Memoirs - 'Money' - not a light reading post!
This is a chapter from my (unfinished) memoirs.
This will take a while to read! 5,000 + words.
I am copying from '.odt' file - let's see how it comes out:
Chapter 'Money'
"People of privilege will always risk their complete destruction rather than surrender any material part of their advantage."
-John Kenneth Galbraith
Money – I am passionate on the subject of money.
US CEOs are getting salaries like no where else, and no when else, corporate lobbies have seen to it that the government allows jobs to go overseas, and on and on. But that is all resting on a bigger long term ripoff. Money, the foundation of commerce and economic health for the rich and poor alike. The US constitution has a unique section that took banks from 1776 to 1914 to circumvent.
I believe we should have sound money, but I don't buy the 'right-wing' package of no entitlements that many sound money promoters promote. I think Ron Paul comes closest to my views. He would promote sound money and a sound economy before he would end social programs, thinking that in good times people would be able to afford medical care. He would also close military bases and cut the military budget. Those savings would fully finance entitlements, in my version. There would have to be some real good times to pay for cancer treatments! And many other costly medical conditions that occur unexpectedly. I think 50% of personal bankruptcies are caused by un-payable medical expenses. We'd have to have some amazing economy for everyone to be able to afford insurance for catastrophic illness. I seem to recall there is evidence that 4% unemployment is lobbied into our economy to keep wages down. The ability of workers to form unions and use union tools has been strangled to near non-existence by corporate law making. I think we need sound money and social programs, I don't think they are mutually exclusive. I don't buy any political parties full package. I think the closest has been the Green Party. I can't remember their stance on sound money.
This is a brief and general overview, starting with my first exposure to thinking about money, and progressing forward.
When I was 12 years old I checked a book out from the library titled something like 'The History of Money'. The only thing I remember is that the 'bezant', the coin of the Byzantine Empire, stayed the same weight and purity for 1000 years. Then a king took out a little gold and put silver or lead in. A hundred years later the empire was no more, the bezant containing a fraction of its former gold content. The book it said the debasement of the bezant was the cause and it seemed logical to me.
I enjoyed going to the bank and exchanging a paper dollar for a silver dollar before 1965. I have since read more and learned how to be precise in my language, distinguishing between redeemable currency, fiat currency, and money. In 1965 when you could no longer go into a bank and trade a fiat currency Federal Reserve Note, or a Silver Certificate, for a silver dollar, I panicked and every time I got paper 'money', I changed it into nickels. Silver dimes, quarters, and halves disappeared very quickly. I later learned this was nothing new and it had a name, Greshams Law – bad money drives good money out of circulation. What I had forgotten was that it took 100 years for the empire to collapse! After about two weeks of driving store clerks crazy paying for everything in nickels, I gave up.
Here is a good illustration of the difference between money and fiat currency: In 1964 if you had a paper 'dollar', Federal Reserve Note, FRN, and a silver dollar, each would have bought about 4 gallons of gas. At that time there was also a redeemable currency, the silver certificate. Banks would take either one for a silver dollar, if I remember correctly. Fast forward to 2014. The paper dollar buys one forth of a gallon. The silver dollar, you take to a coin store and trade it for fiat currency, and that currency will still buy four or more gallons of gas. There will be periods where this may not be exactly true, but it works over the long run. Fiat currency is a useful medium of exchange, but it is not money. A piece of paper exchangeable at a bank for gold or silver is money, but dependent on the bank being open. Metal in your hand is not dependent on a bank. One of the attributes of money is holding value, purchasing power, over time. Fiat has never been able to do this for more than a couple of generations. Where does the loss of value go?
In the FDR era a good portion went to public works when gold backed redeemable notes were devalued and removed from circulation – the price of gold went up denominated in dollars from $20 to $35. I have read that price of gold will always go up as un-backed fiat currency becomes worth less. How does currency become worth less? Well, since fiat is not restricted by how much gold there is, governments can print, or in modern times type (entries), as much as they want. Golds rise from $250 in 2000 to $1300 in 2014 reflects this. Smarter people than me have pointed out that in the mid 80s when gold was at $850, the US could have gone back to gold redeemable notes effortlessly. Now they say it would take a minimum of $7,000 to $50k, depending on whether just the paper in circulation is to be backed, or electrons also. That $850 to $7000 difference reflects the huge amount of paper and electrons that has been created in a short time. Every time in the past this kind of expansion in a fiat money system has resulted in loss of faith in the value of the currency. Hyperinflation is a loss of faith in the currency, resulting in an extreme velocity of exchange as people desperately trade paper for real goods. Then after some very hard times, a new currency is agreed on. This has happened at least 600 times. Why don't we learn? Will it be different this time? Why will it be different?
The current ZIRP and QE is the biggest ripoff by bankers and politicians of the middle and working class in the history of the world. A government that destroys it's citizens and pension funds ability to safely earn interest and preserve wealth is a fraud.
The richness of the Comstock Lode mine threw a monkey wrench into silver price for a long time. Basic economic theory understands that when there is more of something relative to other things, it is worth less in those terms. At one point the US had a 'strategic supply' of silver in the billions of ounces. That has been completely sold off. Bankers seem to be always scamming the public and governments. Cicero gave a speech in 60 AD blasting bankers. Andrew Jackson called them a 'den of vipers' in 1830. The bank he was ti-raiding against had a 50% gold backing of its redeemable notes! He would be stunned speechless today. In 1914 the Federal Reserve was created by a small group of elected men on Jeckel Island. This was a privilege granted to private bankers, not an actual government entity. They receive something like 4% interest/cost on every FRN (Federal Reserve Note) in circulation. Yes, the chairman is appointed by congress, but there is no real governmental control. This is why and how repeated calls for audit are blithely ignored. I never understood Greenspan, Bernanke, non-elected guys, having so much control of the nations economy.
They began issuing redeemable for nothing Federal Reserve Notes in 1914 and they circulated at the same time as gold redeemable notes until 1933. In those 19 years, about one generation, people became accustomed to being able to buy things equally well with either note. This was the training period. Note the timing with WW1. Another war facilitated with fiat currency. I am OK with the US and French revolutions using fiat, but fiat enables easier war funding in general, and I think it just barely balances out. During the training period people didn't really notice the change, because the non-redeemable notes worked as well. Scam! In 1933, when the US was in trouble with trade debts, FDR took gold out of retail transactions, by asking for gold to be turned in and recalling all the gold redeemable notes, and declaring that any gold backed notes still out there would not be honored. The price of gold was then raised from $20 to $35 per ounce to balance the books. If this had been done in 1914, it never would have flown. There would have been massive public outcry. And, I think, real congressional opposition. Some theorists say raising the gold price a bit higher would have prevented WWII. Gold was still used for international trade settlement until 1971, a point unknown, like a lot of this, to most Americans. Also, there were still one dollar silver certificates in circulation, redeemable currency, that could be traded for some metal. I don't know if anyone cared. Without gold as a good portion of bank reserves, fractional reserve banking became mainly based on paper assets.
Gold was still held, but punished by banking rules, by having a set value, or being allowed only to be valued at half of fair market value. Also, why would banks want this stuff when they could have paper, bonds, mortgages, and recently equities and derivatives, things that also made 'money', instead of just sitting there.
In the 2008-10 crisis (which I and some others believe is unresolved and still ongoing) banks were allowed to value these paper assets any way they wanted, not the 'mark to market' method, in yet another way to keep the current scam going. And the law on 'excess reserves' was changed – banks can now earn interest on the excess. This keeps the banks from loaning the money out and creating inflation. So, not only did we give the banks money, but we are paying them not to loan it! It is thought by many that it is only a matter of time before the massive 'money' 'printing' escapes the control of the planners and has some severe effects. Search 'hyperinflation', and 'currency devaluation'. (2017 update - recently a a former IMF, International Monetary Fund, head said the worlds central banks are in a death spiral from which there is no return, but the final out come could take up to ten more years.)
The underlying economic theory when gold was in use is generally called 'Austrian', what we have now is called 'Keynesian'. Under Keynesian theory the money supply should not be tied to gold as that is too inflexible. Keynes knew however, that no one country should be the issuer of the 'reserve currency', as that would lead to trade imbalance. The US has 5% of the world population and consumes 25% of world resources. That simply would not be possible without the reserve money printing privilege. We print paper and buy goods with it. That is not fair and can not last. Well, the bankers saw a steal and ignored that chapter. In 1971 France said, enough, we have too big a stack of this non-redeemable paper you are printing at will, we want to trade the paper for gold, as specified by the Breton-Woods agreement of 1944. Nixon said no, you are not getting gold and no one else is either.
Imagine if you were playing monopoly with some acquaintances and half way through the game one players said, 'Now I get to have as much money as I want.' That's what we did!
Digression on 'script': Script is paper money anyone can print and try to get other people to accept in trade for goods or services. Schools often issue script which is purchased for less than the value provided by a local business, which is in effect making a donation to the school, and getting some exposure to customers. There are over a hundred scripts in use in the US. One of the oldest is 'Ithaca Hours', which has been a model for many others. The paper bill reads 'Good for One Ithaca Hour' and is exchanged in the local economy. Script cannot be exchangeable for gold or silver.
Federal Reserve Notes are a form of script! They are supported by acceptance for tax payment, everybody uses them, and have the FBI on duty to prevent counterfeiting. Pretty good values, but still not exchangeable for something tangible, not a redeemable currency. Those are the main differences between FRNs and script, something anyone can print. The federal reserve might want to make private issue of script illegal, but it can't be done without making FRNs illegal! That's my logical guess. Of course the government can pass any laws it wants, if it or the interests it protects, feel threatened.
Sometime in 1997 I tried to get a script going. I held a meeting in Santa Rosa and about 20 people came. There was not enough interest to continue. I had a name and a design and plates for my version, but it was not accepted, and nobody moved forward with the 'Our Community Cash' design concept that was thought to be better. Newspaper article link:
http://www.metroactive.com/papers/sonoma/09.04.97/funny-money-9736.html(.)
When I searched for this article I found my name used as a link to web sites without my permission. I have seen this with celebrity names, never expected my name to be used that way!
Most of the twenty that showed up were regular folks, but there were four guys in suits. I think they may have been bankers. They didn't say anything, or even ask some good questions that others did. Bankers would be scared, or at least annoyed to have people using a lot of script. Script would be outside the normal banking system and so could not be used as reserve on the banks books to make loans with. This would not sit well. But script is so minuscule I don't see how it could be a threat. Since modern copy machines have gotten so good, the counterfeiting of script may be too easy for it to be viable. BitCoin maybe another kettle of fish. BitCoin has some advantages to script and also seems to be functioning outside the banking system. BitCoin may change the economic world radically. Max Keiser on RT TV, YouTube, championed gold and silver (and still does) after the 2008 fiasco and then also suggested BitCoin as a hedge against a drop in gold value around the extreme climb to $1900 in 2011. He was right on the money(BitCoin)! When he was suggesting this, BitCoin was about $40, it climbed to a par with gold! One day at $1200, and is now about $550. At the beginning of 2014 he predicted BitCoin to $4000 by years end. Doesn't look like that is going to happen. But if BitCoin at some point is used for only 10% of international money transfers, each BitCoin would have to be worth from 10 to $100,000! The risk to reward ratio, $500 to $10k seems to make this an attractive investment. But, at those values, I expect to see computer hacking like never before seen in computer history. If BitCoin survives this, the whole of computer security will be vastly improved to a never before level. Since real estate and other commercial transaction records can be stored with a millionth of a BitCoin, there may be a huge change in how records are kept, using BitCoin. Patents and books may be secured with a BitCoin address that is useable/accessible by anyone anywhere in in the world. This use may be as much of a world changer as the instant and virtually costless transfer of 'money' compared to banking and Western Union charges. I don't believe it will replace gold and silver, but will be a very useful addition to commerce. A welcome alternative standard banking. BitCoin is a cryptocurrency, and since anyone can create a cryptocurrency, like script, there are now over 400! of them. BitCoin is the first and oldest and has the most cash value and will probably be the most accepted and used in the future.
Back to 1971 Nixon international trade settlement change: This caused something that has never happened before in world economics. Before, if a country printed non-redeemable notes to a ludicrous extent, people could always change that paper for more credible paper (or gold, if not forbidden) from another county. But all other counties notes were 'pegged' to the US dollar, so this made all currencies in the world into non-redeemable fiat. There were a couple of exceptions, the Swiss Franc and Indonesia or Malaysia , I think. Why did the other countries/banks go along with this? Because the US Federal Reserve Notes were a huge part of the bank assets – something they wouldn't want to mess with.
The FRNs became in effect a false substitute for gold. It's my opinion, it seems perfectly logical to me, and when I tell this to people, most just don't get it.
Steve Forbes has stated a few times since 2008 that we will return to a gold standard as it is the only thing that works. But that it won't happen soon. There are a lot of people wondering how this is going to turn out. It may not look exactly like our current structure. Or, maybe it will. I have read we may wind up with a fiat for US citizens, and something gold backed, again, for international trade.
The Swiss Franc was 40% backed by gold until they joined the Euro in 2000. Ever wondered why Swiss bank accounts were popular? It was not just privacy, which has disappeared under new laws. Not satisfied with plummeting the purchasing power of the 'dollar' fiat currency to about 4 cents of its 1914 value, they have made our politicians undo safeguards put in place after the crash of 1929, and other laws more recently, and made huge profits at the peoples and governments expense. Where has that missing 96 cents gone? Into the pockets of bankers and other elites, with a portion going to gov social programs. Our constitution defines a 'dollar' as .7154 ounces of silver, and nothing else, not a piece of paper with the word 'dollar' on it. There is some exception for 'United States Notes', which were issued by A. Lincoln to pay Civil War debts and continued until 1971 [note 1971 Nixon action] and R. Kennedy was going to re-issue them. Hmm.
US Notes are issued by US Treasury not the Federal Reserve, though both are fiat money, interest is not paid to bankers on the US Notes. Think about it.
It's a chicken and egg thing as to which came first, bad government or bad bankers. Inflation can be thought of as a hidden tax enabling the government to pay back debt with cheaper money. Borrowers get an advantage with inflation, like for a house, but bankers will always have an edge. Aside on mortgages in a bit. With top elites as members of many different boards and those board members shuttling in and out of private and government posts, who is in charge of who? The politicians make promises that can only be paid by future taxpayers and bankers print the money to do it and charge interest on the loan. At some point the tax revenue will not even pay the interest. There is something called the 'Haverstein Moment', it's when interest on gov debts and cost of government programs reaches 40% of tax revenues. I think we got there a couple years ago. It has always resulted in a major political and or economic upheaval. Will this time be different?
To keep the whole game going awhile longer, we have no interest paid to savers, forcing some into the stock market, and zero interest loans to banks and large entities, who seem to be buying up real estate nationwide because cash sales the last year or so have been 50% when the normal is 10%. Currently 'new housing starts' are 6 unit apartments, not single family dwellings. Something is very wrong here. Families with good jobs are not buying houses to live in, flipping and renting speculators are dominating the market. Anyone see something fishy here?
The average reserve of US banks (reserve is what is supposed to be available to pay debts and give customers cash when they ask for it) for some years was 2 something Billion, it is now 2 something Trillion – 1000 times more! Just in the last few years. Research 'fractional reserve banking' to get more insight into our (the world) economy. Basically you deposit $100 and banking law allows the bank to create out of 'thin air' $900. This creation is not even the theoretically tax revenue backing the government has when borrowing 'money' into existence! Smoke and mirrors! And then the bank loan electrons are turned to cash and you go buy something with this, that person takes it to maybe another bank and it happens again. I don't know how this is sustainable. It is no wonder we have had booms and busts even before the current mess. What a strange world we live in.
Now the derivative market unleashed by the relaxing of safeguard laws has created trillions in very unstable financial instruments. They are unstable because the interest rates are being controlled. There are people smarter and older than me that say 'the market' will eventually overcome the efforts of planners control, and then, watch out. How about that LIBOR scandal? It is finally becoming mainstream news that all markets are being controlled and manipulated. This includes the price of gold, which needs to stay down to keep the US dollar, and all fiat looking good. The London gold fix is currently under investigation, and the 119 year old silver fix is set to change in August of 2014.
There has been nothing like this in the history of world economics ever before. It looks like a disaster waiting to happen. I heard Jim Cramer, the mainstream TV stock adviser, say on his show about 3 years ago, 'We know this is going to end badly, but (paraphrase) meanwhile we can make some money'. He was probably referring to just the stock market, not the whole mess. I would bet on 5,000 years of history and say gold and silver will come back into play again. They have not been gone that long in the big picture, and the big shots look like they have made a mess of it to me. I have heard that a reading of the FED minutes around 2008 leaves one with the impression that these guys do not know what they are doing and going to cause.
China encourages their citizens to buy gold! In the US the main stream media is constantly downplaying gold. What a difference. The mainstream media jumped on the last market rise in gold, saying buy buy buy when market technical analysis would indicate a peak is in place and not buying but selling might be a good idea.
The point being, the mass media is not always right about what is happening. Stocks are currently massively overvalued and over bought buy P/E ratio and other technical indicators, but the buying party just keeps on. This info is at Yahoo Finance, not 'Wackadoodle.com'. Again, nothing like this has ever happened before. Oh, wait, maybe 1929.
A large portion of normal financial advisers recommend 10-15% of wealth to be held in gold as insurance. Recently Jim Cramer pointed out that gold is cheap and that when insurance is cheap, buy as much as you can.
If you have managed to read all this stuff I have researched and thought about money and you still accept the concept encountered in many economic books that anything will serve as a medium of exchange, I have failed. If you think, yes, anything can serve as a medium of exchange but money is only gold and silver, and gold and silver are barter items, I have succeeded.
The exorbitant privilege of the US ability to print at will has been reaped by the elite, politicians and the military complex. In the past ships and wagons had to transport gold and silver around, or paper exchangeable for the same. Now entries are simply made with computers to buy goods and print checks for soldiers. This has made the waging of war far too easy.
Social programs are also easier, but far more fiat is spent waging war. With an increase in productivity and a tax paying younger population, we might have a chance of paying the extreme debts fiat has engendered. With an aging population and jobs leaving the country, this is not going to happen.
The dollar is supported by 'use demand' and a couple of factors are showing signs of failure. One is the sale of US Bonds. When hedge funds, sovereigns, very rich folks, etc. are willing to buy bonds, they have faith in the tax collecting power of the government in a good economy.
Currently the FED central bank has been making most of the purchases. That can't be good. Russia and China have slowed their purchases and are selling US bonds. QE is making US bonds look less attractive. QE is 'liquidity', and creating liquidity does not magically improve and economy. Stuff and nonsense.
The need for countries to change their money into dollars to buy oil is called the 'petrodollar'. This is per agreement made with Saudis shortly after 1971. We would have bases there and protect them from Russia, in exchange they, and OPEC, would only sell oil for dollars. When Saddam Husein started selling oil for euros, he suddenly had 'weapons of mass destruction', that turned out to not be there. Anyone remember the 'incubator baby' deaths that also were not there? Search 'false flag'. Recently the US wanted to invade Syria and England would not go along. This may be a turning point in the US ability to use military might to support the dollar. Syria may have been about gas pipelines and sale of the gas in something other than dollars. Gasprom in Russia has recently set up contracts with Euro countries to use their own currencies. I do not think we can invade Russia, or China, like smaller countries, to keep the 'petrodollar' in use. Without this demand for the dollar, it will drop in value. Russia, China, Australia, Brazil, Japan – many countries are agreeing to do trade with their own currencies, without converting to US dollars. When demand for something drops, it's value drops. It's basic economic theory. The monopoly players are getting ready to leave the table. No sane ruling body would deliberately continue policies that would likely lead to massive depression or hyperinflation, would they? Yet it has happened 600 or more times. Search: 'Wiemar Hyperinflation', 'Zimbabwe Hyperinflation', 'Argentina Hyperinflation', etc.
Inflation is of no benefit to the average person. With the inflation we have had for the last forty years, there's 1971 again, there has been no increase in the purchasing power of the wages paid to working people.
Bankers, politicians, government, investors, and other financial elites have seen huge gains in wealth. Fiat money is ideal for inflation. There have been essays on how gold is the bankers tool to gain advantage. My guess is they have been written by bankers who see even more advantage with fiat.
Here is an aside on mortgages. The number of people with mortgages was very small before 1900. They really took off after 1914. That year ring a bell? Everybody accepts the 'amortization tables'. Why? Because that's just the way it is. Who made them? Bankers. Look at the tables. For the first year most of your payment is interest. This goes on for about 5 years. Your, say three percent, quote is ONLY correct if you pay for the whole thirty years. The first year is nearly 100%. At five years you are still paying about 50%!
Very few people stay the whole 30 years. I have never heard of a banker explaining this to the customer. Most people trade up. This means whatever small rate the bank quotes is a meaningless scam. So, if the customer gets a better job and trades up, or if housing values rise and a trade up is possible, most people pay an extreme amount of interest while owning property. If the housing market rises people are tempted to take 'equity loans', perpetuating interest payments. If there is a housing collapse, both home owner and banker lose. I think the banker loses. When housing crashed, even with Bernake saying there could not be a nationwide crash, the mortgage paper the banks had became worth so little it looked like they could collapse. So, the government gave them 'money' to prop them up, and changed banking rules so assets did not have to be 'marked to market'. They were allowed to put any value on assets in the books. So, no, in our current system, it is win-win for the banks. People get foreclosed on, bankers laugh all the way to the bank. I once mentioned all this to a friend that purchased foreclosed properties for resale and her comment was, well, would you not have people have a chance to own property? You have to be very sharp in a game where you suspect the deck is stacked against you.
Currency collapse ruins everyone except those holding tangible assets. The most condensed and portable asset is gold. Diamonds need more of an expert to value, but are even more condensed. Silver is good for smaller wealth and budget. There are banks called 'bullion banks', they have gold, and will do OK. I have read the idea that individuals could hold gold and become their own mini bullion bank. In an extreme case, like 1933, gold could be forbidden to US citizens again. As far as I know it would take a constitutional amendment to forbid holding silver in the form of pre 1965 coins. In a very extreme scenario, food and water would be the best tangible asset to have. I hope we don't go there. (2017 update: while suppressing the silver price with paper futures contracts JP Morgan has been amassing a hoard of actual bars of silver. Hmm.)
For most people, this is not going well and will end even worse. Someone on the net found and presented a quote by John Kennith Galbraith that made sense of all this to me: '"People of privilege will always risk their complete destruction rather than surrender any material part of their advantage." (There is more to this quote including something like the rich easily see the errors of the poor but not their own)
It's possible that the invention of fiat currency will turn out to be far more dangerous than nuclear missiles. Add it to my list: Any species that makes GMOs, Plutonium, fracking, and fiat currency is doomed.
I have been telling my friends for years there will be no political change here ( and thus possibly economic change) until there is no food on the supermarket shelves. Then maybe people will wake up. Bread and circuses – SNAP/Food Stamps, and Cable, Dish, Netflix, Internet – the similarities to Rome are striking.
Probably a dictator will 'save' us. Or we could have a military junta. Or a president for life. Looks to be very third world.
In a larger sense everyone of us on this planet is privileged to be here, breathing the air and eating the food that is the product of the sun's energy and the earth's nutrients. And we seem to be abusing that privilege to the point of destruction. But the very rich and powerful have a much larger impact than regular folks. CEO's make huge decisions with devastating long lasting impact that ordinary people seldom imagine.
Final heads up: Recently in Mexico the president went on national TV during a currency crisis and assured everyone the peso would not be devalued. A week later is was. Regulators have announced that banks are solvent, and then next week they are not. So, if our president, or maybe FED chairperson, comes on TV and says there will be no devaluation of the dollar, you have maybe a week to convert fiat to tangible assets of some kind. If a 'bank holiday' is announced with no warning, good luck. Since the Cyprus bailouts, Australia, Canada, Germany, and others have re-written banking law to make it clear that your deposit in a bank is an investment in the bank, and belongs to them. Your deposit is not something they are keeping safe for you. Your deposit can be used to save the bank if their financial bets go wrong. This combined with the undoing of bank-investment bank regulation and a huge un-regulated derivatives market is very unsettling. Even after learning all this the last few years, I am still stunned when I think about it. Oh, and there seems to be an unusual number of banker suicides and deaths the last year or so, 16 in the first half of 2014.
The size of the US financial and military power is enormous. The question is, is that enough to outweigh the current credit boom/bubble and other paper financial hazards that have never in the history of the world been this extreme?
God, goddesses, angels, if any, have mercy on us all.
(excerpt from 'Memoirs (in progress) of Stefan Goya'
copyright 2014)