an outrage. It must be stopped.

“Yet another issue with the gold standard has to do with speculative attack. Now normally, a central bank with a gold standard only keeps a fraction of the gold necessary to back the entire money supply. Indeed, the Bank of England was famous for keeping, as Keynes called it, a thin film of gold. The British Central Bank only kept a small amount of gold, and they relied on their credibility to stand by the gold standard under all circumstances to – so that nobody ever challenged them about that issue. But if for whatever reason, if markets lose confidence in your willingness and your commitment to maintaining that gold standard relationship, you can get a speculative attack. This is what happened in 1931 to the British. In 1931, for a lot of good reasons, speculators lost confidence that the British pound would stand gold, so just like a run on the bank, they all brought their pounds to the Bank of England and said, “Give me gold.” And it didn’t take very long before the Bank of England was out of gold cause they didn’t have all the gold they needed to support the money supply and then, there was essentially – they’ve essentially had to leave the gold standard, so there was a lot of financial volatility created by this attack on the gold standard.”

He did not mention that George Soros did this to the British pound and Malaysia’s currency, and this was long after the gold standard was scrapped. Currency speculators “pays their money and takes their chances.” They can break government monetary policies when central bankers tell really big lies. They can make fortunes, Soros has.

So, the complaint against the gold standard in this regard is a smoke screen.

STABLE PRICES

Then he conceded to gold’s defenders what they have always said.

“And finally, just one last word on the gold standard, one of the strengths that people cite for the gold standard is that it creates a stable value for the currency. It creates a stable inflation, and that’s true over very long periods. But over shorter periods, maybe up to 5 or 10 years, you can actually have a lot of inflation, rising prices, or deflation, falling prices, in a gold standard. And the reason is that in a gold standard, the amount of money in the economy varies according to things like gold strikes. So for example, if United States, if gold was discovered in California and the amount of gold in the economy goes up, that will cause an inflation, whereas if the economy is growing faster and there’s a shortage of gold, that will cause a deflation. So over shorter periods of time, you frequently had both inflations and deflations. Over very long periods of time, decades, prices were quite stable.”

The only case he offered was California, 1848-52. This has not happened since then.

In fact, a gold standard, when accompanied by rising output, produces falling prices: “More goods chasing a fixed quantity of money.” That is what happened in late 19th-century America.

CONCLUSION

Ben Bernanke has a pet peeve. It has to do with power – specifically, his. He does not like it when common people have the power to tell him and his Ph.D.-holding peers that they don’t know what they are doing. The common man can veto Bernanke and his peers by cashing in dollars for gold. He resents this.

The money supply should be supplied by the free market, under the laws of contract. The government should not be in the money business.

End the FED.

Regards,

Gary North

Bernanke’s Pet Peeve: The Gold Standard was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Nobody knows what the future will bring. I don’t know what will happen to the gold price in the next week, the next month or for the rest of this year. I don’t even know what 2013 will bring. But please remember, neither do all the ‘experts’ out there who are much less squeamish about giving investment advice than I am.

When you invest your wealth you are alone. You have to make up your own mind. And accept the consequences of your decisions.

Having said this, I can assure you that, personally, I remain a big fan of gold. I consider it the number one asset out there. It remains head-to-shoulder above anything else.

Gold has not been trading that well recently. Measured in the world’s number one paper money the precious metal reached an all-time high of slightly more than $1,900 per ounce in September of last year but then retreated and has mainly been trading sideways in a wide range since. Considering the ongoing tensions in European debt and banking markets and considering that the global financial system seems forever dependent on super-low policy rates, one could have reasonably expected gold to do better.

The reasons for the somewhat disappointing ‘price action’ of late are not quite clear but could be manifold. Maybe it is a bit of rally fatigue. Don’t forget, gold traded below $300 ten years ago and had just been through a decade-long, unprecedented bull run. In one of gold’s biggest markets – India – the government recently introduced new taxes and regulations to discourage investment in gold (surprise, surprise), and international central banks are not believed to match their healthy buying of recent years.

But the optimists will say it is something else: things are getting better so there is less need for a crisis-asset.

This is how the Wall Street Journal put it:

“Gold is still benefiting from the view the global economy is fragile, but the idea has been shaken by signs that conditions are stabilizing in the U.S.”

Naturally, the financial and political establishment is rejoicing at the prospect of gold losing its luster. After all, the phenomenal ten-year bull market was the equivalent of a raised middle finger in the face of the international paper money bureaucracy. Ben Bernanke, the money-printer-in-chief, famously answered Ron Paul’s question if gold was money by saying he thought it wasn’t…

“I think the reason people hold gold is as a protection against what we call ‘tail risk’ – really, really bad outcomes…To the extent that the last few years have made people more worried about the potential of a major crisis, then they have gold as a protection.”

–Ben “Helicopter” Bernanke

And this is precisely why the establishment hates gold so much. The modern policy elite, people like Bernanke and his fellow central bankers, are tasked with avoiding bad outcomes, and they have at their disposal a body of theories (in large part faulty) and an interventionist tool kit that did not exist through most of gold’s three-thousand year history as the entire world’s monetary asset of choice.

This tool kit, not least of which is the printing press, is supposed to enable the policy establishment to run the economy smoothly and efficiently and save us from depression and crisis. For the public to turn back to the “barbarous relic” of gold certainly means a major vote of no-confidence for the modern financial architecture and all its supposed safety-valves.

The brilliant Jim Grant calls our post-1971 unrestricted paper money system astutely the “PhD-Standard”: We are asked to no longer rely on the apolitical and disinterested firmness of a precious metal to anchor the monetary system and to thus prevent financial extravagance and excess. Instead we are to put our economic fate in the hands of a bunch of self-confident and proactive intellectuals and bureaucrats who learnt how the world works by shuffling academic papers in the MIT economics department.

Understandably, many people have more trust in gold.

(By the way, this explains why the Financial Times, which adores and celebrates the policy establishment like no other media outlet I know of, only writes about gold when it goes down, when the gold ‘bubble’ is once again ‘bursting’, providing the FT with another opportunity to remind you that gold does not pay a dividend.)

Funny how Bernanke puts it with his “really, really bad outcomes” and “tail risk”. He makes it sound as if you have to be a pessimist of biblical proportions to buy gold. Things must get “really, really bad” because for anything else we have the Federal Reserve. Relax!

Limited understanding meets unlimited power to print

But the problem runs deeper than Bernanke implies. Much deeper.

While Bernanke’s quote contains some truth it also reveals an embarrassing misunderstanding of the nature of the problem, a misunderstanding that he shares with the majority of his policy-buddies.

He implies that these “really, really bad outcomes” are just random and uncontrollable events, unquantifiable statistical outliers, freak occurrences that simply happen, that capitalism in its mysterious unpredictability occasionally throws at us. This is nonsense. But this distorted worldview also shone through clearly in Bernanke’s recent lecture series.

According to Bernanke, inflations, recessions, depressions, asset “bubbles” – all these things come over us like acts of God, like droughts and hailstorms, and Bernanke & Co. are charged with dealing with them on our behalf. The rising gold price is merely an indication that some folks fail to appreciate the establishment’s good work. Hell, can nobody get any respect any more?

No, the problem runs much deeper than Bernanke seems to grasp, and that is precisely why gold is such a great asset in this environment. His limited understanding coupled with his unlimited power to produce paper money is indeed the number one argument for owning gold.

The present crisis is not an accident of capitalism but the inevitable product of the fiat money system and the faulty theories and counterproductive policies of Bernanke & Co. The present crisis is not just another business cycle (and business cycles are, of course, also created by central banks) but the unavoidable consequence of the political decision to abandon a gold standard and to adopt a system (as of 1971) of unrestricted fiat money creation.

As I explain in detail in my book Paper Money Collapse – The Folly of Elastic Money and the Coming Monetary Breakdown such a system, while appearing stable for a long time, inevitably accumulates imbalances as it systematically distorts capital formation and asset pricing.

Though central bankers and their crony economists falsely deem moderate inflation to be good, the constant artificial cheapening of credit through ongoing money injection must culminate in the present horror show of bloated banks, inflated asset prices and an unsustainable debt load.

The really, really bad outcome is entirely home-made and the fully guaranteed by-product of decades of mild to medium inflationism, i.e. the modus operandi of modern central banking. The crisis is built into the system; it is part of the game.

Bernanke still believes that his ongoing money printing is saving the world when it is indeed the root cause of this entire disaster. While Mr. Bernanke poses confidently (and I believe sincerely) as a firefighter, he is really an arsonist. His “stimulus” is adding ever more fuel to the fire.

We should not buy gold because Bernanke’s policy (and that of other central bankers) is ineffectual but because it is so very effective. This policy preserves the accumulated imbalances. It sabotages their dissolution and liquidation, and it constantly funds new imbalances.

Bernanke’s policy is guaranteeing the never-ending crisis. Well, I should say almost never-ending, as it will end in a currency catastrophe when the public begins to shun his fiat money and when paper money becomes a hot potato.

We do not own gold because we fear that Bernanke may stop his policy of saving the government and Wall Street. We own gold because we think he won’t stop saving them.

Could Bernanke derail the gold bull market? Sure! But he would have to abandon his policy activism and become passive. Bernanke may want to look at how Paul Volcker successfully ended a gold rally (or, more accurately, put it to rest for 20 years). It wasn’t by by using the printing press to bail out the world a la Bernanke & Co.

Au contraire, Volcker did it by stopping the printing press altogether and allowing high real interest rates to cleanse the system of the imbalances from previous money production. That is what ended the last gold bull market and it is still the major threat to today’s bull market.

Bernanke, alas, is no Volcker, and stopping the printing presses today will create bigger challenges than in 1979.

The financial crisis is not the reason people seek safety in gold. It is central policy response to the crisis that they seek protection from.

If gold is retreating for now, it is because the investing public sees less need for it with monetary and fiscal stimulus presently sustaining the impression – the illusion, really – of stability and sustainability. So this is a great opportunity to buy gold.

In defense of “hoarding”

Let’s look at the logic of investing in gold. When doing so we immediately are confronted with widespread antipathy towards it founded on ignorance and misunderstanding: We gold bugs are not only pessimists who want to make money when the world goes to hell in a handbasket. We even remove our spending power from the markets for consumer and producer goods and invest our wealth in “barren” and “unproductive” monetary assets. Shame on us!

I use the term “monetary asset” as I do not want here to go into the debate about whether gold is presently money or not. I know that you cannot buy a bus ticket with a gold coin but that is not what we are discussing here.

For the purpose of this investigation gold is (almost) equivalent to physical paper money, i.e. to cash under the mattress. The person who invests in bullion does so for the same reason that somebody may hold a large pile of banknotes in a safe, namely to not commit this part of his wealth to consumer goods that may fulfill his present consumption needs or to producer goods that promise an investment return (dividends and interest).

He is holding money – that is, gold or physical cash- because he wants to conserve his purchasing power. He wants to retain the flexibility of spending that purchasing power on consumer and producer goods some time later but still at the drop of a hat (i.e. remain “liquid”).

Money is the most fungible good, the one that can most easily be traded for goods and services. People hold money because they value that flexibility and the maintenance of their purchasing power higher than what they can get for their money at present prices, including what they can get for it in terms of investment goods at present prices.

There are, of course, important differences between gold and cash. The latter is presently slightly more fungible. Remember the bus ticket. On the other hand, there is no limit to how much paper money central banks can produce today. For the paper money holder debasement is not only a risk it is almost a certainty as it is the declared goal of those in charge of the money franchise. (I come back to that later.)

Keynes had a keen eye for widespread prejudices (against the rentier class, against saving and against money hoarding) and was not above providing pseudo-scientific justifications for these prejudices. Thus, his silly “liquidity preference theory” in his General Theory (in particular chapter 15), according to which it is okay to hold money to be ready for immediate transactions but not okay to hold money because you simply want to sit on the sidelines and retain purchasing power.

This is, of course, complete nonsense. Money, like any other asset, is only an asset because it fulfils the needs of its owners. Consumer goods fulfil consumption needs, investment goods promise monetary return, and money provides flexibility and security (at least honest money does) in an uncertain world.

As Henry Hazlitt has pointed out so well in his critique of Keynesianism, the “hoarder” of money does not speculate in money, as Keynes alleges, but simply refuses to speculate in bonds and stocks and other assets at prevailing prices. He has absolutely nothing against investing in “productive assets”; he just does not want to buy them at the current inflated and artificial prices.

Concerns about the stability of the overall economy and the sustainability of high asset prices are most prevalent at the end of credit booms when cheap money has created a false sense of prosperity and economic vitality, and when the prices of bonds, stocks and real estate are elevated by years of easy credit.

In a system of inelastic money, such as a gold standard, growing demand for money at that late stage of the cycle will cause money’s purchasing power to rise and the money-prices of goods and services to fall (deflation). At the new and lower prices demand shifts back from money to other, non-monetary assets. “Hoarding” ends naturally; it is self-correcting. When money’s purchasing power rises, the opportunity costs of holding wealth in the form of money rise, and so does the attraction of spending that money on consumer or producer goods.

["Deflation" is also just money becoming more valuable...which happens naturally in an expanding economy when money is a real commodity whose supply doesn't grow at a central bankers whim. Prices fall over time and savings are rewarded. Ain't nothin' wrong with that.--Ed.]

That money is not an unproductive asset has been argued by W.H. Hutt in his seminal essay “The Yield from Money Held” from 1956. For an excellent exposition of this view see this speech by Hans-Hermann Hoppe on the same topic. Holding money – and in particular inelastic money proper – is a sensible, legitimate, rational and by no means destructive strategy.

We have had an “on-and-off” but mainly “on” fiat money boom for 40 years. Capital misallocations and asset price distortions have become massive as a result. How big they are and where precisely they are located, nobody can tell. We would have to stop printing money and let the market expose the dislocations and then liquidate them but that is the one thing that authorities do not want to let happen.

Be that as it may, the public’s desire to step back from inflated and systematically manipulated asset markets is understandable and entirely justified and naturally translates into demand for money. Not the “flexible” kind under control of the central planners, but the honest kind, i.e. gold.

But Bernanke & Co., just likes Keynes in his time, does not want you to disengage from speculation in bonds and stocks and real estate. Moving to the sidelines is strictly verboten. You have to keep playing – with your own hard earned savings.

The policy establishment believes that it can manipulate the economy by manipulating your desire for assets through the manipulation of interest rates via the printing of money. These manipulations have to be ever more blatant, direct and heavy-handed.

Manipulation used to be conducted in a roundabout way by just administratively easing the refinancing conditions for banks and then waiting for the ‘stimulus’ to play out in the wider capital markets and the economy. Now that this policy has brought us the aforementioned imbalances, the central banks have to manipulate asset prices openly and ever more directly via ‘quantitative easing’.

Here is Bernanke defending the practice in 2010:

“This approach (quantitative easing) eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

If you believe that this brazen manipulation by the paper money bureaucracy is going to work and that it will restore and then guarantee stability and prosperity, you can do without gold. Jump right back in. Put your savings at the mercy of the Great Manipulator! Good luck!

I would only feel comfortable participating in these asset markets if I were confident they were not rigged. It is not a good idea to invest in assets whose prices are artificially inflated for political reasons. The biggest danger, in my view, presently exists in bond markets, in particular in government bonds. As to equity markets, where would they trade without zero interest rates? Where will they trade when inflation picks up?

Sitting on the sidelines makes a lot of sense to me. I want to hold money but it cannot be paper money or bank deposits, as both represent state fiat money that the policy establishment will continue to create like confetti. Additionally, a bank deposit may be your asset…but it is equally the bank’s liability. And let me remind you that banks everywhere are on life-support. Therefore, you have to go back to the eternal and international form of money: gold, which is not anybody’s liability but just your asset.

What about other ‘real assets’, such as property or farmland? Well, I guess you have to have considerable wealth to invest meaningfully in farmland. Also, the yield on farmland in places like Europe is very low and often dependent on state subsidies. With governments everywhere going bankrupt you have to expect those subsidies to be cut at some point with potentially adverse consequences for the value of that land.

Be that as it may, I think it is generally a bad idea to invest in a way that makes you dependent on government spending. Additionally – and this is something that applies to all forms of real estate – you have to expect the level of property taxes to rise. This is low-hanging fruit for the taxman as things are getting desperate for him, too.

All major central banks are in pretty much the same sticky position. None of them have an exit strategy. The Fed has not expanded the monetary base since June of last year. That is not because monetary prudence has set in but because the steroids from the last round of QE are still working. Banks are doing the money creation themselves again. M1 has expanded by 14 percent since last summer, non-annualized. No deleveraging here. Additionally, the myth of Treasurys as safe assets is still alive and kicking, against all evidence to the contrary and probably thanks to the present fixation with Europe. When banks and sovereigns come under pressure again the monetary floodgates will be opened. Just look at the ECB and their recent €1 trillion-plus money injection.

“We’re on crack,” as John Hathaway, the manager of the Tocqueville Gold Fund put is so astutely in the Wall Street Journal. The financial community is completely addicted to cheap money and ongoing stimulus. Just wait for the withdrawal symptoms to set in and you can rely on another round from Bernanke & Co. Unless I see a Volcker-like figure emerging, the avenger of the paper standard, I am happy to sit with eternal money.

Regards,

Detlev Schlichter

Why Gold Is Still My Favorite Asset was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Normally we would not look upon buying a single family house for personal use as an investment. But these are strange times we live in.

Why don’t we consider a single-family house for personal use an investment?

In a completely free market (and a free market means no central bank with a monopoly on currency issue and the ability to manipulate interest rates) housing prices would probably act like the price of all other goods and services. That is to say, that they would tend to move downward over time due to increasing production efficiency and competition among producers against the backdrop of precious metals money and competing currencies that would tend toward stability.

The notion that housing prices should rise at all is born of generations experiencing constant expansion of the money supply by the central bank. Rising house prices are just a byproduct of inflation. A house’s price has no more natural inclination to rise than the price of a gold coin, a good suit or a laptop sans inflationary policy and artificially low interest rates.

A house is at base merely a very durable good for consumption. It provides its user with an essential function: shelter. In terms of assets a house for personal use is more like a car or a kitchen appliance than it is like a stock in a company.

That is unless the house is used like an apartment building. When bought and rented out at a profit, then a house becomes sort of like a dividend-paying stock.

Even in a fiat currency environment with its strong inclination toward inflation, we see small pockets of the free market driving prices downward over time. Technology springs first to mind. But even items whose prices rise due to inflation tend to do so more slowly than wages so that the items themselves require shrinking percentages of median income.

This is not the case with markets in which the state tinkers most: things like medical care, education and housing.

In the case of both education and home ownership, government has tried to increase availability by encouraging increasing levels of debt thus driving up the costs. This is the opposite of the market’s mechanism of fostering lower prices through innovation and competition.

We want to make clear that housing for personal use would likely become increasingly cheaper in a free market. A home would never have been misconstrued as an “investment” in such a free market. It would have been seen for what it really is: a durable good meant for consumption and enjoyment.

The population would have rightly cheered the tendency for homes in this environment to get more and more affordable, just like they do when their electronic geegaws get more sophisticated while coming down in price. (The laptop on which your editor is typing this has a 17” screen, an absolute luxury that would have costs thousands of dollars just a few years ago which now costs us a little over $400). There wouldn’t have been this happy expectation of rising home prices (and simultaneous perverse fretting creating “affordable housing” for the poor who find home ownership increasingly impossible because of those rising prices).

As it is we don’t live in the fantasy land where free markets reign. We live in a world of government tinkering and central bank manipulation of currency supply and interest rates. We live in conditions that foster speculative asset bubbles. We have no choice but to act accordingly.

So while we lament the absence of freedom and free markets, we remain on the lookout for the financial pitfalls of a bubble-prone world. And we look out for the resulting opportunities.

And the opportunity right now? Use borrowed money to get a house for personal use. (Then fill the basement with nickels and silver, guns and non-perishable food).

Ten years ago our advice was different. We said to anyone who would listen, “Sell your house, rent a place instead of buying another house and use the proceeds from your sale to buy silver.”

That was the trade to make back when silver had been languishing in the single digits for two decades, having tumbled from an all-time high of nearly $50 in 1980. Housing in the meanwhile was starting to feel the effects of artificially low interest rates and becoming the bubble du jour. Real estate prices were rising fast as people took on more and more debt to buy houses.

The prices rises were beginning to fuel a bona fide mania. The public came to believe that real estate was a “can’t miss” investment whose prices would never go down again. Just about everyone wanted to get in before they were left behind forever.

Little did they suspect that there would be plenty of opportunity to get into real estate cheap in just a few years.

Silver was clearly undervalued for many reasons. Meanwhile real estate was in full speculative bubble mode. Anyone not caught up in the mania (and who recognized silver’s potential because of monetary and industrial demand reasons) would have sold the increasingly overvalued asset and bought the undervalued one. How well would that have worked out?

Pretty well. After 2006 real estate prices started sliding while silver started really taking off. Real estate is down around 30% from its 2006 while silver is up over 500%.

Now this may seem so clear in hindsight, but it’s the exact kind of clarity that the masses and the mainstream media never seem to have while honest money advocates often have it in spades. That’s because hard money advocates can see speculative bubbles for the central bank-induced temporary distortions they really are. Even when those bubbles are growing in precious metals.

For example, we have no problem admitting that at some point gold and silver will be in absolute bubble territory. There will be a time to get out of precious metals and into something else. We don’t know what shape the dollar or other currencies will be in at that time. But gold or silver may have reached their highs against other things. Like houses. Surprisingly, that time may be right now for gold.

Take a look at this chart:

It shows the median home price in the U.S. priced in gold going back over a century to 1890. Notice that in 2010 gold could buy as much house as it could during its previous all time high back in 1980.

The only other time gold has been able to buy as much house was back in 1980.

What is more likely at this point? Will houses get cheaper or more expensive in terms of gold? We would argue that the trend is ready to revert to the mean. The dollar may continue to fall so that both gold and houses get more expensive in dollar terms, but houses would get expensive more quickly. If the gold price in dollars stays relatively flat, then house price in dollars is likely to go up.

Bottom line: houses are set to get more expensive in terms of gold. Just as it was a good idea to trade your house for gold and silver before 2006, it is now a good time to trade your gold (at least) for a house.

Or more specifically, you should trade your gold for a down payment and then mortgage the rest. Get dollars for your appreciated gold in order to place a down payment. Then borrow the other dollars necessary.

You see, we wouldn’t actually recommend staying in dollars more than you have to. The dollar’s long-term fate remains the same. So locking in a fixed amount of dollar debt at today’s low borrowing cost means you are almost guaranteed to be paying back in much cheaper dollars in the future.

You can take advantage of gold appreciation to secure another inflation hedge at the bargain rates created by the Federal Reserve with the housing bubble and bust and today’s low interest rates.

The Fed is handing you a gift. Sure it is wrecking the economy, but like we said before, you can’t stop that. All you can do is act accordingly to protect yourself.

We may have our problems with Warren Buffett as a shill for the state in general and taxes in particular. We often wonder if the government actually pays the man to act as its charming spokesperson to lull the masses with his homespun advice.

But we have to acknowledge his business acumen even as we scratch our heads at his economic and political philosophy. The man has made ungodly amounts of wealth from knowing where to place his bets. And now he’s calling real estate the smartest place to put your money.

In a February 2012 interview with CNBC Buffett said that if he had a way to buy “a couple hundred thousand single-family homes” and easily manage them, he would “load up on them” and “take mortgages out at very, very low rates.”

Buffett said that right now a single-family home with a 30-year mortgage is a better choice than even stocks for investment purposes.

According to Buffett, “It’s a terrific deal. It’s a leveraged way of owning a very cheap asset now and I think that’s probably as an attractive an investment as you can make now.”

Why would we take Buffett word’s so seriously now? Because we can’t help but notice that he seems to be on the money no matter how you slice it.

Also it lines up with the opinion of another uncanny investor with a very sound understanding of economics…

Agora Financial managing editor Chris Mayer spotted this trend a while back. A little over a year ago he wrote:

During the past few years, rare was the investment thinker who said you should buy a house. Housing was in a bubble that was deflating.

But the investment seasons turn. Today some smart investors are once again saying you should a buy house. John Paulson is one of them.

You may know him as the man who turned the greatest trade of all time. Betting against the housing market, he netted a cool billion dollars for himself in 2007. One fund he managed rose 590% that year. Today, he is one of the richest men in America.

His advice today is very different. “If you don’t own a home, buy one,” Paulson said. “If you own one home, buy another one, and if you own two homes, buy a third and lend your relatives the money to buy a home.”

That’s a strong endorsement. It sounds similar to the advice another investor gave his audience in 1971, at the dawn of one of America’s biggest housing bull markets. The investor was Adam Smith (George Goodman) on The Dick Cavett Show. Here is a snippet from that conversation:

Smith: The best investment you can make is a house. That one is easy.

Cavett: A house? We were talking about the stock market. Investments…

Smith: You asked me the best investment. There are always individual stocks that will go up more, but you don’t want to give tips on a television show. For most people, the best investment is a house.

Cavett: I already own a house. Now what?

Smith: Buy another one.

It was good advice. In the 1970s, US stocks returned about 5% annually, which failed to keep pace with inflation. Still, it was an up-and-down ride. In 1974, the stock market fell 49%. But here are the average selling prices for existing homes in the 1970s as inflation heated up:

1972 – $30,000

1973 – $32,900

1974 – $35,800

1975 – $39,000

1976 – $42,200

1977 – $47,900

1978 – $55,500

1979 – $64,200

You can see that housing held up pretty well. And think about the effect of a mortgage on 80% of that house in 1972. That would mean $6,000 in equity, a sum that went up fivefold in eight years. It’s hard to find a better inflation fighter than that. Granted, today’s market is different, but still.

Apart from this, you might also reflect on the fact that it is quite absurd today to think that anyone can buy an average house for any of these prices – and that, too, is the point. The average price today is $257,500 – even after the great collapse in the last few years.

“If you have a 7% mortgage and your house is worth half a million dollars,” Adam Smith writes, “you may gripe about shoes and lamb chops and tuitions like everybody else, but your heart isn’t in it.” Your heart won’t be in it because you’ll be in fine fettle with your house.

Of course, you can do a lot better than 7% today. For the first time, the rate on 30-year mortgages slipped below that on the 30-year Treasury bond. You can get a 30-year mortgage at little more than 4% today.

Factoring in mortgage rates, housing affordability is back to where it was in September 1996. Then mortgage rates were 8% and the average price of a home was $171,600. As Murray Stahl writes: “One can actually buy a home for a monthly payment that is not very many dollars different from the monthly payment one would have needed in September 1996, when rates were significantly higher.”

Adjusted for inflation, Stahl points out that the payment for an average-priced home today is about 30% lower than it was 14 years ago.

The advice of Paulson and Smith starts to make sense now, doesn’t it?

Essentially, real estate is a way to buy now and pay later. And the case for housing extends to other property types, too. Owners of quality real estate are getting deals on mortgages that we are unlikely to see for a generation.

Real estate, after a long absence from the menu, is back on.

–Chris Mayer

Now, if you don’t plan on sticking around for around three years or more, then buying a house for personal use could be much more expensive than merely renting.

Sure, your monthly carrying costs will ultimately be lower than paying rent (at least in a non-bubble market when people would rather have a pricey mortgage than a cheap rent for a comparable property).

And of course you can deduct the interest payments (structured to be a higher portion of the monthly payment in the earlier years of the mortgage) from your income taxes. Add it all up and your monthly mortgage and interest payments could be as little as half renting a comparable property. And you are also moving toward ownership of the property (in a mere thirty years…after which time if you don’t pay the local government “rent” in the form of taxes, they will show you to whom the property truly belongs).

But that lower monthly carrying cost doesn’t come for free. There are those property taxes you’ll have to pay as long as you “own” the property, along with the transaction costs which could be 2-3% of the selling price. You would have had to save up as much as 20% of the total cost of the home in order to qualify for those lower monthly costs.

When you rent, that down payment money is available to do other things. When you buy that money is locked up in the house. In this environment, however, that may not be such a bad thing. The Fed has abolished the reasons to save the money while precious metals prices have already moved much higher making them less attractive to purchase now. The bargain now lies with housing. The advantage is more in favor of taking on a mortgage than it has been in years.

Lower housing prices, artificially low interest rates and almost guaranteed rising inflation make taking on a mortgage a smart move right now. It’s almost like getting a low interest loan in order to make a huge purchase of gold or silver back when they were cheaper.

Again, this wasn’t the case years ago when houses were expensive and precious metals were incredibly cheap. Try securing a fixed low interest rate loan from anywhere in order to buy precious metals. You won’t get that sort of a deal. But you will for a single family house, which right now can provide the same sort of hedge against a falling dollar that gold and silver do.

Right now perhaps the greatest opportunity to hedge yourself against inflation is getting a mortgage. Buy your inflation hedge now and pay for it with devalued dollars later.

Essentially real estate is the new inflation insurance that you can get on the cheap, much like silver and gold were back around the turn of the century.

Further a mortgage taken out now lets you leverage a whole lot of this cheap insurance, giving you command of much more money than you likely have available. If inflation takes off in the coming years, you could sell your house for far more inflated dollars than you would owe at that point.

Imagine if someone had lent you $250,000 at 5% interest fixed for thirty years in order to buy 50,000 ounces of silver in 2003. You would be sitting on over $1.5 million in silver right now.

That’s sort of the situation that getting a mortgage now could put you in. Of course a house has maintenance costs that precious metals do not. But these are costs you’d be covering with renting in any case.

And with this particular inflation hedge, you have a place to store your silver…along with your ultimate deflation and inflation hedge, the humble nickel (but more on that another time).

Regards,

Gary Gibson

Is a Mortgage a Better Inflation Hedge Than Gold and Silver? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Does the Fed’s latest colorfully named plan amount to anything more than money printing and legerdemain? Will it not punish savers and interfere with oh so vital capital accumulation?

Jeffrey Tucker is on hand to take a look in today’s feature article.

And then we get real in today’s Parting Shot with a look at real estate in the world the Fed has wrought. There’s actually a way to play it to your great benefit.

Keep reading below…

The Fed’s Newest Trick

The money masters at the Federal Reserve have done a splendid job, haven’t they? Well, no, and all the more reason to End the Fed, in the legendary slogan of Ron Paul.

Every few months since the great meltdown of 2008, there’s been some announcement that appears in the financial press about the latest fancy-pants move that the Fed will undertake to save the day.

These guys aren’t just printing money! They are engaged in amazingly technical maneuvers that mere mortals can’t fathom. The catchphrases are multiplying: quantitative easing, Operation Twist, sterilized QE, ZIRP (zero interest rate policy) and now reverse repo.

Stay tuned for other amazing tricks. They could pull out the camel clutch, the bite of the dragon, the hammerlock, the bridging chickenwing, the gorilla press, the octopus hold, the sunset flip, the inverted figure-four three-quarter leglock and finally, if they really get desperate, the Tree of Woe.

These names are all, of course, drawn from the world of professional wrestling. Sadly, the world of central banking is not nearly as entertaining, mainly because instead of just hurting each other, the bankers are hurting the rest of us.

You know this when you look at your bank statements and see that all your efforts to save money are for naught: Your money is losing more value through higher prices than it earns in cash.

The Fed is sending the message: If you save, you are fool. What message is it sending to investors? It is telling them to put their money in something, anything, besides short- and long-term bonds. In this way, it hopes to stimulate some kind of artificial boost of stocks and any form of financial arbitrage besides buying and holding debt. (See the Cleveland Fed for a wicked picture of what has happened.)

This is outright market manipulation of the sort that the government criminalizes if done by the private sector. For example, the Justice Department has said it is looking into charges that book publishers are manipulating the price of e-books and also said that it might force a settlement that could wreck this wonderful emerging market. Thanks a lot!

But how does pushing up the download fee of e-books by a buck or two compare with completely wrecking the price-signaling mechanism of interest rates, the very thing that every human soul relies to estimate the profitability of long- and short-term economic planning? As a result, no one knows for sure what is real and what is not.

This is not only perfectly legal, but it has also become the job description of the Federal Reserve itself. It is nothing more than an elaborate and insanely contorted central plan designed to manipulate prices. But because the Fed has the legal monopoly and claims to be doing this in the public interest (thanks for wrecking my reward for saving!), they get away with it.

Worse, they demand our respect and deference to their brilliance. But do they deserve it? The Fed set out in 2008 to rescue the credit markets, boost the housing industry, save the employment sector from stagnation and boost the economy.

It has failed on all four fronts. Bank lending for industrial and commercial purposes is still at 2007 levels. Housing price pressure is still pushing downward, there’s no end in sight to the foreclosure fiasco and Fed is the proud owner of as much as a trillion dollars in mortgage-backed securities. The unemployment picture is grim: Jobless claims are up, and labor force participation is at 1980 levels!

As for economic growth, it is so sparing that the whole financial press celebrates over the slightest good news like prisoners of war cheering the arrival of scraps of bread. Meanwhile, China, India, Argentina, Indonesia, Vietnam, Mongolia and even Botswana are managing growth rates between 6 and 10%. And this in times when economic growth ought to be as easy as breathing, giving the digital revolution that has blessed us with astonishing productivity gains.

The Fed couldn’t possibly have screwed up more than it has. It’s zero interest rate policy (ZIRP) has been a complete failure by any standard but one: It has kept the borrowing costs to the federal government at the lowest possible levels. Even then, the fiscal budget crisis is never ending. Should interest rates come back up to something approaching a human and realistic level, the budget will blow, which the Fed surely knows and which further gives some indication that the Fed knows who and what butters its bread.

But let’s say a quick word on this new trick called reverse repo. The Fed prints money to buy long-term bonds. But then the Fed “locks” the use of the new money by borrowing it back again for short periods at lower rates. It can conduct this operation with institutions other than banks, such as money-market funds. As James Grant has said, borrowing short and lending long is a great way to go broke.

There’s a line from the Hayek-Keynes video made by John Papola and Russ Roberts put into the rap by F.A. Hayek: “You’ve got to save to invest, don’t use the printing press.” That sums it up. There is no sound investment that is not preceded by savings. To save, you have to forgo consumption. Once saved, the money can be loaned out for future-oriented projects and pay higher returns than one could experience without the initial steps of saving. That’s how capitalism grows the economy: an evermore complex expansion of the division of labor sitting on a rising stock of capital.

The Fed’s claim to be spurring economic growth rests on a doctrine that gets this whole process backward. We are supposed to consume more and save less. If that works, the ticket to good bodily health is to be a beer-guzzling couch potato and avoid the gym like plague. Or maybe the plague is exactly what all these fancy Fed moves are actually bringing us.

Regards,

Jeffrey Tucker

A Parting Shot:

Yeah, thanks a lot, Federal Reserve.

Thanks for destroying savings. And thanks a lot for propping up the inflated housing market.

But wait! As Jeffrey points out, the Fed has actually failed in that mission. Housing prices are still moving down. But that’s a good thing.

You know, it really is strange to us that people would want housing prices to go up. The house you buy to live in, after all, is no more an investment than a car you buy to drive.

Sure, if you rent out either the house or the car at a profit, then it’s an investment. But if you are using either, then you are consuming it and it is consumer good, not an investment.

A house is something you use, like any appliance or your own vehicle. It is a very durable good, one meant for long-term consumption. Do you expect your blender or your Ford to go up in price over time? So why would you expect your house to do so?

Sure your house provides you with a very essential function: shelter. But the food you buy provides you with a more immediate function: nutrition. So why is it that of all the goods we consume, we expect houses to behave differently when it comes to price? Does a house’s combination of utility, necessity and durability give it some magical property that makes prices rise?

This is the Whiskey Bar so don’t be surprised when we point the finger at government. The government’s spent a century convincing (conniving?) us that “certain” markets need they’re intervention, particularly education, medical care and housing.

You’ll notice that these are the markets where prices keep spiraling up. In some cases (education), quality simultaneously moves down.

Markets with their competitive forces tend to drive quality up while relentlessly driving down prices. Housing should be — and would be — subject to this as well. Left to market forces, the quality of houses of would march upward over time while their affordability increased.

But the government has spent a century crafting a housing mythology that poo-poos outright renting and encourages increasingly longer term renting-to-own from the bank. We notice that this mythology has been augmented over the generations as real estate came to be seen as one of the ways to fight the savings-destroying inflation in which the central bank almost constantly engages.

We fully believe that in a free market we would get to the point where a decent house would cost less than a year’s salary of the median income. The market would provide the affordable housing that people claim there’s not enough of…even as they salivate over the idea of Fed-manipulated interest rates boosting the price of their own homes.

Who wouldn’t want a world in which a modest 3-bedroom house could be paid off in three or five years…or paid in full in cash after a year or two of saving up while living with parents?

Apparently the Fed doesn’t want that. They tell us to be afraid of that kind of deflation. It may be fine for the constantly booming technology sector, but falling house prices would somehow be the deadly. So the house has become the means by which an unsustainable debt-driven consumption economy flourished.

You see, a free market unweighted by the politically backed monopoly of the Federal Reserve would have competing currencies, gold and silver as money. Competition and precious metals would act as a lid on inflation. Savings in these things would tend to gain value over time as the economy grew while this money supply grew less.

Does a bunch of currencies sound unworkable? It really shouldn’t. The currencies that performed best — those which best did the job of storing and increasing in value — would thrive. Multiple currencies in a region would be no more problematic than multiple currencies across the globe. The alternative is the monopolistic Federal Reserve system we have now. You know. The one that has destroyed over 95% of the dollar’s value in a century.

The Fed would have us believe that the much surer growth to prosperity is for them to have a legal monopoly on the issuance of new money. This may destroy savings, they admit, but it encourages investment in the bubbles the Fed’s policies are constantly germinating.

Fed to savers: “Quit whining about the destruction of your savings and your interest income. Hop on our inflation-fueled asset bubble ride!”

All good bubbles must come to an end, however. Houses are getting cheaper in terms of dollars. And since the Fed has been on a money-creating tear these past few years, houses are getting even cheaper in terms of real, Fed-proof money, like gold and silver.

Another way to play this is to keep an eye on the price of houses in terms of precious metals. Particularly in terms of silver. Houses are one real good that have a lot of downside left because their prices had been flying way too high thanks again to central bank monetary policy (You didn’t think really think it was just because of the wicked commercial banks, did you?).

Houses are below their median price in terms of gold. Even though they’re currently moving lower in terms of dollars as the house-in-terms-of-dollars bubbles deflates, this could easily reverse if the Fed’s easy money policies ignite a hyperinflationary storm. Of course, then the price of everything in terms would explode in terms of dollars.

We’re of the conviction that gold and silver would benefit from this more than any other commodity. Silver in particular would see greatly increased demand for use as a medium of exchange and for the storage of value (which is a basic a function of money as machine lubrication and energy are for oil).

So if you could find some decent, unusually expensive real estate right now (say, in an out of the way town in a state with no income tax and a burgeoning liberty movement where the mills have closed and houses are unusually cheap…like Berlin (rhymes with “Merlin”), New Hampshire, for example…), then you could get an affordable mortgage and keep accumulating silver.

Source

Silver prices are likely to go up no matter what. Even faster than housing prices in case the over-printed dollar tumbles against everything. Then you could pay back your fixed mortgage debt by selling your rapidly appreciating silver for rapidly depreciating dollars.

Of course, the conditions under which this plan would work mean that it’s prudent to hedge your mortgage with silver on a property well removed from big cities and welfare-dependent populations. If you plan to ride out the political and economic storms brewing here in the U.S., this is one way to do it.

Regards,

Gary Gibson

The Fed’s Newest Trick was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Inflation is a tax.

It’s just a very sneaky one. The fine folks over at Economic Collapse Blog explained it so well that we thought we’d share it with you…

“It is a continual tax on every single dollar that you own. As your money sits in the bank, it is constantly losing value. Over time, the effects of inflation can be absolutely devastating. For example, if you put 100 dollars in the bank in 1970, those same dollars today would only have about 17 percent of the purchasing power that they did back then. In essence, you were hit by an 83 percent “inflation tax” and all you did was leave your money in the bank. So who is responsible for this?

“Well, the Federal Reserve controls monetary policy in the United States, and the inflationary monetary policy that the Fed has gotten all of us accustomed to is taxing the living daylights out of us. This is madness, and it needs to stop.”

This is the point that the average Joe or Jane or combination thereof on the street seems to miss. People have just been conditioned to accept that prices “rise” over time.

They seem to be okay with that because they also think that their wages are rising at about the same rate as general prices.

What about their savings, however? Surely they understand that even if their income keeps up with inflation (it doesn’t…and over a couple of generations a little lag adds up to ever lower standards of living), aren’t they worried about how their savings are being eaten away by the inflation tax? Again, Economic Collapse Blog:

“Inflation is a tax that is very cruel to average American families. It destroys their wealth and it destroys the purchasing power of their paychecks.

“Unfortunately, this is always what happens when a society adopts fiat currency. Our dollars are just pieces of paper backed by absolutely nothing. When more pieces of paper are printed up, the value of the pieces of paper already in existence goes down.

“This is one of the reasons why so many people out there are talking about “real money” like gold and silver. Unlike fiat currency, precious metals tend to hold value over a very long period of time.

“For example, it will take you about three times as much U.S. currency to buy a gallon of gasoline in 2012 as it did back in 1990.

“But an ounce of silver will actually buy you more gasoline today than it did back then.

Back in 1990, an ounce of silver would buy you about 4 gallons of gasoline. Today it will buy you more than 8 gallons of gasoline.

“Talk about holding value.

“We see the same kind of thing happening with gold.

“When Barack Obama first took office, an ounce of gold was selling for about $850. Today an ounce of gold costs more than $1700 an ounce.

“It is not that gold is becoming so much more valuable. It is just that the U.S. dollar is losing value on a continual basis.

“So why don’t the U.S. government and the Federal Reserve quit flooding our economy with more paper money?

“That is a very good question.”

One way for us all to insure our purchasing power against the constant, sneaky tax (theft) of central bank inflation is store at least some of our savings as gold and silver.

Yet most people don’t do this despite history’s constant evidence that says they should. Rather most people look to other assets — real estate and stocks are especially popular — to gird against inflation. They’ll even lend money to the government that taxes them and inflates away their savings at a rate of interest that doesn’t counter the rate of loss due to new money creation!

They’ll even call gold and silver — the real money — “volatile” or “useless”.

You call this useless?

Silver: a horrible way to save?

We surmise that the average person is just too brainwashed and too ignorant of history to get it. They see silver and gold acting the way money ought…but they only hear the talking heads on the boob tube talking about the gold and silver crash of 1980.

They don’t look further back. They don’t see how gold and silver have held their purchasing power throughout American history and back through the centuries…

So in today’s feature article we offer a little help. Chris Horlacher shows us the history of another empire and silver, debasement and inflation. Read on below…

The Decline and Fall of the Roman Denarius

History repeats itself, so the scholars say. But according to Mark Twain it just rhymes. Literary quips and hair-splitting aside, I’ve found that one of the most valuable things anyone can do to advance their knowledge and understanding of the world is the study of history. Now I’m not talking about the kind of history you get in grade school and university, where all you’re told to do is rote-memorization of people, dates and events. To get any value whatsoever out of studying history, you have to be able to discern cause and effect. What causes civilizations to grow to greatness, and what causes them to collapse?

There are few collapsed civilizations that have been studied in quite the depth as the Roman Empire. Many theories have been offered, some with more merit than others. Ludwig von Mises argued that Rome was eroded from within and that economics played a huge part in it. This is too big of a story for me to cover in a single article, so I will focus on one of the most important aspects; the currency.

For hundreds of years, the Romans were on a bimetallic standard, not unlike the currency system of the early United States. There was a gold coin, the aureus, which was popularized by Julius Caesar. There was also a silver coin known as the denarius, which was what most Romans used in their day to day transactions. It was on a solid gold and silver standard that Rome ascended to the height of its development and power.

One of the greatest enemies of mankind is hubris, and the Roman Empire was certainly not immune to this. The phrase “bread and circuses” refers to the massive welfare spending that occurred in Rome during the height of its power. With the treasury filled with gold, spendthrift politicians quickly used the money to buy influence, votes and curry favour with neighbouring states.

“The budget should be balanced, the treasury should be refilled, public debt should be reduced, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.” — Cicero, 55 BC

When Julius Caesar first began minting large quantities of the aureus it was 8 grams of pure gold. By the second century it had declined to 6.5 grams and at the beginning of the fourth century it was replaced by the 4.5 gram solidus. The purity of the coin itself was never debased, but the ever decreasing weight was a sure sign that government spending had been outpacing revenues for centuries.

All of this however, pales in comparison with the devaluation of the denarius. The denarius was the backbone of the Roman economy. Citizens earning their income in gold were a rarity given that a day’s wage for an average labourer at the time is estimated at a single denarius. Thus it also became the target of severe abuse by the Roman authorities.

The denarius began as a 4.5 gram silver coin and had stayed that way for centuries under the Roman Republic. After Rome became an empire, things began to turn sour for the denarius and, by extension, the Roman economy. Base metals, such as copper were blended in with the silver and so even though the coin itself weighed the same, the amount of silver in it became less and less with each successive emperor. Throughout the first century the denarius contained over 90% silver but by the end of the second century the silver content had fallen to less than 70%. A century later there was less than 5% silver in the coin and by 350 AD it was all but worthless, having an exchange rate of 4,600,000 to a gold solidus (or nearly 9 million to the original aureus).

The economic chaos the hyperinflation of the denarius had on Roman society was very real. The population of Rome reached a peak of about 1 million inhabitants during the first century BC and maintained that level until nearly the end of the second century. At this point it began to slowly decline throughout the third century and precipitously throughout the fourth. By the fifth century, only about 50 thousand people remained.

Now compare the collapse in value of the denarius to some modern-day currencies and see if you notice any similarities:

Further reading in to the events that unfolded in Rome will reveal that as the denarius was debased, Rome became an economic basket case. Desperate times called for desperate legislation as the fabric of society was slowly torn apart by inflation. I urge my fellow readers to gain a firm grasp of these events because they will be instructive as to what we can expect for the future. The destruction of the Denarius is only one example of currency debasement, of which there are hundreds. Romans that held on to their gold coins fared well in the hyperinflation and if history is any guide, they will serve us well in the coming years.

Regards,

Chris Horlacher

The Dollar Vigilante

Chris Horlacher, CA is the Founder and Managing Director of Maple Leaf Metals Exchange Inc. He possesses a Chartered Accountant designation and is a former Senior Auditor for Deloitte & Touche LLP where he provided audit and assurance services to Fortune 500 companies, as well as independent businesses. He left Deloitte to aid Euro Pacific Canada Inc., an IIROC dealer-member, during its formative period by serving as Chief Financial Officer before founding Maple Leaf Metals Exchange Inc. Chris is also a correspondent for The Dollar Vigilante.

The Fall of the Roman Denarius was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Robert Preston, the BBC economics expert, last week claimed that the solution now lies with the ECB, and he spoke confidently of the ECB’s “unlimited resources.” Yesterday, Vince Cable demanded “unlimited powers” for the central bank. He also shamelessly regurgitated the well-worn politician’s excuse for Europe’s problems, namely, that these countries are under “speculative attack.” The advocates of large-scale ECB intervention now include many pundits and commentators, plus, a sizable group of financial market economists and strategists, whom decency obliges me to leave nameless. “It is important to keep the ECB engaged,” as one economist put it, “as only the ECB has unlimited resources.”

Such proclamations immediately invoke Albert Einstein’s famous dictum: “Only two things are infinite, the universe and human stupidity, and I am not sure about the universe.”

Everything Is Going According to Script.

None of what is going on surprises me. It is perfectly in line with what I predicted in my book. However, I am ready to admit that I am a bit baffled by the quick willingness by so many people to embrace what is, ultimately, a sure road to complete economic destruction. In Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown, I explain why systems of elastic money are always suboptimal, unstable and, ultimately, unsustainable. A monetary system like ours must, over time, accumulate dislocations and imbalances that will, finally, become so big that their liquidation through market forces is deemed politically unacceptable. Then, out of desperation, an unwinnable war against economic reality will be fought by means of the printing press. Ever more money will be created ever faster in a futile attempt to outrun the market’s urge to liquidate.

In Chapter 10 of my book, I describe the two final stages of a paper money system as monetization of debt and inflationary meltdown. We are now firmly in the monetization of debt phase. This process will accelerate in coming months and quarters. Not only in the eurozone, but also in the United States and in the U.K. All of these central banks will continue to expand their balance sheets aggressively and use their ability to print money — without limit — to support banks, governments and a wide range of asset classes.

Bernanke (Fed) and Draghi (ECB) pointed out, in their respective press conferences, recently that monetary policy is not a panacea for all economic ills. It doesn’t matter. Policy has no other tools left to postpone the inevitable or to make the status quo appear sustainable again. By the way, it is entirely immaterial what Bernanke or Draghi thinks and says. Their press conferences keep Wall Street and City of London economists busy. But these gentlemen are quickly becoming mere extras in a bigger political game, in which desperation rules, and in which they will simply perform their roles of fiat money producers.

When do we enter the final stage of inflationary meltdown? Difficult to say. It all depends on when the public loses faith in a form of paper money that is being printed in evermore bizarre quantities, only to keep states and banks alive and to project some resemblance of normalcy to the masses.

I do not disagree with the mainstream economists on whether paper money central banks can create, essentially, unlimited amounts of money. Of course, they can. That is precisely why gold and silver as monetary assets were replaced with entirely flexible state money under central bank control in the first place. And I do not disagree that we will soon see more debt monetization by the ECB and other central banks around the world.

What is sheer lunacy, however, is to advocate such a policy as a solution, or part of a solution, to our problems. This is where I draw the line. It is simply beyond me how people who call themselves economic experts, and who must have at least a basic understanding of monetary theory and some knowledge of economic history, can seriously advocate debt monetization as a sensible policy tool.

Dr. Strangelove — Or How I Learned to Love the Printing Press

Our financial market economists now cling to anything that promises to buy them time and some stability, even if logic tells them that what they are advocating is exactly the opposite of what should be done. They are not unlike the gambler who knows he should quit, but out of sheer desperation, is rolling the dice one more time.

Of course, there are always those who are imbued in Keynesian economics and other sorts of interventionist myth to such a degree that they honestly think that there is no problem that cannot be fixed with government stimulus. If the medication hasn’t worked, just keep increasing the dose. Paul Krugman (Nobel laureate) and Christina Romer come to mind. But I don’t quite believe that all economists are in this camp.

Whatever their reasons and motivations, it is quite clear that all these economists are now mouthpieces for the establishment. They are all defenders of the status quo, or of what has passed for the status quo for the past 30 years.

Government bonds should again be considered “risk free” assets, and banks should again be considered “too big to fail” and “too important to fail.” This is so the symbiotic relationship between states and banks that fiat money system fosters, and that has been so mutually beneficial to the political class and the banks, can finally be restored. It is a sad spectacle to see people who call themselves economists — and often, even free-market economists — come up with evermore extreme recommendations of how we can fund Big Government.

To the broader public and the economy as a whole, the collapse of this system would be painful first, but ultimately, hugely advantageous. It would allow a renaissance of real capitalism, rather than the continuation of this system of monetary interventionism that has allowed the state to assume control over such vast resources and the financial sector to enjoy uninterrupted fiat-money-fuelled growth for decades.

What good do these economists expect to come out of ECB debt monetization? Do they really believe that once the ECB has committed itself to buying hundreds of billions worth of Italian government bonds, in order to manipulate the yield on these bonds — against market forces — down to what the political class deems sustainable (let’s say 5%), that then Italian politicians will reform public finances in the country? That they will quickly bring down deficits and the debt load to sustainable levels, at which point, Italy can borrow from the market again, the ECB can safely sell its bonds and reduce its balance sheet and everybody lives happily ever after? Does anybody seriously suggest that this scenario is likely, probable or even possible?

The fact is that none of these governments can be trusted to bring their finances under control, as long as they have access to cheap credit, i.e., to funds at “sustainable” interest rates. Germany forced through the Stability and Growth Pact at the start of EMU (does anybody remember Theo Waigel?) that should have limited debt-to-GDP ratios to 60%, only to violate it herself. Germany’s ratio is now, officially, at 83%. The government is already on the hook for another €211 billion under its EFSF commitments, which are now all but guaranteed to come due, as the bailout fund is supposed to cover first losses on bonds in order to maximize its “firepower,” meaning Germany is already set for more than 90% of debt to GDP. And that is supposed to be Europe’s “stability anchor.”

All rules and guidelines that were designed to guarantee the fiscal and monetary stability of EMU and were implemented at its start have, by now, been broken — without exception. Do you think that this will change once the politicians have obtained the unlimited support of the printing press?

“Quantitative easing” in Japan, the United States and the United Kingdom goes hand in hand with growing debt, not debt reduction. Providing a lender of last resort and easy money and cheap credit to governments does not lead to deleveraging, but to the opposite.

Only default and cutting off a government from additional borrowing will reform the government. That is why I say: Embrace default!

The Future

When the ECB will have implemented its backstop for Italian government bonds, it will end up buying vast amounts of these securities at above-market prices. Draining equal amounts of liquidity from somewhere else in the system, in order to minimize the inflationary impact, will be illusionary. Inflation will creep higher. Concerns about sovereign solvency are, of course, not restricted to Italy. These concerns, plus rising inflation, will put upward pressure on the yields of other bond markets, in particular, Spanish and French bonds. The ECB will have to expand its support program in order to stabilize these bond markets as well. Why should unlimited ECB support be limited to Italy? What is good in the case of Italy must be equally good for Spain and France!

The notion that the ECB could ever change course now and tighten policy, in order to fight rising inflation pressure, will appear increasingly fantastical. Market participants and the wider public that uses the euro will simply not believe it. Inflation expectations will rise rapidly. Money will become a hot potato. When money demand falls, inflation will shoot up quickly, which would require the central bank to establish markedly positive real interest rates in order to restore confidence in paper money. But this would mean allowing several governments that are now reliant on cheap central bank funding to go bankrupt. This will not be allowed to happen, which will undermine confidence in paper money further. We will have reached the inflationary meltdown phase.

All complete paper money systems in history were established to fund the state. Our system is no exception, as becomes increasingly clear. All paper money systems in history failed. Ours will be no exception, either. Our system is the most ambitious. We had a global system of unrestricted fiat money production for 40 years. The endgame is fast approaching.

Regards,

Detlev Schlichter

Infinite Stupidity was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

It seems like an odd result for a man to be in such a hurry to get to, at least until you consider the alternative. In a way, it’s an early example of government not being able to get anything right. Not even a hanging…

You see, Guy had just watched his fellow English-Catholic conspirators hanged until nearly dead. Then they were cut down. Their most private parts and entrails were removed and burned before their eyes. Then they were beheaded.

This all happened to Guy Fawkes, too…except wily Guy made sure he was too dead to notice. So what offense warranted this extreme torture and dismemberment?

Guy and his co-conspirators felt that the crown made life miserable for the Catholic minority in England. In truth, the crown was doing exactly that.

So on the 5th of November, they planned to ignite the dozens of barrels of gunpowder they’d packed under Parliament. Their plan was to blow up the king.

The conspiracy was uncovered and thwarted. Torture, confessions and painful executions followed. This was the end of the now-famous Gunpowder Plot.

For centuries afterward, Londoners have organized a curious bonfire on the Nov. 5th anniversary of Guy’s bust. They even gave it a catchy phrase…

“Remember, remember the fifth of November,” they chant.

We say “curious,” because it seemed that half the chanters hated Guy… while the other celebrated his rebellious spirit.

The “Gunpowder” part of our name comes from the Guy Fawkes story. The “Whiskey” comes from the 1794 rebellion in western Pennsylvania, when residents protested new whiskey taxes imposed by Treasury Secretary Alexander Hamilton.

Hamilton had raised taxes in an effort to pay off the national debt. Sound familiar?

I guess you can say Whiskey & Gunpowder welcomes the idea of rebellion.

We believe it’s not only our right, but our duty to fight back when a select few try to tell the rest of us how to live our lives.

Frankly, folks in Washington, D.C., are more concerned about sucking as much as they can from the system before the whole thing collapses.

They’re more concerned about bailing out fellow friends and CEOs than they are about creating a friendly environment for entrepreneurs to thrive.

Take our currency, the U.S. dollar, for example…

It’s been nearly 40 years now since the dollar had even the slightest connection to gold.

Our money is backed by nothing but empty promises. The government holds the power to print itself out of any problem.

That “power” the government holds has corrupted the system. Banks and well-connected businesses know they are very likely to be backstopped by the feds.

So they can still pocket the profits… while you and I shoulder the risks of their bad decisions.

Or take interest rates…

In an effort to create more liquidity — and, subsequently, higher profits for banks as they pay less interest to depositors – the Feds pushed interest rates to historic lows.

Their perverted economic policies encourage Americans to SPEND, rather than SAVE, their money.

Back in Guy Fawkes’ day, the government was punishing Catholics. Nowadays, it’s not about religion.

It’s about the government telling us what we should and shouldn’t eat… forcing us to wear seat belts and helmets for nearly everything… and, most importantly, for punishing the hardworking savers and entrepreneurs that create growth.

In short, it’s the idea people and middle class that are getting squeezed. Actually, hanged is more like it.

Think about it: It’s not the bankers and politicians that’ll be most affected when this economic s%$t hits the fan. They’ll likely have their backdoor deals and bailouts. There’s little you or I can do to stop this.

The poor won’t be affected, either. That’s because they haven’t saved anything that the government can destroy. They don’t have anything to lose. Instead, they’re kept happy, oblivious and complacent with food stamps and social welfare programs. It’s the middle class that will feel the most pain.

The people who’ve worked hard… tried to play the game honestly… saved… and invested wisely.

The people who are frustrated by rising prices… who are now pushed into risking money in the stock market in order to try to gain a decent retirement income.

That’s why, for the first time ever, we’re asking you to band together to celebrate our own fifth November…

How You Can “Remember, Remember the Fifth of November”

This Nov. 5, we’re organizing our own Guy Fawkes event.

Don’t worry…we’re not organizing a protest…we’re not aligning ourselves with the Occupy movement to “quit the banks”…and we’re NOT suggesting violence in any way.

And we’re not suggesting you stock up on gunpowder, like our friend Guy did.

Instead, we want to organize a mass rejection of the U.S. dollar as our currency of choice by ditching the dollar!

That’s right. It’s time to tell Ben Bernanke, Tim Geithner and the Wall Street banks that the fiat dollar experiment — which has sucked wealth away from every American family — has failed!

We want to prove that we as a nation won’t stand for reckless spending… out-of-control money printing… and the threat of future taxation.

So I’m asking you to band together to show the government that we’re “opting out” of this failed U.S. dollar experiment.

In its place, we demand a currency that cannot just be “printed” at the whims of a small group of men with ulterior motives.

It starts today…with two special reports we’d like to send to you for free.

The first report I’d like to send you, for free, shows you how to take advantage of what literally could be one of the LAST hard money loopholes on Earth.

It’s one of the safest “zero downside” investments I’ve ever seen.

You literally… can’t… lose… money… on the deal.

Seriously.

Complete upside.

Inside, you’ll find a simple secret that allows you to turn every U.S. dollar bill into something worth $1.10.

You will also learn how a hedge fund trader — who made millions during the credit crunch — recently put $1 million into this last hard money loophole. He then said in an interview, “You really ought to call your bank and buy some now.”

I call it The Last Legal Hard Money Loophole in America. And it’s yours free when you click here.

Regards,

Gary Gibson

Why You Should Remember the Fifth of November was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Let’s go through the salient points:

1. Write-down of Greek debt to 50%

“Private-sector involvement,” aptly abbreviated PIS, is one of those dreadful phrases that conceals more than it explains. The private sector here means, of course, the banks that were stupid enough to give billions of euros to Greek politicians.

We all know what happens under capitalism to lenders who give money to borrowers, who end up being unable to pay: They lose their money. That is how it should be. That’ll teach them and, hopefully, make them more prudent lenders in the future.

Alas, this is Europe, so there is no capitalism. You can negotiate your losses with the political class and agree on the “appropriate” haircut. In July, a 20% write-off was agreed, now this was upped to 50. Either number is entirely arbitrary.

The positively Orwellian phrase “private-sector involvement” makes it sound as if these poor banks were just innocent bystanders — and respectable members of the private sector, for that matter — who got dragged into this unfortunate business at no fault of their own.

For how much should the “private” sector be “involved”? Well, I would say for exactly as much as it chose to involve itself in the first place, by voluntarily lending money to the Greek government. I mean, have the risk managers and credit analysts at the likes of Credit Agricole and Societe Generale ever been to Athens and inspected the bottomless pit in which their loans were dumped? Or have they, from the start, assumed that the German taxpayer or the ECB would cover their losses?

Of course, a haircut of 50%, as now agreed in Brussels, is better than the ridiculous 20% or so “agreed” in July. But looking at Greece’s dire financial situation, the haircut should be at least 60%, or maybe 90 or 100. There is no reason for the Greek citizens of this and future generations to suffer endlessly because of the corruption of their past governments and the stupidity of their bankers. Embrace default! Just stop paying, go bankrupt, shrink your government, role up your sleeves and start from scratch.

After a complete and proper default, the state will not get loans easily again. This, coincidentally, is an additional bonus of a complete government default. It keeps your future politicians honest. That would be the free-market solution. But again, we are in Europe.

An even bigger haircut, one decided not by political horse-trading but by the market and Greece’s true ability to pay, would be more helpful for the Greeks and would, conveniently, discipline the bankers. Why is it not considered?

Well, the politicians don’t like it, because it would shut much of the government bond market down and make it difficult or impossible for them to keep running deficits of their own, and also, because the banks have skillfully booby-trapped the entire financial system with explosive CDS (credit default swaps) that get triggered if the “private-sector involvement” gets too big. The bankers, increasingly, resemble financial terrorists, effectively declaring, “If you don’t bail us out, we blow the whole place up!”

The bottom line: A haircut of 50% is better than 20, but it is still too little for Greece, and the whole idea that the “private” sector negotiates losses with the politicians doesn’t bode well for the future.

2. Fiscal coordination

Nothing specific was agreed at the summit, but this is where we are going, and the mainstream economists are cheering for it.

For years now, we have heard this in endless macroeconomic research pamphlets and newspaper editorials: There can be no monetary union without a fiscal union. This is, of course, utter nonsense. Complete rubbish. And it doesn’t get any more right by repeating it at nauseam.

The money of capitalism, of the free market and global trade, has always been gold (or silver, but I will refer to gold here). A gold standard is the oldest and best currency union imaginable, and I would argue, the only one workable. Under a gold standard, various countries and their governments use the same currency, gold. There is no central bank and no printing press. Governments have to make do with the income they generate from taxing their local population.

In such a system, the state has to live, just like any other entity in society, within its means. Apparently, this is a truly fantastical notion for today’s politicians and mainstream economists. Under a gold standard, the state may also borrow from the market, but it is clear to the lenders that they assume full risk of default. There is no lender of last resort. This is a powerful constraint on government largesse.

The Greek crisis was a good test to see how closely the European fiat money union could resemble the workings of a proper gold standard. In theory at least, and as intended by the original designs for EMU, there should have been no bailout, and the whole mess should have been a local affair between the Greek government and its lenders, just as it would be under a gold standard.

All this nonsense about the falling apart of the euro was, of course, needless but politically motivated scaremongering. When a government defaults under a gold standard, there is no reason why any other government should give up gold as a currency. Had the no-bailout provision been adhered to, there would equally have been no reason why a Greek default should have affected the acceptance and the usability of the euro in any of the other countries, nor for the Greeks themselves. A currency union does not require a fiscal union.

But EMU is no gold standard, and it already failed its first test of whether it could even be a currency union of some discipline. The gold standard was abandoned globally, precisely so that governments would not have to live within their means. The euro is political paper money, fiat money. It is issued to allow persistent fiscal irresponsibility, as is any other paper currency. Central banks have always been created to fund the state and the banks. The ECB is no different.

This is the global picture in 2011: After 40 years of complete paper money, public debt around the world has reached such momentous dimensions that the major central banks are now increasingly funding the state directly. This is what is happening in the U.S., the U.K. and increasingly, the eurozone. It is either accepted with suspicious equanimity or enthusiastically supported by bank economists and the inflationistas in the mainstream media. The trend is the same pretty much everywhere. It is only that, within the eurozone, it is less clear which government has first call on the printing press. In other paper money economies, this can be done more straightforwardly.

To assume that some form of institutional framework for fiscal coordination will discipline the European governments and reduce the desire for ongoing central bank debt monetization is at least naive. Maybe outright stupid. All governments in Europe are fiscally irresponsible, even the German one.

In the run-up to EMU, Germany imposed the Maastricht criteria on her European partners. Anyone remember the 60% debt-to-GDP limit? Laughable. Today, Germany is at 83% and rising, which may look relatively prudent if compared with Belgium or Greece, but if Germany has to pay up on its already-agreed-upon commitments under the European Financial Stability Fund, she will go above 90% in one giant leap, roughly where Ireland was when her creditors said, “No mas!” Germany may have the lowest unemployment rate in 20 years and, last year, had the highest GDP growth in 20 years, but she is still running deficits, accumulating debt every year, just like anybody else in Europe.

On a long-enough timeline, everywhere is Greece!

The bottom line: We will see a plethora of treaty changes, top-level EU summits and other pointless boondoggles. All to no avail. To assume that governments will not collectively resort to the printing press and that they will, instead, discipline one another, when all of them are long-standing, habitual and incorrigible fiscal offenders, is beyond ridiculous! If you believe it, call me, I may have something I want to sell you!

3. “Unlimited firepower” courtesy of the central bank

I guess you might argue that it could have been worse. Merkel could have given in to demands by Sarkozy to use the ECB straight away to leverage the €440 billion bailout fund. Seems like she didn’t, and Sarkozy will have to go, hat in hand, to the Chinese and see if they have some change to spare. However, this is not a long-term solution, and once Italy and Spain are in trouble, the bailout fund will be depleted.

One of the most shocking aspects of this crisis is how acceptable it has become for the mainstream economists and the pundits in the media to point toward the “unlimited resources” of the ECB. True, a fiat money central bank can print unlimited amounts of paper and electronic money to bail out everybody, the government, the banks, the pension funds, etc. It is just that such a policy used to be advocated only by suicidal cranks. That’s likely because it is a sure recipe for complete currency annihilation.

Today, established and supposedly highly regarded economists point out the importance of “keeping the ECB engaged,” because only the ECB has the “unlimited” resources to underwrite the boundless fiscal profligacy of modern democratic governments and their vote-buying political elites, and to underwrite the gargantuan debt pile.

As the hysterical calls by the inflationistas for a bold ECB policy get ever shriller, Mario Draghi, the new money-printer-in-chief for Europe, has already signaled his support for the ECB’s debt monetization policy, that is, ongoing buying of depressed and ultimately worthless government bonds with the help of the euro printing press.

Anyone who has any savings stored in the euro-area should be extremely concerned about what is going on here, and in particular, about the tone of the debate. When the mainstream speaks of “unlimited” resources of the ECB, they do in fact mean unlimited. The creation of new euro-currency units will be without ANY LIMIT. And the remaining inflation will also be without limit.

The bottom-line…On the face of it, the German position has won: deeper haircuts and no use of the ECB for leveraging the EFSF for now. But from where is the money for the larger EFSF going to come? Italy and Spain will remain under pressure. Nobody has the money to save them or to recapitalize the banks again when the big deficit countries lose access to the market and fail.

The ECB is not off the hook. Resorting to the printing press has become a global policy theme for the past three years, and sadly, such thinking is now part of the mainstream. The balance sheet of the ECB will not shrink; it will grow. There is no exit strategy. Pressure for further and accelerated monetization of debt, of budget deficits and bank balance sheets, will continue and intensify. The endgame will be inflation.

Regards,

Detlev Schlichter

Europe’s Future Comes Into Focus: Hyperinflation was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

We found the following in our inbox today from the National Inflation Association:

“The Occupy Wall Street movement is gaining tons of momentum and is likely to continue picking up steam in the weeks and months ahead. Americans are angry, but they aren’t exactly sure what they are angry about, and they don’t know for sure with whom they should be angry. It is easy for them to point their fingers at Wall Street, but Wall Street is in no way responsible for the financial crisis our country has today.

“NIA believes that Occupy Wall Street protesters need to be educated to the facts and truth about the U.S. economy and what is truly causing our economic problems.”

And what exactly is causing our economic problems? In short: inflation. Both the creation of new money unbacked by productive activity — literally, conjured up from nothing at the whim of a central banker — and the artificially low cost of borrowing to expand the amount of debt…again, thanks to central bankers buying government debt with the money they create in order to shove interest rates down.

Inflation erodes the value of savings. It causes middle-class wages to rise more slowly than prices over time. The well connected — mainly, commercial banks — get the money first and benefit, while their spending of the new money causes prices to rise. Everyone else has to beg and hope for cost-of-living increases to their wages.

Inflation also causes asset bubbles that tend to benefit the rich while wiping out the middle class and poor, who pile into bubbles just in time to be left holding the bag.

In other words, inflation is causing the things that have people revolting in the streets. And central banks cause inflation.

Our comments here at the Whiskey Bar (and on our Facebook page) regarding the Occupy Wall Street movement have elicited plenty of responses. Some not so friendly. Like this…

“What utter drivel. Right out of the playbook of a goose-stepping sociopath like Ayn Rand. The fact is rather than sitting at a computer terminal all day long, pounding away nonsense in support of a capitalist kleptocracy, these ‘Occupiers’ are actually doing something constructive, and this is key, OUTSIDE the rigged political system. That is why the powers that be (including, apparently, you) fear them so much. These folks, at the very least, know that the LAST place they should be is ‘seig heiling’ to the Rand playbook by ‘making some money.’”

Ouch.

First, Ayn Rand would have neither goose-stepped nor seig heiled to anything. She was as ardently against the Nazis’ violent corporatist fascism as she was the communists’ totalitarian command economy. Her paeans to selfishness aren’t a call to theft and violence. They’re a dramatization of the importance of ownership — starting with self-ownership — and the drive to improve one’s own condition, leading to a better quality of life for all.

Second, capitalist kleptocracy? Last we checked, capitalism was about making money by adding value and meeting consumer demand, not about stealing anything. In fact, capitalism demands a sacred respect for property rights, starting with the individual’s ownership of himself.

(Capitalism was named by its enemies. We’re starting to prefer the term “propertyism.”)

The political system is the one eager to move around other people’s money. And it’s “political money” in the form of the monopolized currency issued by a government-backed central bank, which has resulted in the impoverishment of the middle class that the Occupiers are so up in arms about. It’s also something that we at the Whiskey Bar are up in arms about (and in an upcoming issue, we’ll propose a way for you to do something about it…and protect your wealth…in time for the Fifth of November)…

But we notice not a little sentiment among the Occupiers not just to stop the theft, but to redirect it.

We understand the anger behind the protests. We just worry about whom the protesters are blaming…and about some of the usual solutions that are floating through their heads. As Tim Staermose of The Sovereign Man writes:

“The anger is understandable. But it’s infuriating to so many of these protesters railing on YouTube against the free market, moaning how capitalism has pillaged the poor for the benefit of the rich.

“Nothing could be further from the truth. There hasn’t been a free market in money and banking for a century. The central bank/fractional reserve system is the biggest cartel in the history of economics. It’s nothing but big government price rigging.

“How can anyone argue we have free markets when the price of money is set by decree? An unelected board of governors at the Federal Reserve simply decides the price of money, and that’s that.

“Nearly EVERYTHING in our credit economy is driven from this number — mortgages, business purchases, trade finance, government spending…and it affects almost everyone on the planet. This is not a free market, it’s an economic dictatorship.”

We were sorely hoping that the collectivist and redistributionist spirit would be exorcised from the movement, perhaps with the help of that other populist movement who are angry at the same things. On this, David Franke says:

“When the protests first began, conservatives and Tea Partiers should have descended on New York to seek to influence the movement in the right direction. From what I have read and seen, some members of the Ron Paul Revolution have been trying to do just that. But the Tea Partiers have reacted like, well, conservatives. And now the opportunity has probably been lost. Occupy Wall Street has been taken over by the liberal branch of the establishment — the labor unions — just as the Tea Party has been taken over by the conservative branch of the establishment — Washington insiders. The union bosses and conservative power brokers saw their opportunity and took it.”

And Ralph Benko already said it in his article “Occupy Wall Street: Contempt of Political Class”…

“An article datelined Madrid, titled ‘As Scorn for Vote Grows, Protests Surge Around the Globe: Many Are Driven by Contempt of Political Class.’ Contempt of the political class? Sounds like…the Tea Party Patriots…Welcome to the party, #OWSers!”

Welcome to the party, indeed, comrades. We have a common enemy. And it’s not Wall Street. Or greed.

It’s a flexible currency that is constantly being created, and in which we’re all forced to transact.

As it stands now, there seems to be awareness, perhaps even a growing awareness, in the movement about what the real source of the trouble is. We hope that the protesters stop being angry at Wall Street and, instead, look behind the curtain at the forces that corrupted Wall Street.

Yes, we mean the central bank again.

Regards,

Gary Gibson

The Real Reason for the Uprisings was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.