Saturday, April 10, 2010

The Return of Real Money

“All the perplexities, confusion and distress in America arise, not from defects of the Constitution or Confederation; not from any want of honor or virtue, as much as downright ignorance of the nature of coin, credit and circulation.”
- John Adams



“You’re here because you know something. What you know you can’t explain, but you feel it. You’ve felt it your entire life, that there’s something wrong with the world. You don’t know what it is, but it’s there, like a splinter in your mind, driving you mad.”
- Morpheus in The Matrix


“You shall not steal” (Exodus 20:15)



SOMETHING’S WRONG
Since the credit crisis and subsequent bailouts of September 2008, I have been on a hunt.

I seek to dispel my own “downright ignorance” as President Adams puts it. I search out information that adds to my understanding of the current economic situation. As my knowledge grows, a picture forms and becomes more detailed in my mind. I find that I want to share what I’ve learned, so I decided to write this essay. It is a synthesis of ideas that I believe to be logically coherent. For the most part, the ideas are not my own. You may disagree with what I call logical. If you do, tell me.

Initially, I only wanted to know what actually caused the recent downturn. News reports and official government pronouncements were remarkably lacking in compelling explanations. Over time, I have come to realize that there is more to it than current events. Investors lose money for rational and understandable reasons when there is a downturn in the economy. We take for granted that the business cycle of booms and busts repeats every few years or so. The 1970s oil crises, the 1987 stock market crash, the dot-com bust of 2000, the housing bubble and associated credit crises of 2008 and most previous 20th century recessions and depressions are an integral part of a cyclical process. This process can be understood. It’s a process facilitated by the intentional actions of individuals.

What follows is mostly a description of both the current situation and a possible future. I’m not advancing a cause, endorsing a candidate, recommending investment strategies or being conservative or liberal. I recognize that I have a very particular point of view and that it sounds like a conspiracy theory. Nevertheless, this is not a theory about the behavior of conspirators; instead, it’s a description of the behavior of opportunists. I believe those behaviors are leading to a logical outcome for which few of us are prepared or even willing to admit is possible.

My hunt for more information and ultimately understanding continues, but now I want to share what I’ve learned so far: First, about the stock market, and then the rest of the economy. Stick with me. This is relevant whether you have invested in the stock market or not. The main point is that the economy does not go downhill or begin to perform poorly just because there are cycles in life. Rather, thieves actively cause the downturns, stealing from the rest of us through the manipulation of the economy to their own advantage.

CURRENT STOCK MARKET CONDITIONS
As I write this in April of 2010, for almost a year now the stock market has been trending upwards strongly in a way that indicates an economic recovery is slowly but surely going to make our economic situation better again. On the surface, this is good if you have invested in the stock market in the past especially if you didn’t sell when the crash happened in 2008. Today your stock is worth a lot more than it was immediately after the crash and that’s a good thing. If stocks are going up, companies are making a profit, they can hire more people, more people have jobs, those people buy things from other people. That’s an economic recovery.

At least, it would be if it were real. However, the current boom in the stock market is going to go bust.  The “recovery” is non-existent. The reason for this is that the Federal Reserve is actively pumping money into the economy at a torrential rate. If inflation for the last 40 years is an open fire hose, this is a tsunami. This is a new thing unlike anything the world has ever seen, a tidal wave of money.

The Fed pumps money into the system in a number of ways. One of these is through loans to investment bankers.  Every time the market goes down a little stocks become less expensive and big bank investors buy stock by taking out loans at nearly 0% interest from the Federal Reserve. The result is that the market goes back up even higher than it had been. Furthermore, the loans for the investment banks are considered to be guaranteed by the TARP bailout fund. Treasury Secretary Timothy Geithner has described the TARP fund to be a continuously existing pool like a credit account rather than a one-time government expenditure. With TARP bailouts always at the ready, these banks have completely done away with risk to their profits. Even if their investments lose, they will get back what they lost through bailouts from the TARP account. Even if they pay it back, It’s insurance for which they pay no premiums.

Small individual investors represent in aggregate a very large amount of money. Analysts have pointed out that for the most part small investors are still not investing in the stock market again because they don’t trust its strength. However, if the market continues to look strong due to the price of stocks continuing to go up, more people will begin to invest. The market will grow even more and money from small investors will flood in because they don’t want to miss the chance to recover the savings they lost in the last crash.

That’s the description of current stock market conditions.

NOW THE STOCK MARKET WARNING

Most of the recent stock market gains are based on a flimsy foundation of debt held by big investment banks at low interest rates. That is the main thing pushing stock prices higher. This debt is unstable because of the likelihood of defaults. If a domino effect of defaults occurs, it will cause another stock market collapse. 401(k) accounts and many other investment accounts that retirees, small investors, non-profits and others depend upon will be destroyed again like they were at the end of 2008.

No one will know when the next crisis starts. The market has little ups and downs all the time, so what starts as a significant downturn will be perceived as just another small dip. The market’s climb in the last year has not been built on a stable foundation, so it is guaranteed to crash again. We learned from the housing market collapse that it’s not possible to create a sustainable long-term market in housing on pyramiding multiple mortgage refinances and easy credit. Likewise, the stock market cannot be maintained by a debt-based system of easy credit either. It’s safe to say that following the collapse of the housing market, a new bubble has formed in the stock market and it’s going to pop.

THE FED
Like I said at the beginning, thieves are stealing our money through economic manipulation. Here’s how they do it.

The Federal Reserve holds a portion of the assets of big banks and small ones on its accounts as “reserves.” It holds Treasury Bonds as assets as well. It then makes loans to banks or the government based on these reserves. If this already sounds unsettlingly circular, that’s because it is.

A stock market crash starts with corporations going into debt using loans that are made to them at low interest rates. The interest rates are kept intentionally low by the Fed. These corporate investments are unsustainable, just like the housing market was unsustainable. Eventually, a company or a number of companies fail to meet profit projections. Then they find it difficult to refinance old debt causing them to default. The value of a company or many companies is seen to be truthfully illusory. When a large number of investors see the truth, they sell their stock and panic selling follows creating the crash.

After the crash, when stock value has plunged and the small investors sell in order to salvage some value in their investments, the big investors buy. The stock market is thereby used by the Wall Street investment bankers in concert with nearly unlimited loans from the Federal Reserve to concentrate wealth — the stock represents real wealth of actual corporations - into the hands of a few that was previously held among many smaller investors.

The cycle repeats.

Corporate investors go into debt. They can’t pay it back because the economy isn’t as strong as they thought - the customers just aren’t there. Then once small investors finally get in on the act again, defaults cause another crash; small investors sell their stock at a loss while more stock concentrates in the hands of the bankers.

The cyclical boom and bust process is facilitated by the Federal Reserve through an endless flow of money at nearly zero percent interest from the Fed to big investment banks. If preferred banks make a mistake and almost default, they are bailed out using government funds. Smaller investors buy stock at one price then sell it at a much lower price and in the process transfer their wealth in stock to big investors. This is a massive wealth transfer from investors both large and small to the rich investment bankers using the Federal Reserve. It’s intentional and, therefore, effectively theft.

THE CURRENT CONDITION OF THE DOLLAR

If you don’t invest in the stock market, you may feel that you have nothing to lose. However, if you use money, regardless of your wealth or nationality, you are part of another process that endangers your economic future.

When workers work, they aren’t paid for that work with all the items they want and need to live. They are paid with money. Once you have some money, you are only halfway through a transaction from the work you’ve done to having something tangible or valuable that’s usable. The dollars we’re paid for working facilitate the exchange between our labor and something of value. The Federal Reserve distributes the dollars and guarantees that they will be good for exchange. However, the value of each dollar goes down as more are created through massive loans and bailouts for banks and industry. In addition, more and more dollars are created in the Federal Reserve’s accounts and then the new money is used to refinance the federal government debt and purchase bank bonds. This often called “printing money” but, of course, they don’t bother to actually print the money; It’s created electronically in a Federal Reserve computer. All this dollar creation is called “monetary inflation” and it has been extreme since September of 2008.

Monetary inflation reduces the value of each dollar by making individual dollars more common. The dollar is made less valuable through inflation of the money supply. After the money circulates within the economy, the reduced value of each dollar shows up as increasing prices, called “price inflation.” The first entrance into the economy of new dollars from Federal Reserve loans allows the holder of those dollars, corporate investors, government agencies and big banks and their stockholders and high-paid executives, to enjoy the current prices in every item they purchase. Eventually those prices go up because the items become scarcer.

The more money a person has, the more they can buy as long as prices are low. Vendors in the market (retail, wholesale or primary producers) respond after the monetary inflation has already occurred by increasing the price of the remaining goods in their inventory. Those of us who don’t have the opportunity to spend new dollars first will pay more for everything and thereby deplete our available money faster. This is a type of stealthy wealth transfer that benefits the government before it hurts the citizens.

Individuals with authority over government monetary policy choose to create more and more dollars. This is a purposeful process of wealth transfer that allows you to keep your actual number of dollars. It’s sometimes called the “inflation tax.” You become increasingly less able to buy the same things with the same number of dollars because everything is always getting more expensive. If the monetary inflation is extreme, the future price inflation will also be extreme. As prices go up, you will burn through the money you have saved or the money you get in your paycheck faster and faster.

NOW THE DOLLAR WARNING

The most important priority at this point is to preserve wealth. The way to do this is to use the dollars you have to purchase something else that has intrinsic value and won’t continue to be devalued the way dollars are. Next, you hold onto whatever has intrinsic value, use it in trade or use it in some other creative way. For instance, instead of buying a physical object, like a house, you could pay for an education.

In addition, you should use the dollars to purchase something right now rather than later. Holding dollars until you need them for some unforeseen emergency or planned future purchase is smart in a stable economy, but it is no longer advisable in this economy. The reason for this is obvious: Dollars no longer preserve wealth. Therefore, no contracts, promissory notes, checking accounts, savings accounts, stocks, mutual funds, retirement accounts or any type of account denominated in U.S. dollars is a reliable way to preserve wealth. Every type of account that you can imagine that will provide money to you in dollars or that you use to save dollars is being devalued at an increasingly extreme rate by monetary inflation. This devaluation rate is considerably greater than the interest rate your money earns in an investment account. As long as the Fed makes massive loans and bailouts and the government uses the Fed to fund more government debt, the dollar is increasingly debased. You can no longer preserve wealth with dollars. Do something with your dollars and do it as you receive them. They represent wealth that is going to crash when extreme price inflation kicks in.

THE TRANSITION

Over the last year, I’ve heard the term “currency crisis” used to describe what happens when extreme price inflation kicks in. This phrase describes a crisis in the life of each individual and the nation resulting from the fact that dollars no longer have the value they previously had. Paychecks no longer pay the bills and your emergency fund is eroded by buying groceries. During a currency crisis, Social Security checks and retirement income from investments will no longer purchase as much as that same income did in previous months.

A crisis can’t last forever. We look for ways to establish dependable and secure lifestyles. During the transition, the dollar will be worth much less than it is now. Therefore, the transition will be characterized by individuals making choices about how they will respond to the currency crisis. These choices will primarily be based on a need to establish a sustainable source of exchangeable goods. We all need to obtain that which promotes health, comfort, safety and provides necessities like food, shelter and clean water. I don’t want to overdramatize the survival aspect because I don’t believe that a breakdown of the entire social order will characterize the transition period.

These “choices based on a need to establish a sustainable source of exchangeable goods” that I mentioned above are the exact same choices we make every day during times that are not characterized by a period of crisis. In other words, when we look for a job, or don’t quit one, start a business or develop new customers, pay bills before buying toys, grow our own food, buy food that is less expensive rather than eating out at restaurants or sell something to make money; when we do all these things, we are making choices that maintain our source of exchangeable goods. In the current period in the U.S, the “exchangeable goods” are U.S. dollars. During the currency crisis, however, we will need something different and we will find it. At first it could be crops you’ve grown or firewood you’ve cut or large amounts of massively devalued dollars you saved. Before long, however, people will run out of dollars and grow tired of barter. Gradually they will come to trust some form of currency for use in exchange.

It’s possible that since there are many old 90% silver U.S. coins out there, and because they are relatively rare, that silver will become a trusted currency during the transition. It’s also possible that the transition will be very short and silver coins won’t be used.

The transition will affect governments as well as individuals. Every nation in the world has a central bank that provides currency for that nation. Even the European Union follows this pattern as a collective of nations. Currency issued by a central bank that is not a precious metal is called “fiat currency”. “Fiat” means “deemed to be true by law.” Fiat currency is paper money, money that can be printed are created in a computer without anything backing it in the real world. The law says it is money and so it is. It includes coins made from base metals like copper or zinc rather than precious metals like gold and silver.

For governments, the beginning of the transition period will be distinguished by the realization that the U.S. dollar is essentially worthless. It will be worthless to state and local governments as well as the federal government. In addition, it will be worthless to foreign central banks that hold dollars as a reserve currency — and they all do. It’s at this point that the dollar will lose its status as the official world reserve currency.

The end of the transition period will be signaled by a growing trust in a restored dollar. It may actually be different with a different design; it may not be a U.S. dollar at all. Nevertheless, trust will gradually increase in fiat currency circulating within the U.S. whether it’s the old dollar, a new dollar or something else entirely. For convenience, I’m going to refer to it as “the dollar.”

Due to political pressure from the populace and a will to survive among the bureaucratic and political establishment, the government will take steps to restore trust in the dollar as a currency within the U.S. Restoration of the dollar will be accomplished by ending its debasement. America will be different. There will be discontinuation of most government run social welfare programs that can only be maintained through debt or high taxes such as Medicare, Medicaid, Social Security, Fannie Mae, Freddie Mac, Sallie Mae, FDIC insurance and probably a thousand other programs that I don’t even know exist. Federal funds and subsidies for roads, research, agriculture, education, housing - all of it will end. Reckless and profligate spending on war will be unsustainable. Our soldiers will be brought home. Bailouts of banks and industry and other forms of “corporate welfare” will be impossible.

THE CURRENT STATUS OF GOLD

Over thousands of years, gold and to a lesser extent silver were determined to be the best types of money primarily because they are durable, rare, portable and difficult to counterfeit. Individuals and kings would exchange their goods for gold and then exchange their gold for other goods because gold was the best way to preserve wealth. It actually still is. After WWII through agreements between other nations and the U.S. government, the U.S. Dollar became the reserve currency among the world’s central banks. It still is. For much of the last century, the dollar has also been the preferred way for individuals around the world to maintain a source of currency for use in exchange when their local fiat currency collapsed due to hyperinflation. For nearly a century, the U.S. dollar has been treated as if it is as good as gold without regard for whether or not it is actually as good as gold.

During most of the period that central banks of all nations have been using the dollar as a reserve currency, they have on average sold more gold than they purchased. During the last year, however, the world’s central banks have become buyers of gold. In other words, they are adding a different, more dependable reserve to their holdings because they see that the U.S. government is blatantly debasing the dollar. The value of actual physical gold, on the other hand, is not easily or quickly debased by inflation from mining, so gold holds its value.

The European Central Bank has a massive hoard of gold that it will use to replace the dollar as a reserve currency as will many other nations. The European Union has been planning for this since its inception. Also, at the level of the individual citizen, gold is becoming the preferred method of preserving wealth, especially outside of the United States. The Chinese government encourages its citizens to buy gold. Europeans, Indians and others can buy bullion at local outlets. Even the U.S. Mint is required to meet the demand for gold coins purchased by individuals in the retail market before it mints collectors’ items.

From central banks to individuals, much of the world has slowly been accumulating gold as a means of preserving wealth when the dollar collapses. This is not an advertisement to buy gold bullion nor do I advocate the reinstatement of the gold standard. Instead, I only want to describe a process that is happening.

THE NEW CURRENCY PARADIGM

Following the coming stock market collapse and the eventual collapse of the dollar, there will be a transition period. I cannot foretell the future, but that period is likely to be followed by restoration of the dollar as a currency used for exchange. However, it will not be the world’s reserve currency or the preferred method of preserving wealth. That function will be taken over by gold.

The number of ounces of gold in the world will remain the same as it is today but its monetary value will change to accommodate becoming the worlds’ reserve currency. To preserve wealth in the future, central banks will accumulate reserves in gold rather than U.S. dollars (or U.S. Treasury bonds redeemable in dollars) because gold will be the only money recognized for having real value.

The convenience of fiat currency in a digital age of debit and credit cards makes it likely that the dollar will be the currency used for everyday transactions. However, saving real physical gold, not dollars will become the method by which individuals and the government preserves wealth. Commodity trading in gold, bank accounts in gold, digital “gold” currency or any other substitute for actual physical gold will be untrustworthy. When preserved wealth is needed for purchases, only real physical gold will change hands and even then it will not be traded in coins at a local retail store. A gold coin after the transition will be too valuable for small transactions, so most likely banks will handle the transaction from gold to dollars.

There won’t be a gold standard established for the dollar; that’s an old currency paradigm where a dollar is legally defined by an amount of gold. Fiat currencies won’t trade against each other; that’s the current paradigm that allows all currencies to be deceitfully inflated into oblivion. In the new currency paradigm, all fiat currencies will have a fluctuating exchange rate against gold on the currency exchange markets. Some call this “free gold.” It is free in the sense that it is liberated from arbitrary standards or restrictions on its use in exchange. This is the return of real money.

NOW THE GOLD WARNING

Free means free. It’s only free gold if there are no contractual or legal limits placed on the form of gold that can be bought and sold on the currency exchange market. The only way to maintain an end to the orchestrated boom and bust business cycle, once the thieves using it destroy the current system, is to be diligent.

An individual or government that imposes a philosophy of fiat currency on an economic system that uses precious metals can potentially hijack that system so that it exhibits traits of a pure fiat currency. This is accomplished by placing on the gold market legal or contractual limits on the form of gold or silver that can be bought and sold. Any type of limit, approval, standard, definition, recognition, prohibition, certification, allowance, permit, restriction or any other concept that means “not free” will allow the debasement of the currency to begin again.

Every individual or corporation should be allowed to determine for themselves without influence from government regulators or any issuer of fiat currency which bullion, coins, jewelry, bars, nuggets or form of gold they will buy or not buy. The reason for this is that anyone who can control the type or form of gold that is allowed or legal, limiting it to certain coins for instance, can control the market and inflate the currency.

Beware of laws that limit bank accounts to certain legal gold or silver coins, organizations or collectives of retail stores that approve of certain coins and prohibit the use of others, governments that won’t allow the use of competing gold money in their borders or any type of tax, license, premium or fee on certain types of gold. Beware of politicians, bureaucrats, banks, news media, celebrities, organizations or experts offering “explanations” for why any of the above is necessary. Limits on free gold are the writing on the wall. It’s a signal that a fiat currency philosophy is being applied to a precious metals monetary system and that thieves are benefiting from inflation at the expense of everyone else.

THE END OF BOOMS AND BUSTS
I started out by saying that thieves actively cause the downturns, stealing money from the rest of us through the manipulation of the economy to their own advantage. I pointed out that they do this through purposeful monetary inflation using debt, bail outs and stock market manipulation that concentrates wealth in the hands of the investment bankers and the government. In the potential future currency paradigm that I’ve described, the dollar will be on a currency exchange with gold. Every minute of the day the dollar and all other fiat currencies will be judged against ounces of gold.

Monetary inflation will still be possible but it will quickly cause a devaluation of the fiat currency against gold on the currency exchange as the price of gold goes up. Wholesale markets and retail stores will see this and increase prices making it obvious that inflation is kicking in. In a digital age of instant market communication, free gold will cause friction against inflation almost immediately.

Currently, rampant monetary inflation can be government policy for years before it shows up as price inflation. There is no real harbinger to track the inflation. In a world of free gold, however, if a central bank significantly increases the supply of its fiat currency through easy credit or by creating money instantly through expansion of government accounts (“printing” money), the additional money that goes into circulation will eventually be used by investors to buy gold. Like all other goods, the price of gold will reflect price inflation following monetary inflation. That is to say, when enough gold is purchased to significantly decrease the amount available in the market, sellers (mines, other governments, investment banks and individuals) will increase the price they are asking for their remaining supply. I suspect that the market will be sensitive enough to respond to these events over the course of a day or two.

If the fiat currency in the economy continues to be debased by inflation, for, say, several weeks or months, price inflation will begin to reduce economic activity and stall the economy. To pump up the economy, the central bank will not follow the current destructive path of so-called economic “stimulus” through inflation. In the new currency paradigm, that would quickly make things worse. To stabilize the local economy relative to the international markets, the central bank will be forced to release gold bullion from its reserves into the market, pushing the price of gold down in that bank’s fiat currency through greater supply of gold. The central bank will then receive cash for its gold. This will reduce the amount of currency in circulation thereby reversing the monetary inflation. With inflation brought under control, we will see the end of the orchestrated boom and bust business cycle that destroys our wealth and debases our currency.

The reason it doesn’t work this way yet is because the U.S. dollar, not gold, is the world reserve currency. The U.S. government has an advantage on the world stage by having a monopoly on the source of the world reserve currency. In the future, that advantage will be lost and gold will level the playing field for American citizens as well as foreign governments and their citizens. After the return of real money, the central bank with an advantage will be the one that is best able to keep the release of its fiat currency steady with little or no inflation. A bank will lose its advantage when it is forced to sell off its only real reserves that have any value.

MY PRAYER

I pray that you and I are ready for the next stock market collapse, the coming currency crisis and the transition period that follows it. I also pray that all of us, our friends, families and loved ones have the opportunity to enjoy the return of real money and a new currency paradigm that makes the economy dependable. I pray that what I believe to be a potential, even likely, outcome is not just a dream that can somehow be circumvented by those who would maintain the status quo of cyclical economic collapse.

I pray that an era will soon come that promotes a social and economic foundation within which each individual can pursue liberty and truth, life and health, happiness and good government. May we have peace with one another and in the marketplace while respecting each other’s property and living free from officially sanctioned thieves.

And may anything they do to stop the return of real money only serve to make it inevitable!

Travis Williams
April 10, 2010


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