Posted on 05/11/2008 7:35:09 AM PDT by Dick Bachert
( Long but important read. Those with a 30 second sound bite capacity should simply move on. Nothing to see here.)
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The most powerful of the latter-day pagan gods that have guided the destinies of humanity for the past two-score years is irredeemable debt. Before August 14, 1971, debts were obligations, and the word "bond" was to mean literally what it said: the opposite of freedom. The privilege of issuing debt had a countervailing responsibility: that of repayment.
On that fateful day all that was changed by a stroke of the pen. President Richard Nixon embraced the woolly theory of Milton Friedman and declared the irredeemable dollar a monad, that is, a thing that exists in and of itself.
According to this theory the government has the power to create irredeemable debt - debt that never needs to be repaid yet will not lose its value - subject only to a "quantity rule", for example, it must not be increased by more than 3% annually. This idea is so preposterously silly that "only very learned men could have thought of it".
If the thief is thieving modestly, then he will not be detected. It never occurred to the professors of economics and financial journalists that a modest thief is an oxymoron, a contradiction in terms. How did they get to believing in irredeemable debt? The explanation is most likely found in Schiller's dictum: "Anyone taken as an individual is tolerably sensible and reasonable. But taken as a member of a crowd - he at once becomes a blockhead." Economics professors and financial journalists are no exception.
For a time it appeared that Friedman was right. The world has become dedicated to the proposition that it is possible, even desirable, to expand irredeemable debt in order to make the economy prosper. Never mind the default of the US government on its bonded debt held by foreigners. Never mind people victimized by theft. Thanks to the quantity rule, they will never notice the difference.
For all its seductive attractiveness, Friedmanite economics is ignoring the effect of irredeemable debt on productivity. It watches debt per GDP and is happy as long as this ratio stays below 100% by a fair amount. However, what should be watched is the ratio of additional debt to additional GDP. By that indicator the patient's condition could be diagnosed as that of pernicious anemia. It set in immediately after the US dollar debt in the world was converted into irredeemable debt.
The increase in GDP brought about by the addition of $1 of new debt to the economy is called the marginal productivity of debt. That ratio is the only one that matters in judging the quality of debt. After all, the purpose of contracting debt is to increase productivity. If debt volume rises faster than national income, there is big trouble is brewing, but only the marginal productivity of debt is capable of revealing it.
Precipitous decline Before 1971, the introduction of $1 new debt used to increase the GDP by as much as $3 or more. Since 1971, this ratio started its precipitous decline that has continued to this day without interruption. It went negative in 2006, forecasting the financial crisis that broke a year later. The reason for the decline is that irredeemable debt causes capital destruction. It adds nothing to the per capita quota of capital invested in aid of production. Indeed, it may take away from it. As it displaces real capital, which represents the deployment of more and better tools, productivity declines. The laws of physics, unlike human beings, cannot be conned. Irredeemable debt may only create make-belief capital.
By confusing capital and credit, Friedmanite economics obliterates truth. It makes the cost of running the merry-go-round of debt-breeding disappear. It makes capital destruction invisible. The stock of accumulated capital supporting world production, large as it may be, is not inexhaustible. When it is exhausted, the music stops and the merry-go-round comes to a screechy halt. It does not happen everywhere all at the same time, but it will happen everywhere sooner or later. When it does, Swissair falls out of the sky, Enron goes belly-up, and Bear Stearns caves in.
The marginal productivity of debt is an unimaginative taskmaster. It insists that new debt be justified by a minimum increase in the GDP. Otherwise capital destruction follows, a most vicious process. At first, there are no signs of trouble. If anything the picture looks rosier than ever. But the seeds of destruction inevitably, if invisibly, have sprouted and will at one point paralyze further growth and production. To deny this is tantamount to denying the most fundamental law of the universe: the Law of Conservation of Energy and Matter.
The captains of the banking system in effect deny and defy that basic law. They are leading a blind crowd of mesmerized people to the brink where momentum may sweep most of them into the abyss to their financial destruction. Yet not one university in the world has issued a warning, and not one court of justice allowed indictments to be heard from individuals and institutions charging that the issuance of irredeemable debt is a crude form of fraud, calling for the punishment of the swindlers issuing it, whether they are in the Treasury or in the central bank. The behavior of universities and courts in this regard could not be more reprehensible. Rather than acting to protect the weak, they act to cover up plundering by the mighty.
The inconspicuous beginnings of irredeemable debt have blossomed into a colossal edifice, a fantastic debt tower that is bound to topple upon the prevailing complacency and apathy. Actually "tower" is a misnomer. Rather, what we have is an inverted pyramid, a vast and expanding superstructure precariously balanced on a tiny and ever-shrinking gold foundation - the only asset in existence with power to reduce gross debt.
The construction has no precedent in history, and no place in theory, whether Ricardian, Walrasian, Marxian, Keynesian or Austrian. As a matter of fact, no one is analyzing the process. Research has been placed under taboo by the powers that be, lest diagnosis reveal the presence of cancer caused by irredeemability. There is no known pattern or model that would apply to its mechanism in terms of equilibrium analysis.
Two negative conclusions emerge. One is that the edifice of irredeemable debt must grow at an accelerating pace as markets for derivatives providing "insurance" to holders of debt proliferate. The insurer of debt must also be insured, as must the insurer of the insurers, and so on, ad infinitum. This is due to the fact that the risk of collapsing bond values has been created by man. In contrast, the risk of price changes of agricultural commodities are created by nature, and the futures market provides insurance, with no need to re-insure. The other conclusion is that the unwieldy size of the debt structure excludes the possibility of a normal correction: a major liquidation would dwarf the calamities of the Great Depression.
The debt delusion It is a delusion to think that the government can splatter debt all over the economic landscape to cover up its warts, and reap everlasting prosperity as a result. The stimulation and leverage of debt has always caused stock markets to boom, so that the impact of debt was aided and magnified by the added paper wealth which, in turn, increased the propensity to spend and borrow still more.
Businessmen are supposed to be more realistic in contracting debt. Yet the pattern of increase in corporate debt has also changed tremendously. Whereas traditionally corporations used to finance their capital needs in a ratio of $3 in debt for every $1 in stock, in the years leading up to 1971 they issued $20 in debt for every $1 in stock, with the ratio sky-rocketing thereafter.
We hear arguments that economists have by now learned how to control the economy with the so-called built-in stabilizers. Debt has largely lost its sting as a consequence, we are told. For example, bank deposits can now be insured. They couldn't in the 1930s. But when the government itself is loaded with debt, and runs boom-time deficits, the built-in stabilizers may backfire and destabilize the economy further.
The government has commitments so great that its endeavor to offset a depression in our vast economy can only result in a loss of confidence. Anxious withholding of purchasing power in the private sector could far outweigh anything the government can add. To make matters worse, government income is highly dependent on a prosperous economy. The magnitude of the problem of offsetting a depression is grossly disproportionate to resources available.
One of the marks of great delusions is that nearly everyone tends to share them. It is a sorry tale - any delusion gives rise to a rude awakening in due course. Public attitudes to debt have changed so radically since 1971 that today indebtedness is practically a status symbol, instead of the shameful condition it used to be in a bygone era. The most striking reversal in traditional American attitudes towards debt is the widespread acceptance of perpetual national indebtedness, copied by perpetual personal indebtedness - a never-ending lien on future income.
Perhaps the worst aspect of the regime of irredeemable debt is the lowest level of morals followed by governments in modern history. It is epitomized by an elaborate check-kiting (using a bad check to get money) conspiracy between the US Treasury and the Federal Reserve.
Treasury bonds, contrary to appearances, are no more redeemable than Federal Reserve notes. It’s all very neat: the notes are backed by the bonds, and the bonds are redeemable by the notes. Therefore each is valued in terms of itself, rather than by an independent outside asset. Each is an irredeemable liability of the US government. The whole scheme boils down to a farce. It is check-kiting at the highest level.
At maturity the bonds are replaced by another with a more distant maturity date, or they are ostensibly paid in the form of irredeemable currency. The issuer of either type of debt is usurping a privilege without accepting the countervailing duty. They issue obligations without taking any further responsibility for their fate or for the effect they have on the economy. Moreover, a double standard of justice is involved. Check-kiting is a crime under the Criminal Code. That is, provided that it is perpetrated by private individuals. Practiced at the highest level, check-kiting is the corner-stone of the monetary system.
But our world is still one of crime and punishment, tolerating no double standard. The twilight of irredeemable debt is upon us. The sign is that banks are reluctant to take the promissory notes of one another. Significantly, this also includes overnight drafts. The banks know there is bad debt at large, and they don't want to be victimized by taking in some inadvertently. What the banks don't yet know, but will soon learn, is that all irredeemable debt is bad debt, and there is no way to rid the system of poison through administering more.
Redeemability of debt is not a superfluous embellishment. It has a function of fundamental importance: the proper allocation of resources to the different channels of their utilization.
The obligation to redeem debt hangs as the sword of Damocles over the government, just as it does over the head of every economic participant. It compels economy and foresight. It forces balancing of income and expenditures. It adjusts claims and commitments. It limits expansion by shifting resources away from the incompetent, and away from unhealthy projects.
The regime of irredeemable debt creates an escape route from commitments by the promise of eliminating the pressure of solvency. Whether it promises eternal prosperity, or it promises eternal subsidies, it does not matter. The results are the same. They consist in misleading people, enticing them to skate on thin ice, and luring them into financial adventures, private or public, which are not warranted by the ability to pay. The logical consequence is wholesale bankruptcy of individuals as well as that of the political setup. Losses breed more losses, until they become an avalanche. The present crisis is just the first sign of that denouement. More is on the way.
It is still possible to escape the catastrophe which this process would entail. The way out is to open the US Mint to gold and silver, as advocated by presidential candidate Ron Paul. The logic of this remedy is that it would mobilize potentially unlimited resources, presently tied up in idled gold, and re-introduce the indispensable means of debt-retirement into the economy.
Failing to bring gold back, where are we heading? The short answer is: we are marching into the death-valley of collectivism. The alternative to re-introducing redeemable currency is that the debt behemoth will force the imposition of a capital-levy type of taxation - along the lines of Solon, back in the Athens of 594 BC.
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Antal E Fekete has since 2001 been consulting professor at Sapientia University, Cluj-Napoca, Romania. He also runs the Gold Standard University, whose next session is to take place in Szombathely, Hungary from July 3-6 on "The Bond Market and the Market Process Determining the Rate of Interest". For more information see www.professorfekete.com/gsul.asp or contact GSUL@t-online.hu.This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
Sad that those of you trapped on the lower levels of this house of cards will still be crushed when it comes down. History informs us that such shaky structures ALWAYS come down -- HARD!
The only thing sadder than that is that so many seem to have to RELEARN that lesson very painful every generation or so.
History does not exist for this. It is a new thing unaddressed: "The construction has no precedent in history, and no place in theory, whether Ricardian, Walrasian, Marxian, Keynesian or Austrian."
And that’s the part that should scare the hell out of us — but never seems to as most folks can’t be bothered examining things economic.
The scammers LOVE when that happens.
The missing component of the modern American economy is theory. How a country can be so wealthy and nobody seems to know how this happened is a mystery. Somebody must have a plan.
There is much to commend this article, in the foolish compounding of debt for things that don’t provide a value above the value of the debt + accumulating interest. Its underlying thesis that this is all the fault of Milton Friedman is completely unfounded, and destroys the credibility of any other point the author is attempting to make.
To the best of my knowledge, the Swiss retained gold backing to their currency.
I welcome any updates on that.
The gold standard didn't prevent the great depression. It made it much worse by causing pernicious deflation and by making money so expensive that economic activity ground almost to a halt.
You're right. Let's not repeat the mistakes of the past.
Yes, it would be interesting to know if the American success model of free enterprise, thrift, hard work and protection of property rights can be made to work in theory.
The XIVth Amend changed everything. No theory deals with that.
Think of it as a Ponzi scheme, and keep on playing. If we stop playing, we will not be able to live beyond our means, that would result in a more responsible but lower standard of economic living.
If we lived forever we would have to be more responsible but since our years are numbered the Ponzi scheme works for us. - Tom
How do you define wealthy?
No, it is second order capital.
Wealthy? What makes you say that? ;)
Ask how it came to be. It sure wasn’t so before the Civil
War.
later
Gee, that sounds eerily reminiscent of the words of one Lyndon B. Johnson who, when he signed the document moving us another step from fiscal sanity, declared “Why gold and silver are TOO VALUABLE to be used as MONEY.”
The man was clearly a GENIUS!
When I was growing up, “money” was defined as a SUBSTANCE having — among other things — divisibility, portability, durability and INTRINSIC VALUE! The revisionist “friends of paper money” (look up Roger Sherman and George Bancroft for that last reference) have been VERY BUSY as you will no longer find “intrinsic value” listed.
Having said that, there have been some modern politicians who either understood the problem or the solution (or had some folks in their offices who did).
In early 1983, I wrote Senator Sam Nunn of Georgia
to ask about the redeemability of Federal Reserve
Notes. His reply arrived on March 11 and read (in
part) as posted below.
It would APPEAR that either:
1. Sam Nunn ACTUALLY gets it about what happens when man
(or certain men) play God with “money;”
2. Nunn DOESN’T get it — and some staffer sent this out
without actually READING it or running it by the boss (in
which case said staffer now works for the DC Sanitation
Department.
3. None of the above. Because nearly every American is an
economic illiterate, what possible harm could it do to send it?
In which case, you economic illiterates who read this will mutter
“So what?” and flip back to MTV.
In any event, for the edification of you non-economic illiterates
out there, here it is.
“Dear Richard:
Thank you for your letter requesting information on
redeemability of Federal Reserve Notes for lawful
money. I have enclosed information from the
Congressional Research Service that I hope will be of
assistance.”
The enclosure was 4 pages from something called
“The Gold Standard: Its history and record against
inflation. A Study prepared for the use of the
Subcommittee on Monetary and Fiscal Policy of the Joint
Economic Committee, Congress of The United States.” It
was printed September 18, 1981. I was sent only the
England and U.S. portions of the study. What they
revealed was most interesting. From the England study:
(Emphasis added)
“England has had 350 years of experience with
various forms of the gold standard. She first went on
the gold coin standard, de facto, in 1717. This was
done by Sir Isaac Newton, then Master of the Mint. It
was done by pricing gold at the mint more favorably,
relative to silver, than in the marketplace. An Act of
Parliament in 1816 gave formal recognition to this
‘new’ monetary standard that had been operational for a
century in promoting England to a world power.
“Between 1797 and 1821, England temporarily
suspended the gold standard because of the economic
disruptions of the Napoleonic Wars. With no gold
backing to the currency, the supply of money had no
discipline except that imposed by the Board of
Governors of the Bank of England (analogous to our Fed
of today).
The result was that wholesale commodity prices shot up
nearly 50% in 4 years-a momentous inflation.
The ‘Bullion Committee’ was formed by parliament
to investigate. Their findings read in part as follows:
‘The suspension of cash payments has had the
effect of committing into the hands of the Directors of
the Bank of England, to be exercised by their sole
discretion the immediate charge of supplying the
country with that quantity of circulating medium which
exactly proportioned to the wants and occasions of
the Public. In the judgment of the Committee, that is
a trust which it is unreasonable to expect that the
Directors of the Bank of England should ever be able to
discharge. The most detailed knowledge of the actual
trade of the Country, combined with the profound
Science in all principles of Money and circulation,
would not allow any man or set of men to adjust, and
keep always adjusted, the right proportion of
circulating medium in a country to the wants of trade.’
“Gold convertibility of the currency was resumed
in 1821. It is a matter of record that wholesale
prices came back down immediately to the level
preceding the hiatus in the gold standard.
“England was again off the gold standard between
1919 and 1925. When she resumed gold convertibility it
was on a gold bullion standard where she remained until
1931, when she went off the gold standard altogether in
the midst of the Great Depression.”
Under the United States, we find the following:
“The long period of the gold standard in the
United States was not an economic nirvana. The most
severe inflationary period reaching completion under
the gold standard was from 1897 to 1920. But from
trough to peak, the average annual compound rate
was 5.4%—mild by present experience. And most of this
occurred from 1914 to 1920 when the European war and
its aftermath bore so heavily on the domestic economy.
If we look at the period between 1897 and 1914, the
average annual rate of inflation was 2.6% — enviable
from the perspective of today.”
*************
But, of course, idiots like Newton and Sherman and Bancroft can’t hold a candle to you and LBJ.
And as for the Depression, that had many causes. Among them would have been the Fed’s running the presses overtime during the “Roading Twenties” (the roar was from the printing presses) THEN slamming on the money creation brakes AFTER the big boys had their assets safely OUT of the paper money denominated markets, leaving the little guys hanging out to dry — or leaping from tall buildings.
We’ll probably see more of that before this current mess is over.
And I always laugh when I visit your FR home page.
Ever considered having an original thought to replace those song lyrics?
You’re a government employee, right?
Wrong.
The only reason we accumulate debt is that when repaid, we have accumulated wealth.
But under the current debt structure, debt is never retired, so who holds the wealth that backs the debt?
If our government’s national debt is in the billions of dollars, who holds the wealth that backs that debt?
If everyone in the US is holding debt, we have no assets. Default on debt will always overshadow what has been applied to the principle. Example. You held a 20 year mortage on a house. on the 19th year you lose your job and cannot make the payments and the house is repossessed by the mortgage holder, your assets are confiscated. There is no recourse if you cannot raise the money to pay off the debt.
This is what folks around here will never get is that the printing presses have been roaring for a couple of decades. It was easy when we had the world's reserve currency, and so the rest of the world helped support our profligacy by taking our paper in exchange for goods and services (note the enormous trade deficits we have been running which have WIDENED with the drop in the dollar).
Interesting and provacative read. Thanks for posting.
Anyway, what we want is a stable currency, not one that is based on a standard so valuable that no one can afford to posses it.
Let's reduce the debt and the borrowing that comes of it and that will firm up the dollar nicely. Everyone knows that, and let's forget this chimera of the gold dollar. You might as well ask us to go back to the horse and buggy.
"No, it is second order capital".
I think of it as a Pozi scheme with the Govt. putting money into the game.
For example- I am looking forward to getting the counterfeit $1,200 rebate check so I can get to spend more money by buying material things, as opposed to paying off debt. - Tom
I think he's Larry Kudlow...or at least his media agent. ;)
Think Argentina, in 2000/2001.
Billions in foreign investments, average citizens have a hard time buying food and fuel, inflation eating up any savings they might have... sound familiar?
Yeah, the United States is exactly like Argentina. LOL!
The Swiss left the gold standard on May 1, 2000:
(Source: http://www.efd.admin.ch/dokumentation/medieninformationen/archiv/00382/index.html?lang=en#.)Federal Law on Currency and Legal Tender to enter into force on 1 May 2000
12. avr 2000 - The new Federal Constitution has abolished the gold standard of the Swiss franc on the constitutional level. On the legal level, the link between the Swiss franc and gold will be severed within the framework of a new Federal Law on Currency and Legal Tender. This new law incorporates all relevant characteristics of currency and legally accepted money.
The new Federal Constitution has abolished the gold standard of the Swiss franc on the constitutional level. On the legal level, the link between the Swiss franc and gold will be severed within the framework of a new Federal Law on Currency and Legal Tender. This new law incorporates all relevant characteristics of currency and legally accepted money.
The Law on Currency and Legal Tender was approved by both houses of parliament in the winter session of 1999. The deadline for a referendum expired on 20 April 2000. The Federal Council decided to put the new law into force as from 1 May 2000.
When this law is put into force it will create the conditions for a revaluation of the gold reserves of the Swiss National Bank (SNB) and the sale of gold. In order to prevent any adverse effects on the price of gold, the SNB will closely co-ordinate its sale of gold with other European central banks within the framework of an agreement made last September. However, the Law on Currency and Legal Tender does not allow to use the proceeds of the SNB's sale of gold reserves no longer needed for monetary policy (1'300 tonnes) for other purposes. To this effect, a special legal basis shall be created on the constitutional level. In accordance with the decision of the Federal Council of 19 January 2000, gold reserves to an extent of 500 tonnes are to be used to fund the Swiss Solidarity Foundation. Various possibilities for the use of the remaining 800 tonnes, worth some 10.4 billion Swiss francs with annual earnings of some 300 million Swiss francs in real terms, are currently being examined. These include additional payments for people who are put at a disadvantage by the 11th revision of the Old Age and Survivor's Insurance and additional support of old persons and young families with low income, financing educational measures, particularly in the field of new IT and communication technologies, and the repayment of public debt. Such plans, however, require a specific legal basis.
The Coinage Act is integrated into the new federal law. The provisions of the National Bank Law pertaining to banknotes are transferred to the Law on Money and Legal Tender.
Simultaneously to the Law on Currency and Legal Tender, the revised Coinage Ordinance will also come into effect, adapted to the new law. Furthermore, as a direct consequence of the definitive repeal of the SNB's obligation to convert the Swiss franc into gold and the abolishment of the gold parity of the Swiss franc, the Federal Council's decisions of 29 June 1954 and of 9 May 1971 will be repealed.
Information:
Marianne Widmer FDF / FFA 031 322 54 31
Werner Abegg SNB 01 631 31 11
april 12 2000
And the LAST one bites the dust.
I don’t know about you, but I’m hanging on to MY gold and silver until it hits 2K ++ FRAUDS (Federal Reserve Accounting Unit Denominators) erroneously called “dollars.”
Unfortunately, that will probably signal that we have entered the Weimar Republic — and final — phase of the current disastrous process. For those unfamiliar with that bit of history, it was where workers were paid several times daily, wrapped their increasingly worthless Deutschmark in their shirts and hurled them out the factory windows to their waiting wives who then hurried off to the store to buy food before the prices — which often went up 5 or more times a DAY — rose again.
One poor soul who hauled his pay home in a wheelbarrow, left the thing unattended for a few moments and returned to find the barrow missing and the virtually worthless currency dumped on the ground.
But OUR CENTRAL bankers and POLITICIANS are TOO SMART to allow that to ever happen here, right?
If it can happen in the land of Bach, Beethovem, Brahms, Goethe, Einstein, etc., etc., just what makes folks think it CAN’T happen here?
Don’t you have a mother who needs your attention today?
Actually that's a myth. One Bernanke endorses, but a myth nevertheless. The Fed didn't just suddenly slam on the breaks. The banks stopped taking the money the Fed was trying to inject because their biggest borrowers either weren't interested or were no longer deemed credit worthy. It's where we get the phrase "Pushing on a string".
If you are a bank and you believe you are likely to lose your principle, then it doesn't matter what the interest rate is. The Fed's policy of printing money in the twenties had created so much inefficiency in Corporate America that profits were falling everywhere and lenders were losing confidence and becoming unwilling to continue financing.
This statement is rich with either irony, self deception or it is intended as a joke on the reader .
The environmentalists and PETA will never permit you to own a horse. Think of the mess it would create (not to mention you might be able to wander too far from home.) Besides horse feed is becoming too expensive for a peon to provide. Think more along the lines of a bicycle, one per family for use on special occasions, if you're wealthy. If not, you'll have to get by with only your feet to carry you, maybe shoeless.
His article sounds eerily like that Jim Sinclair wacko. Are they related or do they just ride on the same merry go round?
As I read that sentence, I couldn’t help but think about all the idiots on Wall Street — and the bigger idiots who followed them — who are in the process of losing their shirts because of the complex game musican chairs called “Derivitives” that not even the geniuses who created them understood.
Funny money chasing MORE funny money will always end this way — as the immutable laws of economics eventually kick in.
When the music stopped, the players looked around to find that ALL the chairs were missing.
Inmates in the same asylum.
Every dollar lost on a derivative is a dollar gained by the counterparty. Do you understand that?
Sort of like a casino?
Oh yes they do. They really aren't that hard to understand.
The Amish still do. I see them all the time here in the great state of Pennsylvania. However, for the reasons you mentioned and others, the rest of us won't go back to the horse and buggy, or the gold dollar.
It's not possible for the simple reason that there isn't enough gold lying around to back the tens or hundreds of trillions of dollars currently in circulation. The ensuing deflation would make the great depression look like child's play.
Why even talk about this fantasy any more?
I should know by now that it is unsafe to post anything without /s since there are so many on FR without humor who take every word posted literally unless so designated.
I knew perfectly well that you where being sarcastic. What I don’t know is your take on this gold-standard foolishness.
And, inasmuch as they simply move “money” around, except for the brokerage houses, they add to the productive capacity of the economy and provide jobs how?
Then tell me why even Helicopter Ben couldn’t explain some of the more bizarre permutations of these so-called “derivitrives” during his recent congressional testimony, much of which I watched on C-SPAN?
Anxiously awaiting your snappy and clever reply.
Do you understand how reinsurance works? Probably not. Google it.
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