Fiat Redux

I am sure most of you are wondering what happened to me.  I was silent for days.  Well, I went to visit Greg in Endwell and then ate and drank at Glenora Winery, where Irene and Ken mysteriously turned up.

Amid all this activity I slept and the Yankees won, but not at the same time.  I came up with a vague plan that helped put things in a bit more tolerable light. Executing plans, no matter how stupid, is a mojor key to eliminating stress.

Anyway, here is James Turk with some insight you may not need, but it is good to hear a daily message. No work on my part other than brilliant research on my home page. Now that we are clear on what is happening, or, at least, tired of hearing about it, the next thing is to create your own plan. Turk offers some background for those trapped by intertia.

The Dollar Depends on Politicians Now 

It wasn’t too many decades ago that the dollar was, as the saying went, “as good as gold”. It was a truism, almost too obvious for mention because everyone understood the dollar’s essential attribute, namely, that it was redeemable into gold upon demand.

Howard Buffett, who was the father of Wall Street legend Warren Buffett, in a speech on May 4, 1948 said: “Our finances will never be brought into order until Congress is compelled to do so. Making our money redeemable in gold will create this compulsion.” 

This redeemability was a fundamental building block that explained why the dollar had value and was readily accepted and used as a means of exchange in the purchase and sale of goods and services. The dollar did not require legal tender laws or other forms of government force for it to circulate as currency. It circulated freely by choice in place of gold, as a substitute for it because gold was too valuable to use in transactions day-to-day as currency. Gold was lost from abrasion as coins wore out over time, but paper could easily be replaced at little cost when worn. 

But redeemability in practice actually meant far more than just the right everyone had to exchange their paper currency into gold coin. It imposed an essential discipline on the Federal Reserve and indeed, on the whole federal government. It was a dependable governor that throttled dollar creation because paper currency could only be printed if there was gold in reserve to back it. If the redeemability was removed, the unyielding, externally imposed discipline would go with it. 

This point was well understood. After redeemability was ended by Franklin Roosevelt moments after assuming office in 1933, many thoughtful observers began to warn that an important safeguard on the quality of the currency and a necessary restraint on the growth of government had been lost. These warnings continued for years, particularly by those knowledgeable about gold. 

As but one example, a four-term Congressman from Omaha named Howard Buffett, who was the father of Wall Street legend Warren Buffett, in a speech on May 4, 1948 said: “Our finances will never be brought into order until Congress is compelled to do so. Making our money redeemable in gold will create this compulsion.” 

Rep. Buffett’s admonition unfortunately fell on deaf ears. What’s worse, the financial mess he spoke about pales in comparison to the disarray of the federal government’s present finances. Because there has been no discipline for decades on the creation of dollars, too many dollars have been created. If the federal government wants to spend money, it is the primary responsibility of the Federal Reserve to make sure that politicians get all the dollars they want, regardless of the impact on the federal government’s overleveraged and rapidly deteriorating balance sheet. 

Despite its pretentious claims and pompous rhetoric, the Federal Reserve does not exist to fight inflation or encourage full employment or regulate banks.  It has achieved none of these aims, which is obvious from the fact that inflation, unemployment and bank failures are recurring, if not perennial problems.  

Regardless why it was created or the initial intentions established for it, in a fiat currency world the Federal Reserve exists for only one reason – to create all the dollars the federal government wants to spend. 

The Federal Reserve does this job very well. Even as we have seen federal deficits soar into the stratosphere over the past couple of years, the federal government always has as many dollars as it wants to spend.  However, these deficits cannot last forever, which is one of the key points made in a speech last week<>http://www.federalreserve.gov/newsevents/speech/bernanke20091019a.htm<> by Federal Reserve chairman Ben Bernanke. 

He threw down the gauntlet – again, because he has made this point before. Namely, politicians cannot continue spending at present rates. “The United States must increase its national saving rate. Although we should deploy, as best we can, tools to increase private saving, the most effective way to accomplish this goal is by establishing a sustainable fiscal trajectory, anchored by a clear commitment to substantially reduce federal deficits over time.” 

Like much of the rhetoric from policymakers, it sounds good. But it never translates into meaningful action. Maybe Mr. Bernanke is trying to distance himself from the dollar’s ongoing problems and put the blame on Congress and the President by highlighting that they are failing to maintain a “sustainable fiscal” policy. But like Alan Greenspan who is now trying to re-write history and put the blame for the housing bubble on anyone but himself, the reality is that Mr. Bernanke cannot totally blame politicians. 

He could do what Paul Volcker did, and raise dollar interest rates to send a message to the market that he will not allow the dollar to be destroyed.  But that is not likely to happen. There has been no indication that Mr. Bernanke will raise interest rates anytime soon, much less raise them to the level needed to convince the market that he intends to preserve the purchasing power of the dollar. 

Sadly, the dollar is no longer as good as gold. It is now only as good as the empty rhetoric of politicians and central bankers.

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James Turk is the Founder & Chairman of GoldMoney.com <http://goldmoney.com/>.  He is the co-author of The Collapse of the Dollar <www.dollarcollapse.com> and publisher of the Free Gold Money Report<>http://www.fgmr.com<>.

Copyright © 2009 by James Turk.  All rights reserved.

Dollar is not money

Bob sent me an article that had him thinking. Since he is sort of a banker and conservative by profession and nature, I looked at the article carefully. Perhaps, Livingston states the obvious, but perspective is everything. When looking at "money" think "volume."

President James A. Garfield said, "Whoever controls the volume of money in any country is absolute master of all industry and commerce."

Sure, we have a fiat currency, but what does that really mean?

The Myth of Taxpayers’ Money

October 12, 2009 by Bob Livingston

Taxpayers’ money is the definition of an overworked term. We could teach Goebels a thing or two!

When ALL the writers refer to "taxpayers’ money," they think that our taxes are "taxpayers’ money" and they are trying to tell the public that the government "wastes taxpayers’ money" and they actually believe this nonsense.

Now to set this illusion in concrete, the Internal Revenue Service (IRS) does reduce the numbers (money) in our checking accounts when we authorize them to do so via our 1040 tax return.

But no one ever asks where the numbers (money) go when deleted from our checking accounts. These numbers (money) do not go to Washington as taxes to pay anything. They go into the cyberspace of the IRS computers.

All this is Orwellian doublethink.

Facts:  The dollar is a myth. Oh, I know that we have green strips of paper in our pockets that we believe are dollars. The numbers on the green strips of paper are our "dollars." So what we "spend" every day are the numbers or the symbols on our green strips of paper.

Now if the government "wastes our tax dollars," what do they waste? Do they waste the numbers or computer symbols called dollars? How is it possible in the realm of reality to spend or waste numbers that can be created to infinity? What absurd nonsense!

Please, we should memorize this! Anything that can be created to infinity cannot be "spent” or “wasted." To spend or to waste implies to exhaust or use up. These money symbols (numbers) that we think of every day as money have no substance in reality. We as individuals do "spend" numbers, but ours are limited. Therefore, we can use the term spend or debt as it relates to anything except the Federal Government and their symbiotic partners, the banks.

So what does the IRS do? They reduce our consumption by reducing the numbers in our checking accounts. It is a system of economic regulation to conceal the fraud that modern money is numbers created without limit by government/bankers.

What else does this Orwellian system do? It transfers wealth to the "money creators." How does a government make war on its own people? We said that modern money is numbers or symbols which can be created to infinity. Hold on to your hat! Theft through fiat occurs when the VOLUME of numbers (money) exceeds the production of goods and services. This is called inflation. So, the government makes war on its own people by increasing the volume of money.

Individuals, cities, counties and states cannot increase their money supply (more numbers) by creating more. Only the Federal Government in symbiotic relationship with the banks has this monopolistic power. When this monopoly creates inflation it reduces the exchange value of all "dollars" in savings and circulation. Where does this reduction in savings and dollar assets go? It goes to the money creators, the people who increased the volume of money (numbers) into the system. Nobody controls the VOLUME of money except the money creators.

How do they get away with this? The answer is the ignorance of the people. Through the manipulation of economic classes and racial conflict and the military industrial complex, the money creators generate a constant clamor for higher volumes of money, small percentages of which are dispensed back to the poorer classes. The poor people get a crumb and they are happy.

Social Security and Medicare are created with excess money (numbers) volume. They are Ponzi schemes.

What makes this system work even for a day? It’s a confidence system. Most people still believe that it is honest and that it will last even though their store of value and the purchasing power of their "money" decrease constantly.

The other reason that the system of fiat works for periods of time is that the VOLUME of money is regulated through taxation. Estate taxes, income taxes and all other taxes reduce the volume of money which extends the system. When the volume of money is expanded, there must be a serious way to keep reducing the volume. Taxes and wars extinguish the excess volume of money. Do we have taxes? Do we have perpetual wars? Wars don’t cost money; they extinguish surplus volumes of money. Wars would not be possible without fiat.

Modern money is witchcraft, but it can be understood in terms of volume whether it is gold or fiat.

President James A. Garfield said, "Whoever controls the volume of money in any country is absolute master of all industry and commerce."

Thomas Paine and fiat money

Some more common sense from Thomas Paine,  below.  I like Tom's smile; not typical of the somber style of the era. 

I think we are in the frog experiment where the water slowly increases in temperature resulting in the death of the frog because it kept adjusting to the heat. If we jumped into the current dollar suddenly, we would understand the whimsical nature of our "money."

Our ancestors knew exactly what they were talking about but since, oh, the 1920s, then 1972, we have come to believe the dollar bill actually had a value. It is just paper, no, paper and digits, nothing more.

Thomas Paine's "Dissertations on Government."

When an assembly undertakes to issue paper as money, the whole system of safety and certainty is overturned, and property set afloat. Paper notes given and taken between individuals as a promise of payment is one thing, but paper issued by an assembly as money is another thing. It is like putting an apparition in the place of a man; it vanishes with looking at it, and nothing remains but the air.

I picked this up from a discussion by Jake Towne of the curiously long-lived silver backwardization.

I wanted to get a feel for what is going on in the gold and silver bug side. Specifically, I figured that investing in gold mines does not link one to the movement in gold, anymore, and one should look at, for example, GLD or CEF as inflation hedges. Buying real gold doesn't make sense for me as it would be so little and I would lose it.

The above referenced article repeats the notion that the fiat money we use is dead, he was referring specifically to the pound, only few know it yet, and it will take time for people to realize they should have been in gold or silver. He quote Anatal Feteke, whom I discussed a few months ago. He linked to a pdf in the article, toward the end, if you want to keep up. I will get to it.

I did buy 5,000 shares of Brigadier Gold, however. That was so I could have a beer with Ken Wolfson, the CFO, and talk about our mining business. I envision chats like at the end of Boston Legal. Oh, I got shares for .0176 cents, so don't be impressed. My biggest concern was making sure the broker's fee was less than the purchase.

In fact, I made the market for two days. I drove the price down 12% all by myself. (Sorry Ken) I can tell because no other trades seem to have hit the markets. This is blatant specultation based upon fair news. Also, Ken would be incapable of working with crooks. So, its an arrow into the night, a pleasant night.

The metals and monetary areas of thought require time and a clear head, so most of us can't sit around and work through it. So...

Bottom line, as he points out, is get your family protected during the calm. This is the peanut butter and gold speech, I frequently give.

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On the other hand, Mr. Obama reports, with a happy face, from Europe that everyone just worked so hard during their 11 minute meeting. He also noted, indirectly, that GM's bankruptcy would be a clean affair and screw Chrysler. (I thought we invested in these companies) Directly, he promises to save the companies. I guess the government could buy a million cars and give them to Acorn.

Five banks gave back their TARP money today. Signature Bank's president said it all: When the program began, under Bush, it was designed for banks to busy themselves making loans and buy weak banks. He didn't want the money, but the FDIC is always honored and the bank took some 120 million.

Then, everything changed, guess what else changed, and now having TARP money means you are a troubled financial institution and the the government is delivering instructions and regulations. 

He didn't sign on for that, so he is giving the money back. Of note, Signature's stock took a dive after taking the money. People assumed it was a troubled company, one of those evil companies being slammed by Washington. The stock was up on the recent news. Do you get the picture, yet?

Other news, Hank Greenberg, the founder of AIG pushed out two years ago by Spitzer's threats, said in an interview the government screwed up the company. Surprise.

He didn't care much for his successors.  We can thank Spitzer for the AIG chaos, the poor millionaire, dilettante victim.

Backwardization May Be Here

A perhaps rough report, but one I had to get out:

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Well, the rug may have been pulled out from all of us. Even the evil bad guys. For a depressing, must-read click on the title, I hope, as I am in another browser and don't like what I am seeing. 

I sent you Warren's take. Pretty sensible, if the game stays operative. However, if you missed it, Buffet and Gates were huge buyers of gold three years ago, or so. Sometimes, you do as they do, not as they say, even if they are serious. Gold is an insurance policy.

I have come to this point in my late-term studies as I have been looking at alternative currencies, which do exist.  I got side-lined at e-gold, temporarily shut down to register with the states as a money store, by articles expressing noting but panic.  No happy feelings about the coming gold boom, as they see it. This was an interesting mood. No smugness, no up-beat "we told you so" by gold bugs, only the gnashing of teeth. This was sobering.

The article presents another view from this part of the world, the gold standard crowd, few will listen to. Fekete has waived a red flag, so to speak, to anyone paying attention, that gold went into "backwardization."  If it stays there, there is no longer any game in town. There may be no town. He is more than serious. He calls it a 10 on the Richter scale. Please, take the time to digest what he is saying. 

I haven't done any research on the guy, as my goal in this blog is to look at what people say, not who they are or what party they belong to. Put aside researching the messenger for a minute, as that seems a popular way to deal with bad news, and consider his research and expertise. Few of us really understand currency.  I had only heard of backwardization one time and it still makes my head hurt. Examine his words.  For my part, I see clear thinking, not a gold nut.

What backwardization means is there is no premium for future metal because no one will take paper. Think of trying to buy peanut butter with Monopoly money. 

Indeed, if those with gold could sell it, now, and jcould buy a thirty day futures contract for much less, locking in an instant, secure profit, while getting the gold back. Right?

They don't think so because they don't trust the paper.  Don't gloss over this. They are walking away from seemingly riskless profit!  The only explanation is they see massive risk. These are the pros and they have picked up their marbles and have gone home.

COMEX may be ground zero. They do not want to be holding a COMEX promise to deliver gold. OK, let us be clear - they do not trust the metals market is solvent. They do not believe in the promises behind the market, that gold can be delivered. 

Never in history (well 1972 when this stuf started) has there been a backwardization trend or even a hiccup of more than a few hours as contracts came due at the triple witching hour. Sort of an arbitrage opportunity that is rapidly filled. 

Goldman Sacks is the big player here. It is an owner of the Fed.  It is alleged that they are keeping gold's price artificially down, with all manner of tricks, because if (when?) it takes off the fiat currency will be seen for what it is - little. The currency, Sacks, and the rest of the game will collapse. GAME OVER.  So, making believe gold is cheap, may get us over the quiet panic, they hope. Banks won't admit it, but they were dumping gold to hold down gold prices in order to save the system.  I would do the same, if I were there.

If they are, indeed, depressing the market, this is a huge red flag. It is a siren and flashing lights, as well. The metals market is not acting naturally. This begs inspection. The dollar is not collapsing, so gas is coming down, which would be great, if it were not an artificial blip. The average person knows we are in the handbasket, so why is the currency holding up?  You are right, it does not make sense.  It smells, actually, of holding back the dike while you move your family elsewhere. 

All the other crises, the real estate bubble, the derivatives, etc., vanished car financing, are part of a mindset built upon happy money.  Like all pyramid scams, the happy money scam may be at an end. Those out at the end, win. In the end, its the happy money that could get us all. 

The author sees a spiraling inflation, perhaps after a deflation. He says we finally have come to understand, too late, that fiat currency has no value. He says  it is dead, but I guess we have to deal with the rotting. If he is correct, trade comes to an end, as we know it. 

Of note, he points out that today every country is off the gold standard.  That is, every country is about to have the rugged pulled hard. 

If he is correct, the sucking sound is very soon.  Months, maybe.  So, you will know if things aren't so bad next July 4th. 

The answer to the crises is get metals and peanut butter. Do whatever you can to maximize paper money, now, before it becomes much less valuable, the point being when the music stops, you don't want to be holding paper.  The trick is, then, to peg when there will be inflation, when deflation.  This is good advice, even if you are not a gold bug.

I mentioned the government is planning on a deflation. The author stated that, as well, but said a rapid inflation will follow. This is a game of timing, for those who know what is going on. If there is a deflation, and gold has vanished, the prices taking off, prepare for inflation. Liquidate the paper and buy real stuff while people think it is good to hold. There are many paths to follow, but the one to avoid is holding paper money, paper debt. 

Be aware, though, those holding your mortgage and loans, will want their contract paid in dollars as agreed. This is a big timing problem. In a time of rapid inflation, then you want the dollars around to pay off the loans, even though the dollar is devalued.  The Congress has been doing this for years, so why not you? Its a tough timing call:  get peanut butter, get some gold/silver that can be converted into more cash later to pay off loans with cheap cash.  

Don't bank on the old inflation, happy money game. You may not be able to sell your home, at all, let alone for what you bought it. If you like your house, dig in and prepare to keep it. Don't bank on a job.

Realize gold (and gas) isn't really moving around in price so much, these days.  That is an illusion.  You are used to a stable dollar where price changes mean something happened in the market. Today, oil, for example, is not rising or crashing in price - the dollar is.  Gas is gas, how much the seller thinks it is worth in dollars is what matters.

The allegation is the dollar is being propted up as a last stand.  For now, other countries are with us as we are the "stable" one of the crowd.

If inflation takes hold, then all prices will sky rocket. So, you want gas in tanks and silver in the basement before then, after prices lift off, convert the items to paper money, stocks, and pay off debts in cheap paper money.

Of interest, the author says if backwardization occurs in any commodity other than gold, that will cause a rush of mining activity to maximize profit.  The shortage is the key to a growth spurt. Gold is the one thing that doesn't follow this. Gold is what you keep in chaos, not what you sell. There is not a gold sparcity, as I thought, there is a refusal to part with it.

Have you seen the signs on the side of the road, written in crude paint:  WE BUY GOLD.  ANY TYPE?  There is a reason. 

Common experience tells us this is a crock. However, it was not crock in the 1930s that the system went boom. Gee, it was housing financing and bank manipulation that caused that.  How familiar.  I hear a collapse is every 80 years, right on target. We have not eliminated human nature and great grandchildren forget the experience of their elders. People care about iPods, not financial stability. Indeed, we have become the ultimate bubble.

Forewarned is forearmed.  Like I say, the only downside to working on this logic is you paid some bills, have many cans of beans, and lightened up on costly Christmas gifts. If you take this very seriously, and the collapse comes, then you may be the richest people in town. 

Sorry if this prose is a bit rough.  Just wanted to get it out.  If there is any confusion, I am sure I will hear about it.  Time for a beer