Paper Money Scam: Gold continues its rise

Since the announcement by the US Fed last Tuesday, it's barely looked back...breaking $1300 an ounce.

Gold Prices should go up with consumer prices. But, for nearly two decades – from 1980 to 1999 – gold went down while consumer and asset prices rose. Now, consumer prices are stable. Yet gold hits new records.

All views on gold are baroque. There's no line of thought on the subject that doesn't have a curve in it. Some buyers are loading up on gold because they see a recovery coming. Others are buying it because they don't. Recovery, say some, will boost consumer appetites, resulting in higher inflation levels and a higher price for gold. The absence of recovery, say others, will cause the Fed to undertake more money printing.

Those who have no opinion on the matter are among gold's most aggressive buyers. To them, gold looks like a "can't lose" proposition. If the economy improves, gold rises naturally. If it doesn't improve, the Bernanke team will force Gold Prices up. And if not Bernanke, the Chinese.

Gold makes up only 1.7% of China's foreign exchange reserves. Many analysts believe China is targeting a 10% figure. If so, it would have to buy every ounce the world's miners produce for two and a half years. Or, if it relies on only its own production (China is the world's largest Gold Mining producer) it would take nearly 20 years of steady accumulation to reach the 10% level.

The metal holding down the 79th place in the periodic table has many uses. People make spoons, forks and bathroom faucets out of it. It's occasionally used as roofing, or even as a murder weapon; Crassus had molten gold poured down his throat after being captured by the Parthians. And Lenin said he would line the public latrines with it. But the best use ever found for it was as money – as a reliable measure of wealth.

Even gold is not perfect as money. During the years following the Spanish conquest of their New World territories, for example, gold flooded back into the Iberian Peninsula. Soon there was much more gold than the other forms of wealth it was meant to represent. Each incremental ounce of gold was disappointing. It bought only a fraction as much as it had before this monetary inflation began. And had you bought it in 1980 you would have seen 90% of your purchasing power disappear before the bottom finally came. Even today, you still would not be back at breakeven. The price of gold will have to almost double from today's level to reach its inflation-adjusted high of 1980.

But this is what makes gold very different from other money. If you happen to have a billion-Mark note from the Weimar Republic or a trillion-Dollar note from Zimbabwe, you can hold onto that paper until hell freezes; its value will never return. Gold, on the other hand, will never go away. And when the post-1971 monetary system cracks up, gold is likely to return to its 1980 high...and keep going.

Over the centuries, mankind has often experimented with alternatives to gold. Driven by larceny or desperation, base metal and paper were tried on many occasions. Paper was particularly promising. You could put as many zeros on a piece of paper as you wanted, creating an infinite supply of "money," as Ben Bernanke once noticed, at negligible cost. But the experiments all ended badly. People realized that money gotten at no expense was only gotten rid of at great cost. Given the ability to create "money" at will, a central banker will sooner or later create too much.

But one generation learns. The next forgets.

By 1971, Americans had forgotten everything they ever knew about money. Richard Nixon cut the final link between the US Dollar and gold. At first, it looked as though investors hadn't noticed. But then began a great bull market in gold that took the price from $43 to $850. And just then, when investors were most sure that paper Dollars would soon be worthless, a remarkable thing happened. Paul Volcker intervened. He made it clear that if the Dollar were to go the way of all paper, it wouldn't be on his watch. Inflation rates fell, along with the Gold Price.

The DDT Scam

Yet another pop scam: DDT is bad for you and the 'environment'.  The fact its lack of use causes the death of potentially millions, doesn't seem to bother environmental math geniuses.

DDT FAQ

The scam of 'social planning': Groupon: Another Market Success - Robert P. Murphy - Mises Daily

The ranks of academia promote 'social planning' paradigms as if they were truths so solid as to be self-evident.  Not only are these notions not self-evident, they premise behind them is a scam.

Groupon: Another Market Success - Robert P. Murphy - Mises Daily

Keynesian Scam: A popular delusion measured only by failure

Away From Freedom


Murray Rothbard writes the introduction to the reprint of this 1952 gem. It is by V. Orval Watts, one of the leading anti-Keynesians of his time. He is writing during the great entrenchment of the Keynesian perspective within the economics profession, and he demonstrates the dangers and unworkability of the Keynesian point of view. What Watts offers here is a freshness that comes with seeing all his colleagues abandon the old liberal creed--the very mark of the old economics profession--in favor of a new planning mindset that followed the New Deal and World War II.

What's more, he shows that Keynesianism isn't really new but is merely a restatement of old fallacies that were long ago refuted. "Keynes did little if anything more than use new terms for old ideas," he writes.
Watts zereos in on core errors: "The Keynesian economist treats of goods and credit as though they were two quite separate things. He teaches that the output of goods creates a need for credit and currency.... The classical view, on the other hand, is that goods themselves are the source of all sound credit and sound currency." He foresees national disaster from the intellectual trends, predicting widening business cycles, lower output, and inflation as far as the eye can see. He further defends sound money and free markets.

This book had a powerful impact on a generation -- a kind of primer on Keynesian fallacies that still pervade the profession if not by that name.

Inflation Scam: The FED fighting inflation is a contradiction and a popular belief

Stealth Monetization in the U.S.A.

by Gonzalo Lira

Insofar as money is concerned, governments and central banks should be kept as far away from one another as a pedophile from Dakota Fanning. If ever the twain should meet, very bad things would happen. This is because of the disparate natures of government, on the one hand, and the central bank, on the other.

Governments spend money. They spend money on social programs to keep the people docile and happy, wars to keep up the illusion of safety and security, and – almost as an afterthought – infrastructure. Ordinarily, they get the money for all of these things from taxes and other fees that the government collects.

On the other hand, central banks print money. Most of the world’s economies depend on fiat currency – currency that has value because someone says it has value. The person who says it has value is the central bank. They are the custodians of the currency – they take care that it retains its value.

Tons of people say that a fiat currency is unstable, and doomed to fail, and that we will all rue the day that we accepted that abomination into our lives! – and blah-blah-blah, rant-rant-rant.

But in most cases – all cases, actually, regardless of what the tin-foil hat brigade might rant – fiat currency works like a charm. The proof of this is the last 40 years: All of the world’s major currencies have been fiat since at least 1970. The dollar has been fiat since 1973, and by certain definitions, fiat since 1933, or even 1913 – and it’s still around. That’s been because of the Federal Reserve (the U.S.’s name for its central bank).

Central bank independence is key for a successful fiat currency. If the government ever got its hands on the central bank’s printing presses, all hell would break loose. Rather than raise taxes and collect fees – which are politically unpopular – the government could (and would) direct the central bank to print all the money needed to carry out the government’s various programs.

This is monetization.

What would happen once monetization took place is pretty obvious: So much of the currency would be printed by the government that businesses and ordinary people would lose faith in the currency as a stable medium of exchange. Since fiat money depends on people’s faith in it, this would become a self-reinforcing situation: The currency would fall leading to people losing faith in it, leading to the currency falling even more.

This is the mid-stages of hyperinflation. Eventually, the currency would become worthless, wrecking the economy of the currency.

It’s happened more times than one would imagine. But the last time it happened in an advanced economy was Germany in 1922, the so-called Weimar episode. Since then – even during total war in WWII – there has not been an incident of hyperinflation in any advanced economy. (Though as I wrote in Was Stagflation in ‘79 Really Hyperinflation?, there have been bouts of high inflation that had all the traits of incipient hyperinflation.)

A collapse in the currency is why the government and the central bank are kept separate from one another – the fear of monetization, and what could happen, keeps the two apart.

However, now, in the good ol’ U.S. of A., monetization is taking place – and it is happening right before our eyes, even though no one is realizing it. This monetization is invisible to sophisticated analyses, but obvious to anyone looking at the situation. Like one of those stealth fighter jets that are visible to the naked eye of a goat herder, but invisible to the radar and infrared and other sophisticated equipment of the professional military? Same thing:

It’s what I call stealth monetization.

What happened in the Fall of 2008? Essentially, banks found themselves holding debts that would never be repaid – which meant the banks could never pay back the money that they in turn owed to depositors and other creditors.

The bad debts the banks owned – the so-called “toxic assets” – were bonds made from the real-estate and commercial real-estate mortgages, as well as other collateralized debt obligations. Since the properties underlying these bonds had fallen in price – because their prices had been a speculative bubble to begin with – the bonds made from these bundles of loans would never be fully paid off.

In other words, they were bad loans. Therefore, the banks which had made the loans – the banks which owned these toxic assets – would lose so much money that they would go bankrupt. If they did go broke, the U.S. and world economies would take a massive hit.

So in order to avert this fate, the Federal Reserve bought these toxic assets from the banks – but the Fed didn’t pay the market value for these toxic assets, which were pennies on the dollar: Instead, the Federal Reserve paid full nominal value for the toxic assets – 100¢ on the dollar. The banks the Fed bought these toxic assets from became known as the Too Big To Fail banks – for obvious reasons.

How did the Fed buy these dodgy assets? Simple: In 2008 and ‘09, the Fed “expanded its balance sheet.” That’s fancy-speak for, “The Federal Reserve created about $1.5 trillion out of thin air.” That’s essentially what they did. The Fed just decided, “We’re going to create $1.5 trillion” – and lo and behold, $1.5 trillion came to be.

What did the Fed do with this $1.5 trillion it conjured out of thin air? Why, it used it to buy up all the toxic assets and other dodgy assets from the TBTF banks.

What did the TBTF banks do with all this cash? Why, they turned around and bought U.S. Treasury bonds.

U.S. Treasury bonds are called “assets” by sophisticated finance types – in fact, sophisticated finance types callall bonds “assets.” But they’re really just debt – including Treasuries. U.S. Treasury bonds are certificates of debt that the U.S. Federal government issues, in order to finance its shortfall, the deficit.

The U.S. Federal government has been running monster deficits for a number of years now – but lately, it’s gotten pretty bad. In 2009 as well as 2010, the Federal government shortfall was over $1.4 trillion. This is roughly 10% of total U.S. gross domestic product – both in 2009 and 2010: A staggering sum of money. And it is likely that for 2011, the deficit will be another $1.5 trillion or so.

The Federal government has so much outstanding debt that it is unlikely to ever be able to pay it back.

A lot of people think this. A lot of sensible people think that a day will come when the markets no longer believe in the Federal government’s promise to pay back its debt. A lot of sensible, smart people think that, one day, no one will buy any more Treasuries – yet every week, Treasury bonds get sold with numbing regularity. The U.S. Federal government has never put Treasuries up for auction which did not get bid on.

Who are the people who buy these Treasury bonds? The primary dealers – that is, the Too Big To Fail banks.

In other words, the TBTF banks are financing the Federal government’s massive deficits. How are they doing it? With money the Federal Reserve gave them for their toxic assets.

This is one leg of stealth monetization.

Buying up toxic assets following the 2008 Global Financial Crisis was not the only way that the Federal Reserve got money into the hands of the TBTF banks, and thereby the Federal government – the other thing the Fed did was open up “liquidity windows.”

Liquidity windows are simply the mechanism by which the Federal Reserve lends money to the banks. The interest rate the Fed assigns to this money it lends to banks is called the Fed funds rate.

Right now – and for the past several months – the Fed funds rate has been 0.25%. That’s right: One quarter of one per cent. The interest is substantially lower than the inflation rate. This means that the Fed has essentially been giving away free money to the banks.

What are the Too Big To Fail banks doing with this free money? Why, they are buying Treasury bonds: The TBTF banks are borrowing money from the Fed at absurdly low rates, and then turning around and lending it to the Federal government by way of Treasury bond purchases.

This is the other leg of stealth monetization.

In these two ways, the Federal Reserve has been monetizing the Federal government’s debt. The Fed bought up toxic assets from the TBTF banks, which then went and bought Treasuries. And the Fed is lending money for free to the TBTF banks, which are then buying Treasuries.

Take a step back, and you get the picture: The Too Big To Fail banks are the sewer system by which the Federal Reserve supplies money to the Federal government for all its deficit spending.

This is stealth monetization.

It’s not even particularly stealthy, actually – it’s happening right out in the open. It’s just that nobody is pointing it out – or perhaps because it is an obscure, complicated system, nobody has realized what it actually is.

But it’s monetization, pure and simple. The Fed is printing up all the money the Federal government wants and needs.

To put it more bluntly – and disturbingly – the pedophile is in the room with Dakota Fanning.

One of the pernicious effects of this stealth monetization is the dis-incentive it gives banks to lend money to small- and medium-sized businesses. Everyone – including the Fed – is complaining that the banks aren’t lending to businesses. But I don’t know why they’re complaining – it makes perfect sense.

See, the TBTF banks get money for free from the Fed, and then they turn around and lend it to the Federal government by way of buying Treasury bonds. Treasury bonds are paying absurdly low yields, because they’ve been bid up so high by all those freshly minted dollars that the Fed printed up. But to the TBTF banks, it doesn’t matter how low the Treasury yields are – it’s still guaranteed profits. Lending money to the Federal government is totally safe.

But a loan to a small- or medium-sized business? It’s a risk – and a risk for only a slightly higher profit. The business might miss a payment, or even go broke. Plus it’s a hassle, to lend to a business – all that administrivia! The paperwork, the loan applications, the due diligence– blah-blah-blah-blah!

“Screw it,” say the TBTF banks. “Let’s just buy Treasuries.”

That’s how the American government’s massive deficit is sucking up all the available funds. Why bother lending to the private sector, when the Federal government is paying good interest on the Treasury bonds, and the Fed is lending an endless supply of money for free?

This is why private-sector businesses are not getting any loans, no matter how long the Fed keeps interest rates at rock-bottom levels – the Federal government is hoovering up all that money, leaving the private sector with nothing, not even lint.

Ben Bernanke and the Lollipop Gang at the Fed do not seem to understand the disincentive they have created – in fact, they just keep on adding even more liquidity: Backstop Benny has announced that QE2 is on the way – that is, further “expansion of the balance sheet,” so as to create more money to give out to more banks –

– so they can buy more Treasuries from the Federal government.

Other banks which are not TBTF are getting squeezed – everyone acknowledges that the banking industry is really hurting. But the TBTF banks are racking up monster profits, with monster bonuses.

That’s because they’re monsters – or more precisely, they are zombies: The American Zombie banks.

Now this is all good and fine, but is there a simple way to verify that this stealth monetization is indeed what is going on?

Yes – look at the markets:

Over the past few months, we have seen two things occurring simultaneously: Treasury bond prices are rising (and therefore their yields are declining), and the dollar has been falling against all commodities and all other major currencies.

This is a contradiction. This cannot be happening simultaneously for any sustained length of time – unless there is some exterior factor making this contradictory situation happen.

It is a contradiction because, if over a sustained period of time the dollar is losing value against commodities and other major currencies, then it would not make sense for investors to be putting more money into Treasuries and bidding up their prices. Not when their yields are at such absurdly low levels.

Stealth monetization: That’s what’s bidding up Treasuries, even as the markets are losing faith in the dollar.

Poor Dakota Fanning: She’s in the pedophile’s sights – and she has no idea what’s about to happen.

But we do.

"Cheer Inflation"? Have you gone insane?

Of course, this little article will be well received and widely read. It's Fortune magazine, after all.  That's unfortunate.  Everything in it is a scam.

Three Reasons to Cheer Inflation

These are just some of the perverse, yet common, justifications for the Fed ruining the purchasing power of the dollar. They are totally mainstream - which means they are completely backwards and wrong.

Inflation reduces the impact of debt - Yes, but it screws the creditor. How is this good?

Inflation increases spending - yes, because people are getting shafted by having the purchasing power of the dollar systematically destroyed by the Fed. They go out and spend before they lose any more. However, spending does not improve an economy's productivity - savings does - so spending is just consumption of productive capital.

Creates jobs - No, it does not. Consuming the capital of the citizens of the country cannot create jobs. Only saving, then investment in factors of production that actually improve the productivity of each hour of human labor will raise an economy. Nothing else will raise a societal standard of living - nothing.

Inflation only destroys the money, providing the first users of the new money with benefits, while stealing from those who never receive the money.

Once again, Fortune, you got it totally wrong. Not a surprise. Try reading "What has Government done to our Money" by Murray Rothbard, and you might catch a clue.

All government currencies go to zero value, always.

One of the biggest scams going is the belief governments must provide money and control its supply and value.

EconomicPolicyJournal.com: What's the Hot Topic at the United Nations General...: "First was word that Alan Greenspan was advising John Paulson to buy gold for his hedge fund. Then you have former Plunge Protection Team me..."