More than a few articles about money, so ‘money idea’ is in the air.
Throughout its history, the United States has avoided hyperinflation by continually shifting between a fiat currency and a gold standard. As we have already discussed, from 1785 to 1861 the dollar was backed by gold after the disastrous experiment with ‘Continentals’ ended in 1785 (in fact, it was very soon after this episode that Thomas Jefferson wrote his famous ‘standing armies’ letter to John Taylor):“I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a money aristocracy that has set the government at defiance. This issuing power should be taken from the banks and restored to the people to whom it properly belongs. If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered. I hope we shall crush in its birth the aristocracy of the moneyed corporations which already dare to challenge our Government to a trial of strength and bid defiance to the laws of
our country”
– Thomas Jefferson, Letter to John Taylor, May 28, 1816The fiat Greenback lasted 17 years before a return to a gold standard in 1880 brought stability and virtually no inflation until the outbreak of WWI necessitated a fiat currency again in order to pay for the cost of the conflict.
1926 saw the reintroduction of a gold standard once more and this lasted until The Great Depression fostered a run on gold that forced the dollar back to its fiat ways and culminated in FDR’s now infamous Executive Order 6102 and the confiscation of gold. This version of a fiat dollar reigned supreme – for 14 years, until the huge economic dislocations that became evident in the lead-up to (and in many ways resulted in) WWII.
In 1944 the Bretton Woods Accord was signed and this time, the gold standard thrived for 26 years (although during that time, the first Federal Reserve Notes with no promise to pay in ‘lawful money’ quietly appeared, the $1 silver certificate disappeared for good and all coins save the Kennedy half-dollar saw their silver content wiped out – the Kennedy half-dollar being reduced to 40% on the orders of President Lyndon Johnson who went one step further in 1968 when he proclaimed that all Federal Reserve Silver Certificates were merely fiat legal tender
and could not really be redeemed in silver).Then came Tricky Dicky.
Five months after Nixon closed the gold convertibility window to (cough) “protect the position of the American dollar as a pillar of monetary stability around the world” (cough) from those (cough) ‘evil speculators’ (cough), a new and ingenious plan was hatched as the Smithsonian Agreement was passed, pegging the world’s fiat currencies to ….. ANOTHER fiat currency in the shape of – you guessed it – the dollar.
Problem solved.
A mere two years later though, in 1973, as it became clear that a fiat peg to a fiat currency was just not going to work in the longer term, the signing of the Basel Accord ushered in the current status quo.
So now we’re up to date, “what the hell is the point of this seemingly random trip through the history of the dollar?” I hear you asking.
Well, I’ll tell you.
Imagine how the actions of both the Fed and the US government would have been altered these past few years had they been hostage to an anchored currency. Bailouts, stimuli, moneyprinting, mid-game rule changes – all of them would have been held up to the scrutiny of gold – and all of them would have been shown to be unworkable. The ECB’s situation would have been equally untenable and the string of drastic measures adopted in Europe to try and stop the bleeding (including last night’s mind-numbing change of stance on Portuguese collateral rules) would, too, have been shown up for what they are – an almost pathological refusal to accept hard reality in a fiat world.
An interesting article, worth the read. I don’t agree with all of it. ‘Mr. Hmmm’ is all about money and finance, he skips the energy/oil/petroleum parts in favor of the metal. WTF? Why do the Metal Men get all the economic respect and not the oil people?
All the gold could disappear tomorrow and nobody would miss it. Vanish the oil and we are well and truly screwed without any hope of redemption. At least a billion people would die within one month! Billions more would shortly follow. In a hundred years the world would be like it was 20,000 years ago: forests and meadows punctuated with bison, coyotes and ruins. There MIGHT be a few little agricultural settlements here and there … then again, might not!
Energy is economics. what capitalism and finance are really all about, shifting the costs of energy derived ‘wealth’ surpluses onto others such as liberals, negroes, unemployed people and Japanese schoolchildren.
The Swiss Parliament is expected later this year to discuss the creation of a gold franc — a parallel currency to the official Swiss franc, with the fringe initiative likely triggering a broader debate about the role of the precious metal in the Alpine nation.The initiative is part of “Healthy Currency,” a campaign sponsored by politicians from the right-wing Swiss People’s Party (SVP) — the country’s biggest — that is seeking to capitalize on popular fears about global financial turmoil and inflation to reverse the government’s current policy on gold.
“I can imagine that this will spark some sort of debate about gold and there may be some pressure to accept the parallel currency,” said Dr. Gebhard Kirchgaessner, an economics professor at St. Gallen University. “But it won’t have any real effect on the economy. It seems incredible to imagine that there are people out there willing to buy millions of these things.”
Blah, blah-blah … then you get to this part:
Even if popularized, the gold coins are unlikely to be in use for commercial reasons as the volatility of gold prices make this unpractical.
Market Watch calls the idea ‘right wing’. Maybe it is, maybe not. The fun part is the ‘volatility of what, again’ question? Lately, the volatility of the paper franc — not gold — has been a painful issue for the Swiss banks who have franc- denominated loans across the length and breadth of Europe. As Keynes implied, ‘if you owe a bank a thousand dollars you have a problem, if you owe a billion, the bank has the problem’. The grinding EU crisis sends bank depositors with euros hot in hand to buy francs and to stuff already- bulging Swiss bank accounts. This capital flight causes the value of the desirable franc to skyrocket even as it empties stricken Irish, Portuguese and Greek banks of deposits. Two consequences: the relentless march of non-Swiss banks toward insolvency and increasing difficulty in repaying franc- denominated loans that have been issued in the amount of billions across Eastern Europe and elsewhere. Greater amounts of non- franc currencies such as euros or the Hungarian forint have to be spent to buy the Swiss francs on currency exchanges.
Question: what happens to Swiss banks when the myriads default on their mortgages due- and- payable in ‘not to be had at any price’ francs? Answer: Swiss banks fail like all the others!
Read about this either by subscribing the Stratfor or reading on TTMYGH.
A bank failure is a bank failure is a bank failure, eh Gertrude Stein/Sheila Bair?
A gold currency in Switzerland could allow the Swiss to leverage their paper francs in interesting ways, shifting liabilities to the Gold People out of paper franc risk. How much would this cost? Ask me rather than a ‘good guy’ banker! Liability holders would be forced to choose between a powerful fetish object and rational discounts of interest. How much is gold really worth in paper debt? $1,500 per ounce? How about $15,000 per ounce?
“The world is coming to an end tomorrow, buddy! Better think fast! That dude over there is ready to trade a billion in euro debt for an ounce of gold! How about a half- billion?”
With a bit of imagination a gold franc would take a lot of pressure off eastern European borrowers and shift it — the banks’ liability priced in debt — to gold hoarders. Roosevelt could have done the same thing in 1933 and 1934 by creating a auction of gold ownership rights rather than simply mandating (the easy) fixed swap for paper dollars. As it was, Roosevelt never gave anyone a chance to set a market (de)value of the US paper dollar — and make a massive profit for the US in the process.
Roosevelt chose to default the conventional way — devaluing the paper dollar by 40%. What happened to 400%? How much would the country have gained if the paper buck had been devalued 40,000%? It would not have cost the US anything real because the US at the time was the world’s energy producer, an exporter of both oil and coal. Energy is what you have to pay attention to, not the money, which tends to fly up its own precious ass. What is US debt really worth today? $14 trillion? Gimme a break. It’s not worth anything outside of its ‘ad value’: we acknowledge the debt’s existence so we can ‘borrow’ more crude oil from mindbogglingly stupid- idiot producers who cannot think of any use for it besides trade it to equally stupid Americans to burn up for nothing!
Give Roosevelt the bene of the doubt, he had no time and the need was to bail out the US (and English) banking systems. Going off gold saved the US economy which was at the verge of collapse. ‘Easy’ Roosevelt left billion$ on the table in the process that would have come straight out of the pockets of same bankers he bailed out, amounts that would have made the default less onerous to The Gold People who are still resentful to this day.
The whole point of the deflation versus hyperinflation debate is about the denouement, the final outcome of this 100-year dollar experiment. It is about the ultimate end, and the debate has been going on ever since the 70s when the dollar was separated from gold and it became clear that there would be an end. The debate is about determining the best stance someone should take who has plenty of net worth. And I do mean PLENTY. People of modest net worth, like me, can of course participate in the debate. But then it can become confusing at times when we think about shortages or supply disruptions of necessities like food. Of course you need to look out for life’s necessities first and foremost. But beyond that, there is real value to be gained by truly understanding this debate.I want to apologize in advance for the length of this post, but I have to be thorough if I want to have any chance of winning Rick Ackerman over to the hyperinflation/Freegold side. And I think there is a chance. While deflation and inflation are practically polar opposites, deflation and hyperinflation look almost identical on the surface, with the main difference being the wheelbarrows of worthless cash. As I wrote in 2009 in The Waterfall Effect:
There is a quote I like that comes from Le Metropole Cafe. It goes, “we will have deflation in everything we own, and inflation in everything we use”. This is partly true. It is true during the run up to the rubber band snapping. It is true until we hit the waterfall. At that point I have my own version of the quote. “We will have hyperDEflation in everything measured against real money, GOLD, and we will have hyperINflation in everything measured against paper dollars.”
And so it goes for tens- of thousands of more words, because FOFOA loves the English language best of all the languages. FOFOA clearly believes in the ability of language to influence anything other than the electrons which would otherwise flow in the direction of Lady Gaga. Don’t misinterpret: I like FOFOA, unlike a lot of Gold People, he talks about energy, even if I don’t always agree.
FOFOA is eloquently immersed within the ongoing pseudo- scientific Cult of the Gold People or ‘Marketing by’ the gold people. This sounds terribly judgmental and harsh but it is not meant to be. Concepts have internal dynamics without which they would not hold together. Gold has always had a certain cultishness that surrounds it and not other materials. There has never been a thallium or palladium ‘rush’. California was not made a state because it had large deposits of easily mined borax. The natives of western South America did not make religious icons and fetishes out of zinc. Gold fits easily into the diminished imaginations of the miserly. Without fetishists and misers, gold is not particularly useful. You can tint glass with it and make low- resistance electrical connections that do not oxidize. It may be useful for fishing sinkers or ‘rings of power’ but I haven’t tried.
All the ideas about gold and gold/money exist outside of any science or reason but thrive within art. No professional economist takes the Gold Peoples’ hyperinflationary drivel seriously, even when hyperinflation is taking place under the Gold Peoples’ noses in places like China and Brazil. Both countries. have large stocks of gold and where trade in gold is open and encouraged. The reason hyperinflation can exist in China or Brazil without them going instantly bankrupt due to energy costs is because both countries produce prodigious amounts of energy on their own accounts. When these countries’ energy consumption renders domestic production marginal the ongoing hyperinflation will ‘wind up’ to infinity and consumption will collapse.
That is … if their bubble economies don’t deflate first.
At the ‘wind up’ inflection point, both China and Brazil will simply cease to exist as industrial enterprises. They will have lost the means to obtain imported fuel. Should they reach this point with some form of social coherence, a billion and more Chinese will find themselves in frantic and pointless desperation as they realize the totality of their ruin — a centuries- proven means to survive in the form of a petroleum free civilization swept aside for nothing!
China’s return for its sacrifice: fifteen minutes of what passes for industrialized ‘fame’ in waste- based ‘Warhol Land’ imported in its entirety from the United States of America.
The inflation-deflation argument isn’t vital: its outcomes are dependent on what sort of governance the major players in human affairs choose and — frankly — how lucky we are. An impenetrable difficulty is that we humans have cultivated complacency in our garden of prosperity as one being the necessary nutrient for the other.
Because I am an artist rather than a scientist I am drawn to the art possibilities of the gold cult and the effectiveness of the Gold People to make their points in defiance of anything resembling real scientific analysis. The oil and climate people need to learn valuable lesson(s) from the Gold People because the Oil/Climate People basically stink at communicating.
The Gold People succeed in getting what is essentially a resource message across where the Peak Oil and Climate People fail. The oil peak/climate promoters tend to be the experts’ experts: scientists and highly regarded academics or ‘credible’ establishment figures. Matt Simmons was an oil company executive and ran an investment bank that financed petroleum projects, James Hansen is a top NASA scientist. Take the time to examine the curriculum vitae of people so engaged both on the peak energy and climate side and you see an impressive roster of PhD’s, engineers, climate and atmospheric scientists, university professors, military officers, computer modelers, oil field geologists, fund managers, journalists and government analysts.
Outside their respective ‘Amen Circles’, nobody pays attention to them. Climate science is derided as fraud by Big Business by means of the ‘When did you stop beating your dog?’ tactic. This is done without the skeptics presenting any shred of evidence. Where are the gold skeptics? The Establishment promotes soothing energy company viewpoints. The passing of Matt Simmons last year has left Peak Oil without a public voice. The Climate- Peak Oil message belongs now to Joe Isuzu.
Brilliant Nicole Foss has an examination of the natural gas business investment stampede. Folks want to hear the soothing lies courtesy of Michael Lynch rather than listen to Art Berman tell the truth about the gas frakking scam that is taking place under everyone’s nose.
If you look at the Gold People and there are few bona- fide experts of any kind. Perhaps it is the absence- rather than possession of expertise that comforts in this age of job- robbing, confidence undermining technology run amok. The background of the gold promoter emerges from within the darkest shadows of finance. The gold pitchmen typically pimp currency failure: their actions are fairly straightforward sell- side currency speculations, that is they buy gold with dollars and use marketing to reset the value of their holdings in dollars or some other currency. Gold is ‘currency’ the way US debt is advertising for more US debt. Because- or in spite of self- reinforcing cynicism, the communication of the Gold People is more effective than that of the peak- and climate folks. This is unsettling as the course of gold ‘ownership’ has zero relevance to a climate- or energy constrained economy.
What the climate-oil folks fail to do is make a convincing pocketbook connection between a souring oil use ‘mechanism’ and personal financial gain. Gold People call into question the value calculus of money posing a ‘Gold … or (what) else?’ question. Questioning money as means to carry wealth across a number of scary scenarios gives lethality to the Gold Peoples’ arguments. Ours being a wealth-money worshiping culture: within it The Gold People are Isaiahs. Like the rest of modernity’s ad men they put system failure comfortably into the future dependent upon one more ‘development’ to render metal ‘useful’. Instead of Utopia, it promises a dystopic ‘opportunity’ where others cannot exist. Expertise is not necessary to be prophetic in the biblical sense, it gets in the way of the message. The oil people insist that oil shortages will take place and lucky survivors will become subsistence farmers. Gold People insist that persistent, excess currency — amplified by dastardly government- big bank conspiracies — will make gold- holders wealthy with everyone else having to become the subsistence farmers! The Gold People make an ‘outrun the bear’ hedging argument that the oil people have difficulty making because energy constraints tend to undermine hedges before they mature.
Examples of ‘busted hedges’ would be the Japanese stock- and property bubbles, the ‘dot-com’ and mortgage finance bubbles in the US, and the euro. all were hedges erected against rising energy prices, mostly done in by rising energy prices. Why would a ‘golden hedge’ fare any different from the euro- currency hedge?
The Gold People’s pitch to make Armageddon’s survivors rich carefully edits around the oil people’s message. The result is a marketing gap that Gold People are willing and eager to fill. The oil/climate dudes need to hive off the scientists and academics and connect with the The Gold People: both can cross-market each other: the peak oil seriousness is far more advanced than the hyperinflation silliness being pimped by the Gold People. Climate change is a horror show: owning gold won’t help, but a gold campaign pimping the terrors of an underwater Wall Street would give climate change a credibility all the NASA scientists in the world cannot bestow. People might buy gold and ‘sell’ the climate but cred would carry past the golden bucket-shop operators and Metal Men into the mainstream.
The climate/oil people need to start emphasizing the oil/dollar connections the way the Gold People emphasize the gold/dollar relationship. Right now, the economic establishment ignores energy. It’s absurd: the tens of millions of words expended to redefine ever more sharply the effects of money cost on this- or that part of the money- economy. All this takes place without a word written about energy or petroleum. This is a ‘Mass Fail’ on the part of the profession because economics at bottom is about two things: energy … everything else.
Without cheap and limitless energy there is no modernity. There is no modernity- centric economics, there is no ‘theory’ no Keynes, no production, no GDP, no credit, no ‘stimulus’, no value to gold or silver no goddamned thing that a 21st century American might take comfort in. The economics profession needs to shed its narrow and self- amplifying preciousness and start dealing with energy as the central thesis of its enterprise. This means the Paul Krugmans of this world have to mention the words ‘energy’ and ‘oil’ in the New York Times and elsewhere more than once a year, to devote as much thinking to energy as is devoted to rationalizing more debt onto an already debt- saturated lending space.
Or to the ‘deep thoughts’ about gold. After all, it’s just a thing: more ‘chaff’, a product of Warholism, a fetish. Take it or leave it.
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