The Gold Standard Institute is trying to convince TPTB of its manifest benefits. Despite more and more open talk about the role of Gold, friends of Gold are still officially ridiculed, demeaned, or criminalized. We simply need to watch what is happening right now in Iran.
The Gold Standard Institute is trying to convince TPTB of its manifest benefits. Despite more and more open talk about the role of Gold, friends of Gold are still officially ridiculed, demeaned, or criminalized. We simply need to watch what is happening right now in Iran.
The Gold Standard Institute is trying to convince TPTB of its manifest benefits. Despite more and more open talk about the role of Gold, friends of Gold are still officially ridiculed, demeaned, or criminalized. We simply need to watch what is happening right now in Iran.
The Gold Standard The journal of The Gold Standard Institute
Editor Philip Barton Regular contributors Louis Boulanger Rudy Fritsch Michael Moore Keith Weiner Occasional contributors Publius Thomas Allen
The Gold Standard Institute
The purpose of the Institute is to promote an unadulterated Gold Standard
www.goldstandardinstitute.net
Patron Professor Antal E. Fekete President Philip Barton President Europe Thomas Bachheimer Editor-in-Chief Rudy Fritsch Senior Research Fellow Sandeep Jaitly
Membership Levels
Annual Member 75 per year Lifetime Member 2,500 Gold Member 25,000 Gold Knight 250,000
Contents Editorial ........................................................................... 1 News ................................................................................. 3 Letters to the Editor ...................................................... 3 Bullion vs. Buffett .......................................................... 3 Do Real Bills Eliminate the Need for Savings? ......... 4 A Gold Standard Part 1: Six Reasons for a Gold Standard ........................................................................... 5 Currency Wars Part II: A closer look ............................. 7 Economic Foundation Must be Gold, not Paper ..... 8 Caution: Falling Currencies ......................................... 10 New Austrian School of Economics ......................... 12
Editorial Gold Standard In Extremis? Those who understand Gold and the Gold Standard are doing their best to convince TPTB of its manifest benefits; but are not having much success. Although there is more and more open talk about the role of Gold, friends of Gold are still officially ridiculed, demeaned, or criminalized. Was Iraq invaded and Saddam Hussein killed because of Washingtons love of democracy or because Saddam wanted to break the Petro Dollar cartel? Was Libya attacked and Gadhafi killed because of Washingtons love of democracy or because Gadhafi wanted to replace Dollars with Gold money in North Africa? Interesting questions but we need not answer them. We simply need to watch what is happening right now in Iran. Put under pressure by Western sanctions, Iran is being forced to trade Gold for food and other vitally needed goods. As Brussels is cooperating with Washington, Iran cannot use the Euro or the Dollar; Iran is being driven to using Gold instead in extremis. Iran like every other sovereign on Earth has a finite amount of Gold; so when does Iran run out of Gold? When do Iranians start to go hungry? This is an unpleasant but unavoidable question; the answer is for Iran to find a way of replacing Gold traded for food. Clearly this is the reason India is being asked to pay Gold for Iranian oil. The discipline of Gold re-establishes itself. Trade under Gold must balance, or one party will sooner or later run out of the precious, irreplaceable yellow metal. The Iranians and the Indians must find a way to do offsetting trades; equal amounts of Gold for oil from India, and equal amounts of Gold for food from Iran. At this point, you may interject; but wait, why dont they simply barter directly, food for oil? Good question and the answer is simple; how do you value rice, wheat, and other stuff, in oil; and conversely, how do you value crude oil in foodstuffs and sundry supplies? How do you go from bushels of rice to barrels of crude? There must be a numeraire, a The Gold Standard The Gold Standard Institute Issue #15 15 March 2012 2 means of comparing value else trade is unlikely. Gold serves as an admirable measure of value, far better than the rapidly depreciating Dollar or Euro or other Fiat paper. Once the Iranians agree to trade say a ton of Gold for food and supplies, and the Indians agree to trade a ton of Gold for oil, we can see oil tankers laden with a ton of Golds worth of oil leaving Iran and sailing for India. We also see freighters laden with a ton of Golds worth of food and supplies leaving India and sailing for Iran. Can we also see a ton of Gold leaving Iran, being shipped to India at the same time a ton of Gold is leaving India, bound for Iran? This does not make sense. The cost and risk of shipping a ton of gold is not negligible and at the end of the day, nothing would change; after the exchange of Gold, India has exactly the same quantity as before and so does Iran. It is much more sensible to simply net out the two transactions. India gets the oil, Iran gests the supplies, and Gold stays put. Now we have come to the meat of it; if Gold stays put, exactly how is trade consummated, how does the netting out take place? Clearly, bills or invoices must be written against goods like rice being shipped from India; and while the rice travels to Iran, the rice bills go to India. They are held in the Indians accounts receivable, unless full bill circulation is established, and the bills can be used to fund other trades instead of just sitting in the cash register. At the same time, bills are written against the oil being shipped from Iran, and while the oil moves to India, the oil bills go to Iran. So, we have bills drawn on urgently needed goods on their way to the consumer, and these bills will mature into Gold wait, wait is this not the definition of Real Bills? The very basis of the Real Bills Doctrine of Adam Smith? Bills drawn against urgently needed goods that mature into Gold Amazing! The two essential components of a Gold Standard are suddenly in play, under duress. Gold as money and numeraire; Gold as guarantor of exchange Real Bills clearing trade while the Gold supply is not invaded. As Gold driven trade picks up, how long do you think it will be before China is also buying oil for Gold from Iran? How long before Venezuela and Chavez insist on Gold for their oil? How long before all the dominoes start to fall? Unfortunately, even some friends of Gold are either unfamiliar with Bills and their vital role in clearing, or are in fact against them, claiming that Real Bills are inflationary Do you see anything inflationary here? Bills are drawn against real goods, the goods are delivered, the Bills net out the trade then, after doing their job, after being paid off on their due date, the Bills disappear. Where is the inflationary effect? There is none. Gold on its own cannot support international trade; Bill circulation is essential for a viable Gold Standard. Once full circulation of the bills is established, all competing Fiat paper will quickly bite the dust. And just what is full circulation? It is multilateral rather than bilateral exchange of Bills and goods. Multilateral circulation allows netting out far more complex trades, like triangular trades. Multilateral means that a bill drawn on Indian rice heading to Iran may end up maturing in China, or in Venezuela not necessarily in Iran. Multilateral trade using Real Bills has not been in effect since before WWI. Multilateral trade is ever so much more efficient than bilateral; the volume of world trade achieved before WWI was not matched under bilateral trade until the nineteen seventies, in spite of great growth in the World economy. Perhaps this is the reason China has encouraged their people to accumulate Gold; perhaps this is the reason the Indian and Russian central banks are accumulating Gold; perhaps they are not as blind as TPTB in Washington and Brussels. Rudy J. Fritsch-Editor in Chief Hurry. Book a plane, train, car, or stick out your thumb. The New Austrian School seminar is commencing on the 24th March. See details inside.
The Gold Standard The Gold Standard Institute Issue #15 15 March 2012 3 News On the date of this issue (15th March), Professor Antal E. Fekete, the Patron of The Gold Standard Institute, is speaking on a four member panel at the Institute of Economic Affairs in London. Other speakers are: Professor Philipp Bagus, author of The Tragedy of the Euro and co-author of Deep Freeze: Icelands Economics Collapses, and Professor of Economics at the University Rey Juan Carlos in Madrid. Professor Patrick Barron, of the University of Wisconsin and the University of Iowa, a professional banker and prolific writer. Godfrey Bloom MEP, European Economic and Monetary Affairs Committee co-ordinator in the EU Parliament and a long-standing forecaster of the Euros failure.
News from Thomas Bachheimer in Europe (in German) here, here and here. The interview has been aired more than 30 times now and is linked on more than 10 gold related pages.
Chatham House: Gold would place unacceptable constraints on national economic policies. Unacceptable to whom? The four main points presented by this report out of Chatham House are nave in the extreme. They include the statement that its [golds] price can be extremely volatile. It is worth reading to really come to grips with the depth of ignorance that still prevails with regard to gold. And remember this is not a school project, it is from a specialist think tank and is written by economists.
RT.com: Iran uses the gold word.
Guardian: Obama appointed US Trade Advisor scammed in African gold deal.
GATA: Download the BIS PDF. Checkout Our Products Forex & Gold Services page 17. New York Times: Creditors now have the right to seize Greeces gold. Greece should demand that the world, or at least the Eurozone in its entirely, nets out in gold simultaneously. Were talking real money here, not government chits. Why should Greece be the only country asked to actually extinguish its debts? There are many countries with worse per capita debt than Greece, including the US.
GATA: The Vietnamese understand gold perfectly.
Yahoo Finance: Obama wants cheaper pennies and nickels.
Mineweb: State bank of India lures rail employees with discounted gold coins.
Letters to the Editor Thanks, your journal is fantastic! - WS Bullion vs. Buffett All warfare is based on deception. - Sun Tzu When a man assumes a public trust, he should consider himself a public property. - Thomas Jefferson
By associating buyers of gold bullion today to the buyers of tulip bulbs during the famous Tulip mania of the 17 th century, Warren Buffet has carved himself a place of honour among the great deceivers of our time. Im referring of course to a recent article he wrote that was published in Fortune magazine. The timing of it, alone, deserves our attention. My purpose here is not to criticize his arguments, as others have already done this admirably well. Instead, I intend to demonstrate how this was a perfect example of the ongoing bullshit that gets dished out endlessly to us when it comes to bullion (which was explained in Bullion vs. Bullshit, my contribution last month to this Journal). That Mr Buffett is a person of great influence and enjoys the The Gold Standard The Gold Standard Institute Issue #15 15 March 2012 4 admiration and trust of many in the world of investments should not go unnoticed. Keeping gold outside the monetary system has involved a whole program of deception over many years and this, of course, continues in earnest as currency wars escalate globally. But the deception must now also intensify with respect to private ownership of bullion. Think of it as another theatre of operations aimed at sustaining the delusion of fiat money and the belief that gold has no role to play, with Mr Buffett leading the attack. At stake here is no less than the full faith and credit of sovereign governments who issue the fiat currencies of the world, particularly that of the US government. After all, the US dollar and US Treasury securities still represent the foundations of the existing global monetary and financial system. This systems status quo survival depends on those foundations remaining firmly in place. The US dollar may be losing its status as the global reserve currency, but US Treasuries continue to play a unique role in the global financial system (see False Belief #2: Risk-Free Investments, in this Journals March 2011 issue). Mr Buffet knows of this unique pricing role only too well as a successful investor, which explains why he warns that now bonds should come with a warning label. He is right about that. But he conveniently chooses not to explain why: the Feds price-fixing. Now, when it comes to gold...whether or not Mr Buffet knows gold is money is a moot point. He certainly had the opportunity to be made well aware of it: his father, after all, was a strong advocate of a return to gold redeemable money. What does matter, however, is that you not be deceived by what I consider to be a blatant abuse of public trust and that you see through the deception in his arguments against gold ownership. Exactly what Mr Buffetts purpose is in ridiculing gold hoarders is unknown. But he should stick to what he is good at: investing. Saving money is not investing. It may not be pleasant for him to see that gold hoarding has become more rewarding (as a means of increasing ones purchasing power) than investing. It is indeed not productive for that to be the case, for the time being. But that is the inevitable consequence of forty years of fiat abuse. Louis Boulanger Louis holds a B.Sc. from Laval University in Canada; is a Fellow of the Canadian Institute of Actuaries and the New Zealand Society of Actuaries; and is a Chartered Financial Analyst. Prior to coming to New Zealand in 1986, Louis worked for nine years with a global consulting firm based in Montreal, Canada. In New Zealand, Louis worked for another global consulting firm for 18 years, including as Chief Executive of New Zealand operations for five years. In 2006, he launched his private practice. Louis is also Founder & Director of LB Now Ltd, which provides independent investment advice to private and institutional clients, facilitates the purchase of bullion for private and institutional clients as an authorized dealer for BMG BullionBars and also helps firms comply with GIPS. For more information of LB Now's services or to subscribed to Louis' e-letter Prosper! see the contact details below.
Do Real Bills Eliminate the Need for Savings? Real bills of exchange do not eliminate the need for savings as some opponents assert that proponents claim. They are not intended to do so. The function of savings and the function of real bills are entirely two different things. Savings are necessary to provide resources for the expansion of farms, mines, and factories. As productivity precedes real bills, savings must come before any real bills are generated. Once items are produced and on their way to the final consumer, then real bills come into being. Their The Gold Standard The Gold Standard Institute Issue #15 15 March 2012 5 purpose is to facilitate the movement of goods from their origin to their final destination. Real bills free up savings so that more savings are available for production. They do this by eliminating the need for borrowing savings to distribute goods. Real bills cannot and do not replace savings. They are not a substitute for savings. Since real bills make the distribution of goods more efficient and less costly, they are not a form of savings. When an economy operates on the real bills doctrine, it expands and prospers. Without the real bills doctrine, it stagnates because savings must be withdrawn from production to fund distribution. Because it frees up savings for production, the real bills doctrine leads to an increasing standard of living. It eliminates the need for savings to fund the distribution of goods. Thus, it makes more savings available for the production of wealth, which leads to a higher standard of living. Moreover, the real bills doctrine may actually increase savings. As more wealth is created, more resources become available for savings. When the real bills doctrine is abandoned, the standard of living suffers. It is lower because the production of wealth is lower. The production of wealth is lower because savings that would have gone into production must be diverted to the distribution of consumer goods. Real bills do not eliminate the need for savings. To the contrary, they lead to an increase in savings. The above discussion assumes the true gold-coin standard accompanied by a decentralized competitive banking system without special privileges. Thomas Allen Thomas Allen has been a student and adherent supporter of the gold standard and the real bills doctrine since 1972. In 2009, he wrote and published Reconstruction of Americas Monetary and Banking System: A Return to Constitutional Money. Many of his writings on money and other subjects can be found at http://tcallenco.blogspot.com/ and an index to these blogs is at http://tcallenco.weebly.com/ A Gold Standard Part 1: Six Reasons for a Gold Standard The gold standard would keep you from printing money and destroying the middle class. Every country where you have runaway inflation, there's no middle class. Mexico, there's no middle class, you have a huge poor class, and a lot of wealthy people. Today we have a growing poor class, and we have more billionaires than ever before. So we're moving into third world status... Ron Paul There are six very important reasons for a gold standard, not the least if which is the current economic situation around the world. Europe and the US have accumulated so much debt that its paper money is virtually worthless, unless you have high amounts of it. Something only one percent of the population has. The US debt, for example, is greater than all the other countries debt put together, including Europe incurring around 200 Billion dollars a year in interest payments alone. And that is at the current low rate of interest. With an increase in the interest rate to a reasonable 6 percent say, the US would have to borrow 77 percent of the money the government spends each year instead of the current 40 percent just to pay the interest bill. The only thing that has been bolstering up the US dollar is the governments ability to simply print more money to pay its debts. And the ONLY reason they can do that is because the US dollar currently has the luxury of being the worlds reserve currency. Now, because many countries are seeking a way out of this, countries such as India, Iran, Russia and even China are looking to trade around the world in other currencies and even gold rather than the US Dollar. And of course we are all aware of the issues in Europe whose currency, the Euro, is faring no better. Interest rates on savings are minimal if at all. Treasury Bonds are almost at the point of going into negative return which means that one would have to pay interest to buy treasury bonds. Who is going to do that I wonder? Not only that, recommendations coming out of the Federal Reserve The Gold Standard The Gold Standard Institute Issue #15 15 March 2012 6 indicate that the US economy should have an inflation of 33 percent over the coming years. Property prices in the US are in the doldrums and unlikely to recover any time soon. They took a massive dive after the Freddie Mac & Fannie Mae fiasco in 2008. The US government responded to that by guaranteeing their debt and bailing them out with, you guessed it, more printed money. And just recently the US government has printed hundreds of billions of dollars to buy their own government bonds. Quantative easing is like having a credit card and continually increasing the limit while spending UP TO the limit at the same time. The amount owed on the credit card not only increases but the interest payments do too. Some companies, those that are cashed up and do not have to invest more in capital in order to earn, can make good earnings on their shares and so can seem like a good investment. Coca Cola, McDonalds, Apple etc are some examples. But even these depend on future sales and if the economy takes a dive through massive inflation, then who is going to be able to buy their products? Throughout the ages this scenario has played out. Rome in its hey day, Russia, German, even the UK , by devaluing its currency, the pound by 14 percent, in one fell swoop in one day in 1967 caused inflation to skyrocket 26.9 percent over the coming ten years. In hindsight of course it is obvious that pegging the US dollar to gold or even NOT removing the gold standard would have prevented that and would have prevented the wild undisciplined printing of monopoly money that has resulted in such massive debt. That was an almost fatal mistake for the US economically as debt has risen disproportionately since and the value of the dollar has fallen to 3 percent of its prior value. How would it be then if the Gold Standard had NOT been removed? Well we can only speculate but the following seems fairly obvious. 1. The economy would have remained stable. There would have been no inflation or deflation. The fact that the dollar was pegged to gold and each dollar would have simply represented a amount of gold held in trust would mean that the value of the dollar would not rise or fall on speculation or trade of the dollar. 2. It would not be possible to spend more than the amount of gold held by the nation and so debt to the nightmarish levels we now see would not be possible. In short we would not be spending more that we are making. 3. Being backed by gold, money would not be an idea backed by confidence where such confidence can be eroded (as we speak) despite current frantic attempts to bolster it. 4. People would own something other than a piece of paper, the value of which deteriorates yearly so it is worth less and less and more is needed to buy the same goods and services. 5. Prices would not continually rise to compensate for the decreasing value of the dollar because, of course, pegged to gold the dollar would not decrease in value but remain the same. The demand for salary increases would not be so prevalent since prices are not rising and more money would not be needed to buy the same goods and services. 6. Companies would not have to seek cheaper labor and so more industry would remain in the country. This would boost production and the balance of payments. There is in short, a lot to be said for the discipline of a gold standard. In part two we will examine how we could return to a gold standard given the current economic situation Michael Moore Michael Moore is the author of All About Gold. He writes prolifically on precious metals and gems. His website is: http://authorservices.org The Gold Standard The Gold Standard Institute Issue #15 15 March 2012 7 Currency Wars Part II: A closer look My last piece was an overview of Jim Rickards excellent book Currency Wars. Two interesting parts deserve deeper treatment. First I will summarize Rickards concluding section - his endgame scenarios - and then Ill examine his application of critical threshold theory, or how we might get to the endgame. Rickards sees four possible outcomes for the US dollar as its global reign winds down, and also gives reasons why each might not happen. He lists the outcomes in order of increasing potential for disruption. The list also seems to ranks them by increasing likelihood. That is to say, we are probably headed for the worst case (fourth) scenario. These four scenarios are: 1. A basket of currencies, or a parade of multiple, shifting lead reserve currencies, replaces the US dollar. But there has never in history been a transition between global reserve currencies without gold as an anchor for the changeover. This could lead to greater instability and ultimately to the un- workability of any new reserve currency system. 2. The IMFs pool of SDRs (Special Drawing Rights) is gradually expanded for use as a new global currency, integrated into all levels of commerce. But the dollar may be repudiated by the markets before SDRs are ready to replace it. Also, the US government may cling to its monetary power by using its IMF votes to veto the SDRs broad introduction, prolonging the dollars life. 3. An orderly return to a gold standard. A dollar price of $2,500 - $44,000 per ounce depending on how the new gold backing for existing dollar and foreign currency balances is measured. $7,000 is Rickards best guess, given current monetary aggregates. This approach has the greatest chance of successful implementation, in terms of preserving economic activity. That is, provided government leaders act rationally, in the best interests of their citizens, rather than with a goal of preserving their own political power. In other words, c) is more likely than a) or b), but only marginally so. 4. A chaotic return to gold money amidst a catastrophic dollar repudiation and subsequent global payments system failure. A hasty re-valuation of gold, at approximately the same price as c) above. Given the accompanying destabilizing effects on stocks / bonds / real estate, and on law and order itself, disruptions might prevent any new financial system from taking hold. Regarding the timing of Americans abandonment of the dollar, Rickards suggests a fascinating predictive tool. A critical threshold model gives a framework for understanding the process by which a dollar repudiation might proceed. Last time I referenced the avalanche or fire in a crowded theatre analogies Rickards used to describe the phenomenon, but that omits a key factor. Rickards is implicitly highlighting the role of independent minds in this drama. The earliest adopters of a new belief system ultimately determine whether it succeeds. They do so by virtue of their superior insight and determination. These unofficial leaders cause that avalanche-like arrival of the new system. In fact, they make it inevitable before 99.5% of people even consider it. Rickards uses a simple version of a critical threshold model to illustrate the concept. He estimates some typical levels at which people might be influenced to abandon the dollar and applies them to the US population size. In his initial model, the first 1000 people will renounce dollars when 500 have already independently done so, and the next 1 million will join in once 10,000 have acted. Even before Rickards gives estimates for later thresholds, we can see this dynamic system is currently stable. Even if the initial 500 people have acted, the avalanche will not progress much beyond the first threshold. If there are no other ways to get to the 10,000 votes needed to move to the next level, the dollar survives. The Gold Standard The Gold Standard Institute Issue #15 15 March 2012 8 Some readers may already be considering the intriguing implications. But before we go any further, two brief points. First, for purposes of this example, Rickards defines a dollar repudiator as a person who, wherever possible, avoids holding dollars or any paper assets denominated in dollars. This describes hard-core gold advocates, but many people who intellectually understand gold still hold large fractions of their net worth in fixed-income vehicles. Second, although Rickards doesnt discuss it, the first 500 in this example might best be called original thinkers, or prime movers. They have done their own research, reached their own conclusions, and probably dont care what anyone else says or does. And every day, a few more of these types are considering gold and then unilaterally repudiating the dollar. This may be the means of gaining the next critical threshold. Now, as I noted in my last piece, these thresholds are themselves dynamic. Rickards observes that if the second threshold falls from 10,000 to 1,000, the avalanche would progress unchecked. If the next 10 million people will defect after 100,000 people have acted, and the next 100 million after 10 million have acted, then in hindsight we can say the tipping point was actually reached with the initial five hundred people. So what does this framework tell us about the fragility of the dollars rule? That only a tiny number of actors decide events. We still live in a world of elites, in more ways than one. Does this mean gold advocates appeals to the general public are wasted efforts? Not to the extent people keep taking possession of additional physical metal. That is the second front in this war. Yet despite this age of internet-empowered commentators, average citizens still have limited influence on global power structures. But todays serfs can remake themselves into members of the elite through the acquisition of readily available knowledge. May the gold advocates ranks continue to swell until that tipping point is reached, for the new world awaits. Publius Economic Foundation Must be Gold, not Paper In the last article, we looked at how a Golden foundation can support an economic superstructure; and at how this superstructure may look. The foundation has two other legs in addition to Gold money; Real Bills and bonds. Nearest to money are Real Bills; Bills turn into Gold within 91 days, while earning the discount. They are paper the very closest to Gold, the very closest to money. They are so close to money that they naturally circulate, fulfilling a monetary role; the vital role of clearing trade. Bill circulation leverages the productivity of Gold. Large trade transactions, even international trade, are cleared by Bill circulation. Gold just sits in the vault, 'gathering dust'... unless trade balances start to get out of whack. Then Gold will start to move, to change ownership, to settle the imbalance. As no country wants to lose their precious, irreplaceable 'yellow metal', their policy will submit to the discipline of Gold and will strive hard to maintain trade balance. Furthermore an unlimited number of Bills, that is an unlimited amount of trade can be supported by the Golden foundation; in effect, Bills are a proxy for the velocity of money. The more trade, the more Gold coin spent, the more Bills are created. Under paper an increase of velocity is a sign of growing inflation; it is a sign that people are starting to understand that their paper money is losing value. People become eager to exchange paper for anything real; anything that holds its value over time. Under Gold, by contrast, a growth in velocity simply means that people are more willing to spend, more willing to consume and this propensity to consume leads directly to a growth in the number of Bills in circulation. If the propensity to spend declines, the total value of Bills in circulation must match the decline as bills previously drawn mature, and fewer new bills are drawn. Bonds are a step farther from money than Bills. Bonds are not self liquidating, they do not mature into money; they need to be repaid by some other means. Commercial debt is repaid from income generated by investing the borrowed funds... if the The Gold Standard The Gold Standard Institute Issue #15 15 March 2012 9 investment pays. Consumer debt is repaid by income earned by the borrower hopefully. The risk of default is real, and collateral must be provided to offset the risks the lender takes on. As a consequence of these circumstances, bonds cannot and do not circulate; they do not serve a monetary function. Bills serve to clear debt directly; in contrast, bonds must first be sold into the markets and exchanged for money. The money realized from the sale can then be used to clear debt never the bonds directly. Bonds are not money, nor are they a proxy for money; they are a promise of money. The key question is how solid is the promise; what is the risk to the bond holder? Clearly the perception of risk does much to influence the price of bonds. The larger the perceived risk, the lower the value of the bond and similarly, the higher the interest rate. Even farther from money than bonds are equities; equities are not money, they are not proxies for money, they are not even promises of money. Equities are only a potential or possibility of future money. Buyers of equities are counting not only on income, that is dividends, but on a growth in the principal value. Such growth is not a promise, just a possibility. Indeed, unlike bonds held to maturity, the value of equity is subject to decline. Thus, equities are more risky than bonds, and it only makes sense to hold them if they earn substantially more than a more secure bond earns; and much more than a truly low risk/no risk Bill earns. This fact is a key in setting interest rates (more on this next month). But we need to clearly differentiate capital gains under paper, from true growth of the value of equities under Gold. Capital gains under paper are mostly a reflection of the decline in the purchasing power of the paper. A company that was worth 1,000,000 monetary units ten years ago may be valuated at 2,000,000 monetary units today. This is called capital gains but the truth is that the unit of measure, the numeraire, has shrunk in value rather than the equity doubling in real value. Suppose you bought 1,000 Square Meters of land a few years ago; and today, you declare that you own 10,760 Sq. Ft does this increase from 1,000 to 10,760 represent Capital Gains? Like heck! Surely it is the same land, the same size we are just using a different unit of measure. However, suppose that we sneak in a new unit of measure call it the 2012 Meter vs the 2002 Meter and the new meter is only 0.3 or 30% of the old Meter why, then we may get away with claiming that we now own 10,760 Sq. Meters of land! This is called capital gains and this is exactly how the paper money game is played. We all pay tax on a phantom capital gains that come about simply because the unit of measure shrinks, while the real value of our holdings stays the same. Thus the influence of Gold is felt even far from money. The honesty and discipline that Gold imposes affects all markets, not just the ones closest to money. Capital gains are but another paper scheme designed to extract money from the long suffering taxpayer. Traditionally, that is under Gold, equities were evaluated by the dividend flow; any potential increase in share value was considered a bonus. Notice that as the speed of monetary debasement increases, the fraudulent idea of paper based capital gains is becoming more visible. Notice that today, many public companies, even Gold mining companies, are starting to offer dividends to satisfy changing shareholder expectations. Are equity markets being prescient? The pervasive positive influence of Gold on the whole economy is a very good reason that Gold and not paper must be the foundation of the economy. Simply put Gold is honest, paper is false. False capital gains are impossible under Gold. Gold holds its value through time, so any increase in the Gold price of equities must reflect a true gain in value not a deliberate shrinking of the unit of measure.
Rudy Fritsch Rudys book Beyond Mises was written to make Professor Fekete's work and Austrian economics accessible. It can be ordered directly from http://www.beyondmises.com/ The Gold Standard The Gold Standard Institute Issue #15 15 March 2012 10 Caution: Falling Currencies In 1913, the US Congress authorized the creation of the Federal Reserve. Its mandate was limited, but it grew over time to become the central planner of all things monetary. In 1933, President Roosevelt outlawed the ownership of gold. In 1944, the soon-to-be-victorious allied powers signed a treaty at Bretton Woods, agreeing to use the US dollar as if it were gold. Their central banks would hold dollars and borrow dollars, and pyramid credit in their own currencies on top of the dollar. The US dollar was redeemable by foreign central banks, and so this was effectively a scheme for various currencies to have a fixed exchange rate between each other and to gold. It, at least, had the virtue of limiting credit expansion, as there was still this one tie to gold and hence to reality. The problem with fixing the price of one thing relative to another is that whichever one is undervalued is hoarded and whichever is overvalued is dumped. The US government set the price of gold too low, and so foreign central banks were increasingly demanding delivery of gold. By the time President Nixon was in office, something had to be done. In 1971, he defaulted on the gold obligations of the US government. This had the effect of severing gold from the monetary system, plunging us into the worldwide regime of irredeemable paper money. One consequence was that the exchange rates of the various paper currencies were allowed to float against one another. This was the prescription of Milton Friedman, monetary quack. He actually said: If internal prices were as flexible as exchange rates, it would make little economic difference whether adjustments were brought about by changes in exchange rates or equivalent changes in internal prices. But this condition is clearly not fulfilled. The exchange rate is potentially flexible in the absence of administrative action to freeze it. At least in the modern world, internal prices are highly inflexible. 1
And thats why we have volatile foreign exchange markets today, because Friedman and his followers wanted to compensate for labor law and other regulation that make certain prices ratchet only upwards, but never downwards. This fraudulent, unworkable, and dishonest scheme of floating exchange rates certainly did not fix the problem of wage and other price inflexibility. It did cause several others. One side effect was to loot peoples savings and thereby teach them not to save, because the word floating is disingenuous. The paper currencies all sink. There is no mechanism, nor desire on the part of the central bank, to increase the value of the currency. The floating currency regime is a regime of sometimes-slower and sometimes-faster currency debasement. Each government engages in a race to zero. Sometimes one currency is sinking relative to the others, and sometimes others are sinking relative to it. This is enormously destructive. The never-ending process of currency devaluation has a follow-on effect: reduced investment. This of course reduces growth. This premise must be taken to its logical conclusion. Savings, as such, are not possible using irredeemable paper. When saving, the wage earner sets aside a portion of his wage; he consumes less than he produces. His basic intent is to hoard this value until he retires and needs to exchange it for food and other goods when he can no longer work. It is advantageous to lend to a productive enterprise to increase his quantity of money, but this is not essential to the concept. The key is that he can carry value over time. Gold and silver do this, but paper does not. Fundamentally, paper currency is a loan to the government. Unlike a productive enterprise, government is not borrowing to increase production. Government does not produce anything; it consumes. Government is borrowing to consume with neither the intent nor the means to ever repay. And therefore the loan is counterfeit (See The Gold Standard The Gold Standard Institute Issue #15 15 March 2012 11 Inflation: an Expansion of Counterfeit Credit). It will not be repaid. Gold and silver are positive values. One can hoard them, as one can hoard any tangible commodity. Paper currency is a negative value. It is debt. There is no way to hoard it, its value is always falling, and in the end it will default to zero. The governments paper scrip loses value gradually, and then suddenly. We are in the gradual phase now. This phase will end without much warning (other than permanent gold backwardation: see here). Savings, under irredeemable paper are perverted into speculation. People are forced to crowd into one asset bubble after another. Those who blindly follow always end up transferring wealth to those who lead. People who bought houses between 2004 and 2008 in the USA still have not recovered. At least those who deposited dollars into a bank account have not lost as much, yet. When the markets finally become aware that the banking deposits are backed by mortgages on homes which are worth 25% to 50% less than their mortgage values, bank depositors will lose more. Eventually, people will discover that they cannot save in terms of dollars (those who dont figure it out will be rendered economically irrelevant as their wealth is removed from their hands). Savings are a necessary prerequisite for investment. Investment is necessary for companies to grow, to develop new technologies, products, and markets. Growth is necessary to hire new workers. As existing companies achieve higher productivity of labor, and do not need as many workers to perform the same work, they lay off unneeded people. In a free market, the unemployed would quickly be hired by growing companies that expand and develop new businesses. But todays structurally high unemployment can be traced back to Friedmans quack prescription (among other government interference). Weakening the currency not only discourages savings, it also weakens businesses who have to keep the currency on their balance sheet and who have to import some of their inputs. When a currency loses value, then all who hold it incur a loss. It is not possible to employ workers and run a business in a country without holding significant amounts of its currency. Currency debasement therefore imposes constant losses on enterprises that try to operate in such an environment. Combined with the fact that imported supplies, ingredients, parts, software, and other inputs are constantly rising in cost in terms of the falling currency, and one can see another reason why Friedmans assertion is false. In many cases, especially modern products, the cost of the labor input into a product is a small percentage of total cost. Save your lunch money in gold and silver, the best way to protect yourself against our mad regime. If you want to speculate, make sure you risk only your beer money. Keith Weiner Notes 1: The Case for Flexible Exchange Rates by Milton Friedman The Gold Standard The Gold Standard Institute Issue #15 15 March 2012 12 New Austrian School of Economics The Austrian Theory of Money, Credit, and Banking March 24 - April 2, 2012 (10am-12noon and 4pm-6pm) Also discussing: 1. The Phenomenon of Economic Resonance 2. The Linkage and Kondratieffs Long-Wave Cycle 3. Why Silver? Lecturer: Prof. Antal E. Fekete Guest Lecturers: Sandeep Jaitly (United Kingdom, www.bullionbasis.com) and Keith Weiner (United States of America) Location: Munich, Germany This is the fourth in a four-course series on Austrian Economics, a branch of economic science based on the work of Carl Menger (1840-1921). The school is meant for those (incl. beginners) interested in the Austrian theory of money, credit, and banking, with special emphasis on the present financial and economic crisis. The complete program consists of four courses (20 lectures in 10 days each). Registration Information The participation fee for Course IV is 1,100.00 Euro (incl. 19% German VAT). There is a EUR 300.00 non- refundable pre-registration fee that will be credited toward the tuition fee. This includes tuition, non-alcoholic drinks and snacks during the lectures, printed lecture notes for the course. Hotels and Restaurants are within walking distance and you will receive a list of suggestions. Students will receive a scholarship reducing the tuition fee to 100.00 Euro for the complete seminar (limited to 10 scholarships in total). Organizers of the course are Wilhelm Rabenstein and Ludwig Karl. In order to register for the course you can get in contact with us via mail ( nasoe@kt-solutions.de ) or phone ( +49 170 380 39 48, before calling please consider a possible time lag). For further information, please take a look at the Events page of http://professorfekete.com/ or consider taking a look at our Facebook page http://www.facebook.com/newasoe