Money
Panics & Depressions
* Canada had no central bank ('til 1934) and didn't have these panics. They were on the gold standard but didn't have those panics we had in the 19th century. The Panic of 1819: Cause: excessive issue of paper money by banks at all levels. Issue didn't correspond to gold in their vaults. Second Bank of U.S., chartered by U.S. Gov't in 1816, drove inflation through overissue of paper money. Senator William Wells predicted this outcome during chartering of bank. Money supply inflated, prices rose, encouraged U.S. to buy abroad, discouraged purchase of U.S. goods by foreigners, who began demanding specie (precious metal- gold, here), which flowed out of U.S. This forced banks, losing their gold reserve, to contract their loans. The contraction punctured the boom, which became a bust. If banks didn't inflate $supply in first place, the artificial boom and chaos that followed wouldn't have happened. As in later crises, banks were allowed to suspend specie payments (refuse handing over their depositors' money when customers asked for it). Knowing gov't would bail out banks, a lingering problem of moral hazard affected future bank behavior. Why be careful and honest when you can make a fortune being reckless. http://mises.org/resources/695/The-Panic-of-1819-Reactions-and-Policies 1837 Panic of 1857: result of 5-year boom based on substantial credit expansion. The most capital intensive industries expanded the most (railroads). States backed railroad bonds. President Buchanan obsreved, "It's apparent that our existing misfortunes have proceeded solely from our extravagant and vicious system of paper money and bank credits. As long as banks are permitted to expand credit beyond level of deposits they hold, these revulsions must continue to occur." Panic of 1873: The monetary system established by the National Banking Act of 1863 inflated the currency, expanded credit and gave government favors like land grants and low-interest loans to railroads. Combination of regulatory and monetary measures mirrors our crisis. Led to Panic of 1873. Depression of 1920-21: vital to understand. During and after WWI, Fed inflated MS ($ Supply) hugely. When it began raising the discount rate, the economy slowed. By mid 1920, downturn in production was severe, down 21% over next year. Conditions were worse than they would be in 1920, after the first year of the Great Depression. Virtually NO ONE knows such a slowdown occurred, b/c compared to Great Depression of the 1930s, it was so shorrt lived- b/c the gov't didn't try to steer the economy out of it. Economy was back to record production within ~2 months. Unsurprisingly, economists who advocate intervention-- public spending, gov't deficits, inflationary policy-- can't explain how the recovery was so swift. Gov't did not do what Keynsian economists have since urged: run unbalanced budgets, increase expenditures. Japan, 1920: Compare to Japan who introduced fundamentals of a planned economy with aim of keeping prices artificially high. Banks, industries and gov't got together, destroyed freedom of the markets. Had 7 years of stagnation and in '27 it was so severe, whole industries and big bank systems went down. To avert losses on 1 year of inventory, it lost 7 years.
National Debt
Adam smith: 2 ways to enslave a nation- sword and debt We've consumed more than we produce for too long March 2010: Gov't announced they're trying to raise the debt ceiling to $3.8T. Their excuse: they money was already spent; we're just trying to pay the bill So (humorously), your hands were tied b/c you... tied your hands. The gov't isn't trying to protect you, so you need to protect yourself. Mugabe is the economic mentor of Ben Bernanke. Private Credit is 250% of GDP Government Debt is 600% of GDP. Total: Debt is 850% of GDP. Our $15 trillion debt is over 7 times our government's current annual income (taxes). That's very hard to pay back. How many banks would lend money to a company like that, with no plan to pay it off, and projections of further huge increases in its debt? In 1960, the first year of this study, the U.S. government was taking a mere 5% of the nation's net private savings. It's now taking the whole lot and then some, in 2009 setting a post WWII high of 3.4 times the nation's savings. At a trend take rate of 1.5 times the nation's savings, the U.S. government debt burden is going in the wrong direction and fast. Simply said, the U.S. government is overwhelming the capacity of American savers to fund the government's borrow and spend programs. From a low of roughly 10% in 1984, foreign creditors have taken their share of the U.S. government's outstanding debt to 33%. Indeed, since 1984 they've funded 35% of the U.S. government's borrowing needs, and since 1995 an eye-popping 50%. In no uncertain terms, they've given the U.S. government one heck of a helping hand. "They say we're the richest nation in the world, why can't we have health care for everybody." (apply to any idea of spending) Our government cannot From a low of roughly 10% in 1984, foreign creditors have taken their share of the U.S. government's outstanding debt to 33%. Indeed, since 1984 they've funded 35% of the U.S. government's borrowing needs, and since 1995 an eye-popping 50%. In no uncertain terms, they've given the U.S. government one heck of a helping hand. afford to underwrite yet another expensive program. The reason for this is simple: After decades of fiscal excesses, the government of "the richest country" is basically broke. If this comes as a surprise, consider the following. Our national debt currently stands at $11.5 trillion To pay it off would take fiscal discipline which would require that over a period of years our government spend less than what it takes in. But this is hardly realistic, since we have ran deficits in forty-four of the last fifty years. Decreases in spending are practically unheard of in this era of limitless governmental compassion. Even proposals for miniscule reductions in the federal budget are met with outrage and condemnation. Those who dare to suggest such a thing are promptly cast as cruel and un-compassionate halfwits who want to starve, rip off, or otherwise hurt the American people. as we strain under record debt we are being led by the most fiscally irresponsible administration in American history. This year they will run up a deficit of more than $2 trillion, which is five times the previous record of $454 billion set by Bush in 2008. High as these projections are, they do not factor in the cost of healthcare and other costly programs the president is seeking to implement. Enormous as the national debt is, it only constitutes a small fraction of our government's indebtedness. Due to America's aging baby boomers and other demographic trends, the "big three" entitlement programs - Medicare, Medicaid, and Social Security - put the federal government in the red by at least another $50 trillion. Taken together the government's total obligations of more than $60 trillion In light of this, more and more observers are coming to the conclusion that it is simply impossible for the federal government to live up to its fiscal obligations. One of them is Peter Schiff, one of this country's foremost financial experts and one of the few who accurately forecast the bursting of the housing bubble. But rather than taking proper emergency measures our political elites seek to conceal the depth of our predicament. Perhaps their most dishonest trick was to remove entitlements from the nation's balance sheet. They did this by claiming that these programs do not represent a genuine liability, because they theoretically can be recalibrated through the legislative process. This, however, is a virtual impossibility in our political culture. Entitlements are considered the third rail of American politics and for a good reason - anyone who attempts serious reform is almost invariably destroyed. In any case, by concealing the true extent of our fiscal plight, the government is doing a great disservice to the American people. It has been remarked that when private corporations are caught conducting their book-keeping in such dishonest fashion their management is sent to jail. Barack Obama publicly declares that the huge deficits that he has run up "keep him awake Over the winter, prices in credit-default swap markets implied a significant probability of default on U.S. debt in the next five years. Default on national debt is what happens in failed states and banana republics; such a possibility for the U.S. would have been unthinkable in the past. Those who may think this an exaggeration, need to go no further than the government's own Congressional Budget Office which opened its latest report with a sobering statement: "Under current law the federal budget is on an unsustainable path." As we are hurtling toward a fiscal abyss, Obama's approach is to press down the accelerator. To pay off unfunded liabilities: - they print off dollars now - issue debt now and print off dollars later - taxation - default State Municipal pensions are underfunded by over $1T. This means as people saved, states and muni's spent it and decided that someone would worry about it in the future. The future has arrived. The reason taking money out and hoping it'll be there in future doesn't work is that NPV shows that $1T today requires $1T + interest next year, so money must be invested and not spent to reliably be there. $53 trillion is national shortfall, some countries estimate up to $85T.. Debt has grown by $40T over last 10 years "Problems explained / Simplistic view This rather brilliantly cuts thru all the political doublespeak we get. This puts it into a much better perspective . This shows how long daddy government can still fund the banks messed up behavior: * U.S. Tax revenue: $2,170,000,000,000 * Fed budget: $3,820,000,000,000 * New debt: $ 1,650,000,000,000 * National debt: $14,271,000,000,000 * Recent budget cuts: $ 38,500,000,000 Let's now remove 8 zeros and pretend it's a household budget: * Annual family income: $21,700 * Money the family spent: $38,200 * New debt on the credit card: $16,500 * Outstanding balance on the credit card: $142,710 * Total budget cuts: $385".
9- History of U.S. Money
History of money: - Barter gives way to indirect exchange. People will get wheat or otherwise most widely used commodity even if they don't need it b/c they know others will need it, or value it for indirect exchange. - Money is another term for the most widely used commodity. - Metal in 7th century b.c. arose as money: high value to weight ratio, easily divisible, rare - Jefferson looked around to see what people were using as money—it was the gold coin. So, he started minting the gold eagle (10 coin). - People who thought themselves patriotic bought Continentals—pieces of paper printed by Congress to pay for the War for Independence effort. Diluted MS led bills to fall near zero. People lost everything. But tories, who wanted nothing to do with gov't money, did well. Palinti Webster, the first American Economist, saw that this money unbacked by gold was extremely dangerous. - Bank notes as substitutes arose since they were easier and safer to use for big transactions. If bank had 1,000 oz. of gold and 1,000 oz worth of depository receipts, bank could double its profits by printing up another 1000 oz of notes and lending those out. This was 50% reserve backing (only 50% of gold receipts were backed by gold). Bankers were no longer warehousing gold for a fee. They were inflating the money supply for interest. - This is fraud. If you had a grain storage business that lent out the grain, they'd never get away with it. Banks are the one industry permitted to do this. - 1836, Jackson abolished 2nd National Bank. Hundreds of smaller banks were set up but with little in gold reserves to back them. - In 1834, the U.S banking system stabilized by introducing a gold standard. U.S. went off the gold standard to finance Civil War. Virtually every war causes us to go off gold standard, b/c we can't afford to finance them without taking money from people. 1879, we went back onto the gold standard to start the most productive period in our history. For 20 years, total output of economy grew at 4%/yr. w/o ability to manipulate 'r', higher savings and investment and more capital and labor productivity. The ICC was put in place to protect railroad owners from competition. By 1896, they did the same thing with the banks. Led by JP Morgan and Jon D Rockefeller (oil tycoon). They wanted cheap credit and inflated MS to finance their empires and succeeded in creating Fed Reserve. To sell their idea to Americans, they said it would make the money supply more elastic. In 1906, due to fractional reserves, panic spread and Fed was easier to sell in. Fed was to be the "lender of last resort," so that if any bank were to fail, they could go to D.C. Q is, "should there be a lender of last resort?" No! Each bank should be responsible for its own debts and obligations. If banks thru imprudent policy go bankrupt, this should be considered not bad but good, since danger of bankruptcy is precisely what make banks adhere to sound policies. Just before Christmas of 1913, Fed Reserve Act was passed by Wilson (famous progressive) http://www.chrismartenson.com/crashcourse/chapter-9-brief-history-us-money Gov't radically shifted rules during emergencies After Panic of '07, banks agitated for for gov't involvement. Stock of Fed was to be held by member banks (it was a bank cartel not to be held by gov't or public) What we call the Fed Reserve is a federally sponsored banking cartel licensed to lend money into existence 1933 FDR's executive order, in which he declared on April 5th, 1933, that "All persons are hereby required to deliver on or before May 1, 1933, to a Federal Reserve Bank or a branch or agency thereof or to any member of the Federal Reserve System all gold coin, gold bullion and gold certificates now owned by them." World trade before 1971 But that's exactly what then President Richard Nixon did on August 15, 1971, when he took U.S. currency off the gold standard. Prior to 1971, in most of the world, currency had been backed by gold for more than 100 years. In the United States, dollars issued were called silver certificates because currency was backed by silver (or by gold in terms of purchasing power internationally). From the end of World War II through the 1960s, all well-governed nations in the world sought to maintain a constant balance between their exports and imports. They all wanted to maintain a situation where they exported more than they imported, so that they could accumulate growing Treasury reserves of gold, or in its defect dollars, which, under the terms of the United States (US) promise in the Bretton Woods Agreements of 1944, could be redeemed by any Central Bank that requested gold in exchange for its dollars. To be precise, we cannot fail to mention one exception. The exception to the rule was none other than the US. All well-governed countries sought to export more than they imported, except the US. Economists of the day warned of the danger of this practice, which resulted in a constant loss of American gold. From over 20,000 tons at the end of World War II, US gold reserves dropped year by year as certain countries, notably France, insisted on redeeming their dollars for gold at a rate of 35 dollars per ounce of gold. France incurred intense displeasure in Washington and New York due to its demands for gold in exchange for dollars; some analysts attribute the unrest in France in the spring of 1968 to covert operations by the US intelligence services, in a show of America's disapproval of the behavior of France, led at the time by General Charles de Gaulle. The US did nothing to slow the loss of gold. In the early months of 1971, Henry Hazlitt, a solid classical economist, predicted that the dollar would have to be devalued; he said it would be necessary to increase the number of dollars that would be needed to obtain an ounce of gold from the United States Treasury. Only months after his warning, the dam burst, and in August 1971 the US was forced to devalue its currency, because the amount of gold in its reserves had fallen to a dangerous level. (Today, many doubt that the US has the 8,000 tons of gold it claims to have in its vaults at Fort Knox and the US Military Academy at West Point, N.Y.) What Henry Hazlitt never imagined was that instead of devaluing the currency - the recommendation of Paul Samuelson, Nobel Prize Winner in Economics, published the week before August 15, 1971 - President Nixon took the advice of Milton Friedman and declared that from that time forward the US would no longer redeem dollars held by the world's central banks at any price. The US unilaterally violated the terms of Bretton Woods. In effect, it was actually financial bankruptcy. Since then, all world trade - or most of it, as the euro, the pound sterling, and to a lesser extent the yen all compete with the dollar - is conducted using dollars that are nothing more than fiat money, fake money. Because all the world's other currencies were bound to gold through the dollar, the immediate consequence was that simultaneously they also became fiat money, fake money with no backing. As the loss of gold ceased to be a limiting factor, the last restrictions on the expansion of credit were stripped away. A heavy flow of dollars to all parts of the world spurred the expansion of global credit, which did not stop until 2007. The international banking elite always strive to obtain greater profits and to that end always seek to expand credit. Starting in 1971, freed of the restraint of being required to pay international accounts in gold, or with dollars redeemable for gold, the constant unfettered creation of credit and still more credit ensued. It was boom time in the US. The US, which paid the rest of the world with its own irredeemable dollars of no intrinsic value, lauded the adoption of "free trade" and "globalization". The US could buy whatever it wanted, anywhere in the world, in any quantity, and at any price. Starting in the 1990s, its export deficits became alarming, but nothing was done to reduce them; on the contrary, they grew year by year. The "globalization" of the 1980s and 1990s and to date is based on the ideas of "Free Trade". However, in the absence of the gold standard that existed when the doctrine was conceived, "globalization" had completely destructive results, which have caused the de-industrialization of the West and the rise to power of Asia. These evils appeared because gold was eliminated as a) a constraint on the expansion of credit and the creation of money, and b) the only form of payment of international debt. Under the gold standard all players in international trade knew that it was only possible to sell to a country that sold something else in turn. It was not possible to buy from a country that did not buy in turn. Trade was naturally balanced by this restriction. The "structural imbalances" so commonplace today were unheard of. For example, in 1900, Mexico could export coffee to Germany because Germany, in turn, exported machinery to Mexico. Germany could buy coffee from Mexico because Mexico, in turn, bought machinery from Germany. Each transaction was denominated in gold, and as a result there was a balance based on an economic reality. Because there was balance in world commercial relationships, a relatively small amount of gold sufficed to adjust the international balance. The world financial center which acted as a "Global Clearing House" was London. A few hundred tons of gold were sufficient to meet the needs of that Clearing House. For further reading on the function of London as a clearing centre for world commerce, see "Real Bills" and associated articles by Antal E. Fekete at www.professorfekete.com Another example: In 1930, the US could sell very little to China, because the Chinese were poor and lacked purchasing power. Because the US sold very little to China, at the same time it could buy very little from China. Although prices of Chinese products were very low, the US could not buy much from China, because China did not buy from the US - China was poor and could not afford American products. Thus, trade between China and the US was balanced by the need to pay the balance of their transactions in gold. Balance was imperative. There was no chance of "structural imbalance". Take for example the US manufacturers of T.V. Some of the famous US factories that built TV receivers by the millions were "Philco", "Admiral", "Zenith", and "Motorola". The Japanese had better and cheaper products, and since the abandonment of the gold standard allowed Japan to sell without buying in turn, and allowed the US to buy without selling in turn, the result was that all the huge factories producing these TV's in the US were closed down. That's how "going off gold" closed down US industry. After 1971, the US embarked on a protracted, large-scale expansion of credit. As the nation was de-industrialized and high-paying jobs in industry disappeared, a lack of disposable income for the population was replaced with easy and cheap credit, to conceal the stagnation in per capita income. Consumer credit drove imports from Asia and furthered de-industrialization even more. Gold, up until the Bretton Woods Agreements of 1944, figured as the complement to the international exchange of merchandise or services and did settle outstanding balance of payments deficits, because it was a merchandise or commodity used as money. As it turned out, the "fiducia" or "trust" was misplaced, for in 1971 the US reneged on the Bretton Woods Agreements of 1944, "closed the gold window" and stiffed the creditor countries. No final settlement of international commerce debts took place in 1971, nor has any taken place since then; the truth of this statement is obscured by the mistaken idea that tendering a fiat currency in payment of an international debt constitutes settlement of that debt. Today, China and the other great Asian exporters have belatedly realized that the dollars they received as "payment" for their mass exports are nothing more than digits in American computers. If the Chinese do not cooperate, the bankers in New York can erase those digits in half an hour, and leave China with no reserves. For this reason, the Chinese and Asians in general are buying gold, and will continue to buy it indefinitely: computers cannot erase gold reserves. If Americans find they simply cannot purchase Chinese goods, Americans will manufacture those goods themselves. Industries and new jobs will spring up like mushrooms immediately, to satisfy American demand. International balance will be restored, unemployment will disappear. I advocate the separation of bank and state just like we used to advocate the separation of church and state. Activities of the government should be limited to the collecting, safekeeping and dispersing of moneys in the U.S. The state should have no more involvement with money than it does with baking or tailoring. No country has ever achieved wealth and prosperity without the use of gold or silver or other natural money. In 1933, newly-elected President Franklin D. Roosevelt decided to counter the falling money supply in a most drastic manner. To accomplish this he confiscated all privately-held gold and immediately devalued the US dollar. Prior to the seizure it took approximately $21 to buy an ounce of gold and afterwards it took $35. Soon after, contractual obligations of the US government, such as bonds payable in gold, were nullified, with the approval of the Supreme Court. This goes to show how governments, in a period of emergency, can change rules and break their own laws. The Bretton Woods II system ushered in a period of prosperity and rapid economic recovery. But there was a flaw in the system. Nothing in the Bretton Woods agreement prevented the US Federal Reserve from expanding the supply of Federal Reserve notes. As this happened, the gold backing behind each dollar steadily declined, such that there was not enough gold to back all of the dollars. Meanwhile, as the Vietnam War intensified, the US was running budget deficits and flooding the world with paper dollars. The French, under President Charles DeGaulle, became suspicious that the US would be unable to honor its Bretton Woods obligations to redeem their excess dollars into gold. As the French exchanged their surplus dollar for gold, the US Treasury's gold stocks declined alarmingly. Finally, President Nixon declared force majeure on August 15th, 1971, and "slammed the gold window," ending its dollar convertibility. Without a gold backing, there was no hard, physical limit to how many paper dollars could be issued. Since we now know that all dollars are backed by debt, what do you suppose happened to US debt levels once the externally applied rigor of gold was removed? Let's find out. This rapid accumulation of debt is not a mysterious process at all; rather it is an entirely predictable consequence of the slamming of the gold window. How much longer can this continue? Unfortunately there's no good answer to this, besides "as long as foreigners let us." A second predictable, and related, consequence concerns the total amount of money in circulation. Remember, all money is loaned into existence, so the shape of the federal debt chart should tip you off to the shape of this next chart of US money from the years 1959 to 2007. The first thing we can note here is that it took our country over three hundred years, from the very first pilgrim until 1973, to generate our first trillion dollars of money stock. Every road, every bridge, and every marketplace on every corner of every town; every boat and every building, from the first colony until 1973, required a trillion dollars of money stock. Our most recent trillion dollars? That was created in the last four-and-a-half-months. My questions to you are, "What will it be like to live here when our nation is creating a trillion dollars every four weeks? How about every four days? Every four hours? Four minutes? Where does it stop, if not in hyperinflation and the destruction of the dollar, and, by extension, our nation?" How much is a trillion dollars? $1,000 bills 67.9 miles high. Just b/c it's so hard to fathom, we shouldn't sit complacently. In 1791, the First National Bank was started and given a 20 year charter, and then when it expired in 1811, it took until 1816 for the Second National Bank to be started. It was likened to waking from a good dream, and then trying to go back to sleep to resume the dream. The dream being the dream of a boom, even though the bank caused a bust. The idea is that eliminating the first bank, which was like a set of state banks, to start the First National Bank was like going into the water or a pool to hide from the rain. As if the bank of the states was not working, suddenly a bank of the United States would work.
Currency - Euro
Faber: As we discuss later, the euro is unique in the history of currencies because it isn't backed by any nation's government, taxation or army. It is backed by a newborn international central bank whose control is indistinct. What makes this current crisis is so sever is that it may have the same effect on the credibility of the euro that tearing down the curtain had on the Wizard of OZ: There's no nation or economy standing behind the paper currency- just an international committee of bureaucrats which can only enforce its decrees against its members with their consent. It is little more than the currency equivalent of the United Nations - a good ideal, perhaps, but you might not want to bet your personal wealth or pension fund on it.
Gold
Gold went from 35 to 800 in 1970s when stocks did what? Precious metal system occurs spontaneously without government intervention Fiat money has never been introduced voluntarily; only with the use of police and violence to suppress alternatives (when was violence used)
Logistics- China buying debt
How the currency peg works China will allow the RNB to appreciate; it's not rigid. Chinese monetary authorities monitor forex trading on the RNB If chinese merchants are looking to sell dollars accumulated from selling us products but there aren't buyers in private market and RNB rises, bank of china, chinese gov't will intervene and buy up dollars. It's quantitative easing. It's going on daily in china w/o it, RNB would be rising. If it could rise, beneficiaries would be dhinese savers who'd gain purchasing power and U.S> savers would have rug ripped out from beneath fee.
FIat is better
Money evolved as a product like any other—there is a reason why societies selected a commodity money (one backed by a commodity) throughout history and why they never opted for a fiat currency (hence, the name "fiat"—imposed by forceful decree). Fiat money leads to monetary policy designed to achieve political aims, and governments have less discipline than a hungry fat man at an all-you-can-eat-buffet. Voltaire put it best: "Paper money eventually returns to its intrinsic value - zero. This is a lesson that will never be taught in government schools (i.e., public schools), which is why YOU have the opportunity to make a real difference. You say that gold is not real wealth (i.e., gold doesn't have real value). But gold has tremendous value... not because it has "intrinsic" worth, but because of our belief in its ability to function as money. We trust sound money because it exists in limited supply and is, by definition, not subject to government manipulation. Why gold? Virtually all early forms of money were imperfect choices. Goats aren't interchangeable, don't hold their value over time, and... resist being divided up for change. So after much trial and error, most societies settled on pieces of metal as their money. More durable than goats and less variable than tea metals like bronze, copper, silver. Gold could be mined, smelted, and turned into recognizable, more or less identical coins that could then be traded and stored. Over 3300 currencies have been discontinued throughout history—all following the same trajectory—commodity money turned fiat. You state that amount of gold we find is arbitrary and shouldn't impact our tech progress and how hard we're working. To the extent that we want to steady money supply, the Fed has failed miserably in this, as have central banks throughout history. Gold, unlike paper is a limited resource. The very point of gold is that it isn't subject—in the real world—to the devaluation that paper is. (We can address the one counter-example you propose further, if helpful— the thousands of counter-examples notwithstanding). You explain that gold wasn't helping transactions happen. It was just sitting in Fort Knox. To the contrary, the increased printing of money (possibly only because of a devitation from a market money (gold or otherwise) sends false signals about what projects can be completed. You see, the Fed is at root of boom/bust cycle. It controls the money supply and influences interest rates. But interest rates serve a PROFOUND function: to coordinates supply and demand for money over time. When savings rise, interest rates fall. Then, long-term more interest-sensitive projects are begun (new plant, new equip). This corresponds to more savings now, more consumption later. Interest rates can coordinate only if they floats freely. If not, we should expect discoordination on massive scale (like a fiat asteroid or botched helicopter dropping, which has happened, rather than a golden asteroid, which hasn't). Fed's cheap credit misleads businesses into thinking now is a good time for long-term projects. (E.g., housing boom and countless others throughout history. I'm glad to share the history of all major booms/busts in US history and how they correspond with loose credit as a result of central banking policy.) As long as interest rates are kept low, the public isn't postponing consumption and freeing up resources to devote to those longer term projects. So even if projects get completed, in the long term purchasing power won't be there to demand what they sell. Thus, investments that'll bear fruit only in the distant future are encouraged at time when public shows no letup in desire to consume in the present. To the contrary, lower interest rates encourages them to save less and consume more. It's like a builder starting with a foundation too large, who would have laid out a foundation of different dimensions if interest rates had been genuine. One example is the housing glut resulting from low interest rates (of course, along with other factors). People had insufficient savings to pay for them and so resources were massively misallocated to home we couldn't afford rather than factories or other investments that the market does need. The government has only arbitrary ways of knowing how much of something to produce, where to produce it, using what materials and which production methods. Private firms use a profit and loss test to gauge how well they are meeting consumer needs. Gov't has no such feedback mechanism, since it acquires its resources not through voluntary means, as in private sector, but through seizure from the citizens and no one can choose to buy or not to buy what gov't produces The purpose of production on the market is to satisfy real consumer demands; politically motivated and economically arbitrary diversions of resources do absolutely nothing to set the economy on a long-run path of acccomplishing that. Diverting resources from those who've successfully met consumer demands to those who haven't only weakens the economy.
Money
My 2½ year old thinks milk and eggs come from safeway; doesn't know about farming and the whole mess behind grocery store. Similarly, with $, people have stopped questioning where money comes from, so we just accept this stuff, so we're least able to understand recklessness. So now we know that there are two kinds of money out there. The first is bank credit, which is money that is loaned into existence, as we saw here. Bank credit is a type of money that comes with an equal and offsetting amount of debt associated with it. Debt upon which interest must be paid. The second type is money printed out of thin air, and that is what we see here at this stage. The process by which money is created is so simple that the mind is repelled HOW MONEY IS CREATED BY THE FED: Suppose Congress needs more money than it has. I know, that's a stretch! Perhaps it has done something really historically foolish, like cutting taxes while conducting two wars at the same time. Now, Congress doesn't actually have any money, so the request for additional spending gets passed over to the Treasury Department. You may be surprised, or dismayed, or perhaps neither, to learn that the Treasury Department lives hand-to-mouth and rarely has more than a couple of weeks' of cash on hand, if that. So the Treasury Department, in order to raise cash, will print up a stack of Treasury bonds, which are the means by which the US government borrows money. A bond has a 'face value,' which is the amount it will be sold for, and it has a stated rate of interest that it will pay the holder. So if you bought a bond with $100 face value and that paid a rate of interest of 5%, then you'd pay $100 for this bond and get $105 back in a year. Treasury bonds are sold in regularly scheduled auctions, and it is safe to say that the majority of these bonds are bought by big banks, such as those of China and Japan recently. At auction the banks purchase these bonds, and then money gets sent into the Treasury coffers, where it can be disbursed for the usual array of government programs. I promised you that I'd show you how money first comes into being, and so far that hasn't happened, has it? The bonds are being bought with money that already exists. Money is created by this next mechanism, where the Federal Reserve buys a Treasury bond from a bank. When the Fed does this: They simply transfer money in the amount of the bond to the other bank and take possession of the bond. A bond is swapped for money. Now, where did this money come from? Glad you asked. It comes out of thin air, as the Fed creates money when it 'buys' this debt. New Fed money is always exchanged for debt, so we can now put the title on this page. Don't believe me? Here's a quote from a Federal Reserve publication entitled "Putting it Simply:" "When you or I write a check, there must be sufficient funds in our account to cover the check, but when the Federal Reserve writes a check, there is no bank deposit on which that check is drawn. When the Federal Reserve writes a check, it is creating money." HOW MONEY IS CREATED BY BANKS First, let's look at how money is created by banks. Leaving aside for now where this money comes from, suppose a person walks into town with $1000, and, luckily, a brand new bank with no deposits has just opened up. The $1000 is deposited in the bank, and now the person has a $1000 asset (their bank account) and the bank has a $1000 liability (the very same bank account). Now, there's a rule on the books, a federal rule, that allows banks to loan out a proportion, a fraction, of the money they have on deposit to others. In theory, banks are allowed to loan out up to 90% of what people have on deposit with them, although, as we'll see later, the actual proportion is much closer to 100% than 90%. Nonetheless, because banks retain only a fraction of their deposits in reserve, the term for this process is "fractional reserve banking." Back to our example. We now have a bank with $1000 on deposit, and banks do not make money by holding on to it - rather, they make their living by borrowing at one rate and loaning at a higher rate. Since any bank can loan out up to 90%, the bank in our example manages to locate a single individual that wants to borrow $900. This borrower then spends that money by giving it to another person, perhaps his accountant, who, in turn, deposits it in a bank. Now it could be the same bank, or a different bank, but that really doesn't change how this story gets told at all. With this new deposit, the bank has a fresh $900 to work with, and so it gets busy finding somebody who wants to borrow 90% of that amount, or $810. And so another loan, this time for $810, is made, which gets spent and redeposited in the bank, meaning that a brand new, fresh deposit of $810 is available to loan against. So the bank loans out out 90% of $810, or $729, and so it goes, until we finally discover that the original $1000 deposit has mushroomed into a total of $10,000. Is this all real money? You bet it is, especially if it's in your bank account. But if you were paying close attention, you'd realize that what we've actually got here are three things. First, we've got $1000 held in reserve by the bank, $10,000 in total in various bank accounts, and $9000 dollars of new debt. The original $1000 is now entirely held in reserve by the bank, but every new dollar, all $9,000 of them, was loaned into existence and is "backed" by an equivalent amount of debt. How's your mind doing? Is it repelled yet? You might also notice here that if everybody who had money at the bank, all $10,000 dollars of them, tried to take their money out at once, that the bank would not be able to pay it out, because, well, they wouldn't have it. The bank would only have $1000 hanging around in reserve. Period. You might also notice that this mechanism of creating new money out of new deposits works great...as long as nobody defaults on their loan. If and when that happens, things get tricky. But that's another story for later. What's a dollar? In 1963, the words "PAYABLE TO THE BEARER ON DEMAND" were removed from all newly issued Federal Reserve notes. In 1968, redemption of reserve notes officially ended. Then, dollar bills used to say: Will pay to the bearer on demand 1 dollar. The broken promise to pay a dollar becomes a dollar A dishonest promisorry note is misreprented as being a dollar If you hang a sign that says Cat and hang it on a dog, does it become a dog? Not until Congress If you check your coat in, and you get a coat check, when you return and say I want my coat, they say, No. This is your coat. No it's not. many philosophers and economists are misled by widespread belief that a state of rest is more perfect than one of movement. Their idea of perfection implies that no more perfect state can be thought of, and consequently, that every change would impair it. The best that can be said motion is that it is directed toward the attainment of a state of perfection, in which there is rest, because further movement would lead into a less perfect state. Motion is seen as the absence of equilibrium and full satisfaction, as a manifestation of trouble and want. As far as such thoughts merely establish the fact that action aims at the removal of uneasiness and ultimately at the attainment of full satisfaction, they are well founded.
Offenses
Nothing is easier than going around the country distributing largess from the public treasury, which has become the political definition of "caring." That is the whole purpose of free market prices -- to convey realities to you in a form that you cannot ignore. Unfortunately, one of the main purposes of contemporary politics is to shield you from these same realities. The country as a whole cannot be shielded from realities, no matter what policies are followed or how often words like "compassion" are used. The country's total resources are not one dime greater after compassion, rights and entitlements are handed out hither and yon. All the government can do is rob Peter to pay Paul -- or rob both Peter's and Paul's children by leaving them a larger national debt to pay. If the country as a whole is no better off, then why do these emergency disaster relief programs exist? Because politicians are better off.
Objections
O: You can't grow with gold standard R: Our greatest period of growth was the Industrial Revolution—we were on the gold standard. Sound money breeds prosperity b/c it encourages savings, the root of capital formation. Politicians always say the opposite b/c they want to print. B/t 1790 and 1910, prices fell. Capitalism benefits people by lowering prices, but only if you have sound money. Instead, our prices are rising, so living standards fall. O: Supply could change dramatically R: So the Austrian's typically speak of higher order and lower order stages of production. The higher order stages are the ones that are most remote from the consumer, so research and development, for example is a very high order stage because that might not bear fruits for the consumer for 20 years or more in some cases, or increasing expanding mining capacity, which by the way helps on the predictability of money supply increases under a gold standard because the increase in mining capacity is such a slow process, it gives everybody years and years of time to anticipate it. Beyond that, you can think of manufacturing, construction, machine tools. These things are far from a bagel in a bagel shop, which is immediately usable by the consumer. So the lower order stages would be retail stores, services, things of that nature. So
Objections
Objection: Gold mining is the only trade I know that fundamentally doesn't make sense. The more you successful the industry is, the less it's worth. Response: ? • Why would you ever increase the supply of anything? • A store of value is a good. This brings utility. If we recognize that people have subjective notions of value, some people will say, 'dollars are worthless' or 'have defaulted' and I want protection. What are you afraid of about gold? My response is, gold is the reason I am not afraid. If I weren't holding gold I would be afraid. Because gold holds value and if someone says, "What if there is a wild stamped out of gold?" There is not going to be a wild stampede out of gold; there's going to be a wild stampede out of the dollar because that is what is being devalued and has no intrinsic value. Gold will hold its value amid what is happening.
Currency - Global Currency
This suggestion involves an extremely complicated political and economic judgment. In the abstract, a world currency is a wonderful idea because it significantly reduces transactions costs. It would also help to reduce the risk of third- world countries significantly destroying the value of their currency. On the other hand, (1) The funds would be controlled undemocratically, which means that world elites would dominate the money supply. That already exists here and it is a bad thing (the market, not the people should control the money supply). (2) The funds would be more or less monopolistically controlled, which means that if the IMF screws up, everyone on earth is screwed. (3) There will be a world institution with a striking capability of controlling our lives - which forms the groundwork for a world government. (4) There will be a world institution with the ability to at least try to track our use of money - which forms the groundwork for a world government. (5) A world government would be an insane nightmare. At least in the Soviet Union, you could try to escape. But with a world government, your best hope is to suffocate and die on the moon or under the sea. Given these factors, a world-wide reserve currency strikes me as a nightmarish idea, from a pro-liberty perspective. The costs outweigh the benefits.
Pre-U.S
What did we do with people in debt? Ancient Greece: Debt Slave Midieval Europe: Debtor's Prison
Videos
http://www.youtube.com/watch?v=a6OQzH07u0U History of Money http://www.bigeye.com/griffin.htm on the Federal Reserve Paul Bergman Movie: Money is Debt part I and II http://www.agorafinancial.com/reports/AWN/cc/AWN_cc_alt_hellish2_vp_test.php?code=EAWNM772 http://agorafinancial.com/reports/AWN/cc/AWN_creditcard_alt_vp.php?code=LAWNM709 (breakdown in civil order/ u.s. creditworthiness)
Quotes
"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." John Maynard Keynes George Washington, in a letter to Thomas Jefferson "Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice." Alexander Hamilton, America's first Treasury secretary: "To emit an unfunded paper as the sign of value ought not to continue a formal part of the Constitution, nor ever hereafter to be employed; being, in its nature, pregnant with abuses, and liable to be made the engine of imposition and fraud; holding out temptations equally pernicious to the integrity of government and to the morals of the people." These words from our founding fathers are understood by only one person eyeing the presidency. Ron Paul. Jefferson, author of the Declaration of Independence: "Paper is poverty"... "It is only the ghost of money, and not money itself"... "paper moneys abuses also are inevitable and, by breaking up the measure of value, make a lottery of all private property." James Madison, "Paper money is unjust. It is unconstitutional, for it affects the rights of property as much as taking away equal value in land."
Gold Standard
- Late 1800s: Many European countries start gold standards - World War I: Financial crisis leads gov't to end gold standard. - Roosevelt confiscated gold by giving $20USD. - After World War II: the Bretton Woods system: US$35/oz. Then he devalued the USD, so gold was $35USD/oz. In so doing, he confiscated the wealth of US citizens and spent it on his social programs. - 1971: Nixon & US unilaterally suspended the direct convertibility of the United States dollar to gold. - Demand: central bank reserves, jewelry, industry (dental), investment (bars, coins, ETFs, etc.). - 2007: 160,000 tons The advantage of a link to gold (or some other commodity) is that the value of money would apparently be free from manipulation by the government. The aim, then, would be to "de-politicise" money We think of wealth as stuff that you can touch. Wealth is value. Value is subjective. Value doesn't have to be tangible manufactured goods. Services. Nothing has intrinsic value. Things only have value to the extent they're used up in the economy. What you're saying is that "gold doesn't make stuff" like diamonds. People aren't going to have regular uses of it. Cool thing about gold is that it stays relatively stable in its supply, unlike dollars, which makes it a reliable means of exchange. The Romans had precious metals as their currency and do you know the term "debase"? The Roman politicians had the brilliant idea that if a coin was 100% pure precious metal, they could slip a little base metal in and, over a couple of hundred years, they went from 100% pure precious metal to almost 0%. That's where the term "debase" comes from. So, we've tried it. Unlike dollars/fiat, gold is real money because it isn't someone else's liability. With fiat & fractional reserve, many other people hold the purchasing power/credit given to you. With fiat and fractional reserve banking, you hold a dollar—a claim to real resources. But someone else holds 90% of your dollar, and someone holds 90% of that. according to the constitution, gold and silver are money. And by article 1, section 8, the congress actually coined gold and silver. And when most americans bought gasoline, they used gold and silver. And oil fluctuated b/t 20 and 30 cents a gallon. Wasn't 'til the 70s that oil prices role, b/c in 1971 we came off the gold standard. (we're paying for gov't spending through more expensive gas and food)
Sort
Argentina, Nineteenth and Twentieth Centuries - Perhaps learning from the mistakes of the Europeans, Argentina went on the gold standard in 1853. For the next century, the economy thrived. In 1943, Juan Peron's coup destroyed the country's system and gold reserves disappeared, to be replaced by paper money. This began a downward spiraling economy that has only recently begun to recover. A New Shay's Rebellion? In January 1787, Daniel Shays, a former officer in the Revolutionary Army, led 2,000 farmers in a revolt against U.S. government troops at a Springfield, Massachusetts, armory. The rebels, mostly farmers, were protesting serious economic conditions, the worst of which was the lack of a stable currency. They demanded that the government create what they called "sound money." In other words, the farmers were demanding a gold-backed dollar. There was a lot of money in circulation, but very little of it was worth its face value. The 2,000 rebels were arrested and the leaders were given death sentences, but all were later pardoned. This was an early and relatively small example of what can happen when a country does not have sound money. The farmers who followed Daniel Shays knew that their economic survival depended on fixing the problem. Their actions forced the government to create a single currency and control it. Now, more than 200 years later, we face a similar problem but on a far larger scale.
Unnamed Topic
For you and I, there are only two ways to settle a debt. Pay it off or default on it. If you have a printing press like the government does, a third option exists: Printing money to pay for the debt. This method is a poorly disguised form of taxation, since it forcefully removes value from all existing money and transfers that value to the debtholders. I view it as a form of default, but one that preferentially punishes savers and those least able to bear the impact of inflation. 9 trillion, 444 billion dollars and change . This is only the debt. Once we add in the liabilities of the US government, chiefly Medicare and Social Security, we get a number five to eight times larger than this. The total debt in the US now stands at over $48 trillion. That's 48 stacks of thousand dollar bills, each of which is 67.9 miles high. Am I saying that all debt is "bad"? No, not at all. Time for another definition. Debt that can best be described as investment debt provides the opportunity to pay itself back. An example would be a college loan offering the opportunity to earn a higher wage in the future. Another would be a loan to expand the seating at a successful restaurant. In the parlance of bankers, these are examples of "self-liquidating debt." Meaning that the loans boost future revenues and have a means of paying themselves back. But what about loans that are merely consumptive in nature, such as those taken out for a fancier car, or for vacations, or for more war material? These are called "non-self-liquidating debts" because they do not generate any additional future revenue. So not ALL debts are bad, only too much unproductive borrowing is bad. In the past five years, American debt has grown by more than $16 trillion, and a very large proportion of that has been of the non-self-liquidating variety. This has profound implications for the future. Because non-self-liquidating loans do not generate future cash flows, it means that ordinary income will have to be used to pay off today's consumption. And this will mean less cash for discretionary spending in the future. At any rate, depending on which government agency's numbers you use, the Federal shortfall is anywhere from $53 trillion to $85 trillion.
Revolutions, following Debt
So, the US government will go bankrupt. That's not the end of the world. Lots of governments have gone bankrupt, some of them numerous times - like almost all of them here in South America, where I am at the moment. In fact, there's a temptation to look forward to it eagerly. After all, the state is the enemy of any decent human. One might hope that when they bankrupt themselves, maybe we will get to live in a libertarian paradise. But that's not likely the way things will come down; rather, just the opposite. Not all state bankruptcies are just temporary upsets. Most of the great revolutions in history have financial roots. Great revolutions are more than just unpleasant and inconvenient; they're extremely dangerous. The French Revolution of 1789 was brought on by the financial collapse of the French government. It was a good thing to depose Louis XVI, but things didn't get better - they got much, much worse with Robespierre and then Napoleon. In Germany, the destruction of the German mark in 1923 set the stage for the Nazis - and then the depression ushered them in. The collapse of the Czar's regime in Russia in 1917 seemed to be good news at first - but then things got worse, and they stayed worse for a long time.
