How Do We Get There??

If you have read my last three articles, you are starting to understand the true value of Honest Money to society and to you and ME… but we have barely scratched the surface. The well hidden ‘magic’ of Gold money emerges only once Gold is in free circulation.

However, we do have a slight problem… namely, how in heck do we transition from a paper world, in hock up to its ears, to a world of honest money… to a world of modest, honest debt… to a world where power lies with the people, not with banksters and G’men?

A tough question indeed… and another place where a Big Lie sneaks in… like ‘there is no way’ to go ‘back on Gold’… so don’t even try. If we believe this lie, we are damned to continue with the Chinese paper torture… and nature will take its own course… we will be dragged kicking and screaming back to honest money. Better we disbelieve the Big Lie, and find a rational, reasonable way out of our paper dilemma.  I quote Hans Sennholz, well known Austrian economist;

"Sound money and free banking are not impossible, they are merely
illegal. That is why money must be deregulated. The Gold standard
will return as soon as people realize that honesty is the best
policy. As hope of ill gain is the beginning of the fiat standard,
so is honesty the mother of the Gold standard. The Gold standard
is as old as civilization. Throughout the ages, the Gold standard
has emerged again and again because man needed a dependable medium
of exchange."

To find our way back, we must understand that a Gold Standard has more than one component; sure honest, real money, Gold and Silver, must be in circulation and in the hands of the people; but this is just the foundation. Once the stable, earth quake resistant Golden foundation is built, we must then build the rest of the edifice.

To create the Unadulterated Gold Standard that is our ultimate goal, we need to build an honest credit system. Credit breaks down into two distinct components; credit (in the form of debt) created by borrowing, and commercial credit, created by clearing urgently needed consumer goods… credit created without borrowing.

The idea of credit and debt are well understood… indeed too well! All the trillions of debt in existence today reflect this emphasis on borrowing… the very stuff we use as ‘money’, the Dollar bills, the Euros… all paper… are borrowed into existence.

Unfortunately, the other vital component, credit created WITHOUT borrowing, is pretty much unknown. I will be writing another article on this very issue… the third leg of the Gold Standard. The first leg is Gold (and Silver) in circulation. The second leg is Gold-bonded debt; the third leg is commercial credit created by clearing, not borrowing.

For now, we talk about Gold Bonds… the second component of the Unadulterated Gold Standard. Gold bonds will work to absorb and extinguish the enormous debt tower that is presently tottering, and threatening to take the world economy down with it. The situation here is simple; ‘if you dug yourself into a deep hole, first stop digging’.

Even a child knows the truth of this; yet seemingly our ‘fearless leaders’ have no clue… the hole dug so far is approximately sixteen trillion Dollars deep… and instead of stopping the digging, they are encouraging, indeed forcing us to Dig Deeper! What total insanity is this?

We can stop the digging by turning to Gold and Silver as our currency… no more borrowing endless quantities of paper into existence. Then, once we have stopped digging, once we have stabilized the situation, we can think of how to repair the problem… how to fill up that sixteen trillion Dollar hole.

The thought of filling this hole is daunting; it is bigger than the Grand Canyon, and will take an awful lot of filling to heal… but given a stable situation, that is no more digging, even a slow and methodical method will eventually fill the hole; instead of digging, start filling.

Bit by bit, day by day, the wound can be healed… and the economic situation also improve day by day instead of staggering from crisis to ever deeper crisis. After all, it took more than a century of digging to make the debt hole as big as it is… don’t expect to fill it overnight.

So how do we start? The plan is simple… start to issue Gold Bonds, instead of paper bonds. Gold bonds are the second major component of a Gold Standard; Gold Bonds are denominated in Gold units, are payable in Gold units at maturity, and pay interest in Gold units… actual, physical Gold, not paper promises.

The key difference between current bonds and Gold bonds is that no paper is involved… only physical Gold. This means that once a Gold Bond is paid, the debt it represents is extinguished… whereas this is not true of paper bonds. Paper bonds issued by the Treasury are never paid off, cannot be paid off… else the Dollars they ‘back’ are themselves extinguished.

Simply put, by issuing Gold bonds we separate money (Gold coin) from debt… (Gold bond). Once this is done, once Gold bonds are issued, the holders of paper bonds will face a choice; continue to hold paper bonds that mature into worthless paper currency… if they ever mature at all… or trade their paper bonds for Gold Bonds, bonds that not only mature into Gold… but pay interest in the form of Gold.

The choice will be a no brainer… and paper bonds will be gradually replaced by Gold bonds. The Gold bonds will eventually mature, and the debt they represent will be extinguished. Gold income, needed to pay interest on the Gold bond, is assured by the circulation of Gold coin.

As paper bonds are retired, the deep hole will continue to be filled… and financial sanity will return to the planet. It may take years if not decades to make this transition… but that is incomparably better than an outright debt default… see Greece or Cyprus for examples of the destruction caused by default. Imagine a default by a major nation, rather than economically invisible entities like Greece or Cyprus.

The idea of ‘inflating away’ the debt is another Big Lie; not only is inflation just as destructive as an outright default, inflating the debt away is actually impossible. The idea that inflation is the consequence of ‘more money chasing less goods’ is false.

In order to create more ‘money’ to chase the goods, more debt must be created to back the new ‘money’… indeed, for every new Dollar created, new debt of exactly one Dollar must also be created. On the other hand, no debt new or old is needed for Gold; Gold IS money, Gold stands on its own, Gold is not ‘backed’ by anything.

Let’s get started. The sooner we stop digging and start filling the better. If we don’t stop soon, the tower of debt will indubitably collapse, and take the world economy… and you and ‘ME’ with it.

Rudy J. Fritsch

Editor in Chief

The Gold Standard Institute

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But there is not enough Gold… is there?

One of the ‘Big Lies’ about Gold is that there is not enough Gold around; after all, Gold is valuable because it is scarce, so Gold cannot be used as ‘money’… right? Well, no, not right at all. In reality, this particular ‘Big Lie’ is three ‘Big Lies’ rolled into one.

The first lie is that the quantity of money in circulation is crucial to the state of the economy, and determines recessions, booms, etc. After all, we hear about ‘money supply’ and ‘fine tuning’ the economy practically every day. Rest assured Mr. Bankster and Mr. G’man want our attention on this… not on the truth.

The bland truth is that the quantity of money in circulation has NO effect whatsoever on the economy…! Read the last statement again, carefully, because it probably goes against everything you have ever heard… from Mr. Bankster, from Mr. G’man, and their bought and paid for ‘economists’. Once again; the quantity of money in circulation has no effect whatsoever on the economy… zero, nada.

Ok, may you find this hard to believe… trust me, it took me a long time and a lot of study to understand how and why this is true. It is vital to understand that the quantity of money is irrelevant if we expect to understand what really goes on.  History is full of examples that show beyond a shadow of a doubt that the quantity of ‘money’ in circulation is absolutely irrelevant… if we have eyes to see.

Surely you have heard of the cases of ‘New Pesos’ replacing ‘Old Pesos’… or ‘New Lira’ replacing ‘Old Lira’? This happens every time a currency is so debased that million, billion, and even trillion unit bills must be printed. A cup of coffee may cost three billion Lira… and it becomes impossible to add more zeros to the bills… lest the bills become the size of bed sheets.

At this time the G’man decides to issue a new currency… and in the process lops six zeros from the ‘old’ currency. That is, a billion Old Lira note is replaced directly by a new one Lira note.  Think about this; every billion Old Lira is replaced by ONE Lira… and there were millions of the old Billion Lira notes in circulation… they are all gone, all replaced by One Lira notes.

The money supply just shrank, overnight, by a factor of one billion. Not by a percent or two as usually claimed by the ‘fine tuning’ money supply ‘experts’… but by a factor of one hundred billion percent. Yet, the next day, life goes on as usual… incredible, yes? Of course, it is easy to see why.

The price of a cup of coffee was three billion Old Lira; the price of a cup of coffee is now three New Lira. Meanwhile, the average wage was thirty billion Old Lira per hour… and is now thirty New Lira. One hour’s pay in Old Lira bought ten cups of coffee. Surprise, surprise… one hour’s pay in New Lira will also buy ten cups of coffee.

Nothing has changed… in relative prices that is. Clearly the quantity of money is irrelevant… only relative prices count. Or, to be more precise, only the purchasing power of money vs wages counts.

The second big lie is based on the first big lie… if money supply is crucial (lie # one) then the G’man must carefully manage it… (lie # two). Let’s take an economy with 300,000,000 people… like the USA. If we add $1,000,000,000.00 (one billion Dollars) to the money supply that sounds like  a big number… but it only comes to $3.33, that is three Dollars and thirty three cents, per US citizen… now honestly, would it make any significant difference to your ‘economy’ if someone gave you three Dollars and thirty three cents? Methinks not….

On the other hand, suppose that the $1,000,000,000.00 (one billion Dollars) were given to ONE person… now that would surely make some difference to that person. But this is exactly what happens when a billion of new ‘money’ is printed… one person gets the whole billion; Mr. G’man gets the billion, and gets to spend it any way he chooses. This is called seignorage… profit made by the money issuing agent. It is more accurately called ‘legalized counterfeiting’.

Contrast this to that ‘barbarous relic’, the Gold Standard. Gold cannot be counterfeited, but has to be earned (or stolen openly). Gold is earned by either trading value for value, or by digging it out of the earth at full cost and with much sweat. Just like you and I earn our living… not like Mr. G’man, who makes us take his freely printed paper, at gunpoint, calls it ‘Legal Tender’, taxes us, and makes us sweat to pay him back.

Not like Mr. Bankster, who prints paper freely, and then has the audacity to not only demand that we pay his ‘money’ back in full, but demands that we pay him interest for the privilege of using his ‘money’. This is my definition of usury; create paper chits, pretend they are money, then charge real interest for the use of it… and if you or I try to print the chits, guess what happens? Only Mr. Bankster has the privilege of counterfeiting legally. His bedfellow Mr. G’man sees to that.

Under the Barbarous Relic, money supply took care of itself. If it cost 11 Gold coins to mine and refine 10 Gold coins, no one would do it…. On the other hand, if Gold was really scarce and valuable, and it cost only 9 Gold coins to mine and refine 10 new Gold coins, miners would get to work, and balance would be restored… in the long term. Short terms fluctuations are impossible.

The third big lie is a bit of a paradox, and we need to see both sides of this paradox in order to understand Gold. First, Gold is indeed a precious metal; to mine Gold today, tons of rubble must be dug up and sifted to find grams of Gold… indeed, this is why rubble cannot be money; it is far too easy to get new supplies… new gravel ‘money’ would be almost as easy to create as new paper ‘money’.

The paradox kicks in when we look at the supply of Gold on hand… remember, Gold has been money for thousands of years, and Gold was recognized as being precious and valuable far longer than its use as money in circulation… so Gold has been mined and hoarded since time immemorial… long before written history.

Thus, even though new Gold is very difficult and expensive to extract, there is an enormous supply of mined and refined Gold around. It would take about 80 years of mining at current rates to dig up as much new Gold as already is known to exist. This is called the ‘stock to flow’ ratio… and it means that the supply of Gold is steady, not subject to disruption on a new mine discovery.

As supply is steady, so value is also steady… and by steady I mean steady over centuries, not just over a few weeks or months. By comparison, all non-monetary commodities like copper, crude oil, grains etc. have stock to flows measured in weeks, not decades.

This is logical if you think about it; if there was a glut of zinc, like a year’s supply, the price would collapse. The value of all commodities except Gold and Silver… the monetary metals… declines rapidly with excess supply. Guess what the value of freely printed paper does.

The demand for the monetary metals Gold and Silver is endless. There is never a ‘glut’ of Gold or Silver. Indeed, only real interest paid in real Gold or Silver can lure hoarded monetary metals out of their hoards.

Today, we get no real interest… and so most Gold and Silver is in hiding, awaiting the day of freedom… the day it will once again be safe and legal to earn, to hoard, and to spend Gold and Silver instead of counterfeit paper; real money instead of Bankster’s debt notes masquerading as money.

Rudy J. Fritsch

Editor in Chief

The Gold Standard Institute

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Hey, been a long time since last post.

I use Explornet internet, and it is full of flaws. Cannot log in to my blog unless I go somewhere else. Any user who is thinking of using Explornet better check this out. Their service is nonexistent… have same issues for months, no remedy.

Anyways, here is next article;

Gold is for the Rich… no?

Is Gold, and a ‘Gold Standard’ really for the benefit of the rich… or is Gold and a Gold Standard actually of benefit to the average person? The short answer is; remember the Golden Rule… no, not the Golden Rule that says ‘Do onto others as you wish others do onto you’… but the other Golden Rule, the one that says ‘He Who Has the Gold Makes the Rules’.

Today, the American G’man and his top bankster boast over 8,000 Tons of Gold in their vaults. The German bankster has over 3,000 tons, the Italian near 3,000 T… and on and on. The final numbers are a bit vague, but the world’s central banksters collectively ‘own’… or hoard, or control or whatever you want to call it… tens of thousands of tons of Gold.

In the meantime, average people have almost no Gold… the world population is estimated to hold less than ½ OZ per capita… and the total amount of Gold in (legal) circulation is Zero. Guess who makes the rules?

One example of ‘making rules’ is setting the rate of interest. Mr. Bankster has decreed that he will set a ‘ZIRP’ policy… that is, a Zero Interest Rate Policy… supposedly to ‘stimulate the economy’… and to bring about ‘full employment’. By the expedient of buying bonds with newly created Fiat paper, Mr. Bankster keeps the price of bonds artificially, fraudulently high… which is the same as keeping interest rates artificially, fraudulently low.

Explaining exactly how and why high bond prices equal low interest rates is beyond the scope of this article. If you are interested, Google ‘bond equation’ and you will see the answer for yourself.

Getting on with it, the claim that ‘low interest rates stimulate the economy’ is a Big Lie. Really? Let’s ask our average persons; like our retired couples who live off their life’s savings… does ZIRP benefit their ‘economy’…? With their hard earned cash bringing a miniscule income, far less than the ongoing destruction of purchasing power… so called ‘inflation’… having to live off their rapidly disappearing capital… ZIRP is hardly of benefit to them, is it?

How about our middle aged couples, saving to pay for their children’s education… does ZIRP help their economy? With their savings earning negative real income, with their accumulated wealth being robbed by monetary depreciation… when prices grow far faster than whatever their savings earn… and their wages never even match the rate of monetary depreciation? Hardly. ZIRP is destroying their ‘economy’ as well.

But surely, the young graduate about to embark on his career, who has borrowed a bunch of money to pay for his education… surely HE must benefit? What? He says “no, man… I borrowed a bunch of money for my schooling, and I can’t possibly pay the loan back. I am doomed to live as a debt slave…

I can’t get a job in my field of studies… the best I can do is flip hamburgers part time for a pittance. I am not even allowed to declare bankruptcy… I am Doomed.”

But didn’t Mr. Bankster tell us that he was introducing a ZIRP to ‘stimulate the economy’? If this were true, if the economy were really ‘stimulated’, how come our new grad can’t find a job? If even he doesn’t benefit, then who does? Maybe a business man? That is another claim by the G’man. That the ZIRP will stimulate business investment, by making ‘money cheap’… and surely more business investment will reduce unemployment? Just another Big Lie, I am afraid.

I ran a business, manufacturing metal forming machinery in Canada, for over thirty years… still run the business in fact, but the work is all being done in China… and the prevailing rate of interest never had a noticeable effect on our business. The only thing that moved our business, either up or down, was demand for our products.

Demand depends on the financial health of our customers, and of the economy. If ZIRP impoverishes most people, it does not do anything but destroy the economy… and this destruction takes most business with it. Believe me, I know… ZIRP took my business into bankruptcy!

Does anyone benefit from ZIRP… fraudulently low interest rates? Come on, it’s obvious… big time debtors benefit big time. Can you guess who is the biggest ‘big time’ debtor of all? Why, surprise surprise… it’s the G’man. Uncle Sam owes… wait, I will check usdebtclock.org… geez, hard to read, the numbers keep flashing higher and higher… every second the G’man’s debt grows…but as I write this, the official US debt is over $16,800,000,000,000.

Savor that number for a second or two; it is beyond astronomical… 16 trillion, 800 billion Dollars. Mind numbing. No human mind can imagine even a trillion, never mind multiple trillions… but there it is. The truth is out; Uncle Sam can’t afford higher interest rates, so he tells his bedfellow bankster to push interest rates down… regardless of the economic destruction this causes. This is the true reason behind ZIRP… ignore the Big Lie… and just follow the money; Cui Bono… to whose benefit… The G’man is the big beneficiary of ZIRP.

Thus dies the Fiat world economy… but a Gold Standard economy goes in exactly the other direction; not towards death, but towards prosperity. Remember the Golden Rule; he who has the Gold makes the Rules…

During the nineteenth century, the heyday of the Classical Gold Standard… and of the British Empire… England ruled nearly 85 percent of the ‘civilized’ world… and the Bank of England ran the whole show under the graces of Gold. Care to guess how much Gold the Bank of England had in its vaults during the nineteenth century? During the ‘peacable days’? It was not the 8,000 Tons that Uncle Sam has… not the 3,000 Tons that Germany has… no, it was an incredibly tiny  150 to 250 Tons…

This number is in the public records of the Bank of England… if you doubt me, check it your self. The commerce of practically the whole world was well conducted on the basis of a few hundred Tons of gold. Where was the rest of the Gold? Where were the thousands of Tons that were in existence? Why, in the hands of average people; Gold was in circulation as money. Guess Who Made the Rules?

It was every man who made the rules, not a handful of banksters and G’men. But how… how could hundreds of millions of men, nay billions of men make any rules? The answer is laughably simple, once you see the truth. The rule for setting interest rates works like this;

When I earn money, there are only three things I can do with it; spend it, hoard it, or put it to work to earn more money… somehow. There is no other possibility… if you concede that giving money away as a gift is spending. Some spending is mandatory… as I need to buy food, fuel, shelter, clothing… the essentials. Hoarding and ‘saving’ are optional.

Hoarding has some less than pleasant connotations; we are constantly being told that hoarding is somehow wrong, anti-social, ‘primitive’… like a Gold standard is called ‘primitive’… but even squirrels have enough brains to hoard, saving food in balmy summer days to last them through the tough winter days to come. Are humans as smart as squirrels?

As far as putting money to work, only entrepreneurs and businessmen truly put their money to work. Average, ordinary people are far too busy earning a living to go into business for themselves. Instead, they look for ‘yield’ with ‘safety’.

This is impossible under Fiat paper… as we already saw. There are no real returns possible without all-out gambling, er speculation. Under Gold, the story is very different. After all, simply hoarding Gold is profitable. The purchasing power of a Gold hoard increases as prices decline. Any earnings from lending money at interest are a bonus.

I would not lend my Gold money… unless I was absolutely certain of getting it back, and was offered sufficient interest income. If you get Gold money, would you not think the same way? Spend some, hoard some… but only lend some if the interest being offered was sufficient to make it worth your while?

I believe you think the same way, although what you consider ‘worth your while’ may not be the same as what I consider ‘worth my while’. Nevertheless, this is the crux of the matter; this is where the rubber meets the road.

If hundreds of millions of people think the same way… that is, choose NOT to lend their money unless they believe it ‘worth their while’… then anyone who wants to borrow must offer more interest. The ones who hold the Gold make the rules. Borrowers must follow the rules set by the Gold holders, or they luck out.

With paper this does not work; the ‘powers that be’ will simply print up more paper, and force rates down… regardless of what I, or what you, or what a hundred million others wish for.

This is why only a true Gold Coin standard can work; actual Gold must be in circulation, in the hands of all… else the teeth are not there. No monetary system with Gold ‘backed’ (paper) money can ever work. If fraudulent paper is in circulation, and if fraudulent paper is  accepted as money, more fraudulent paper will be printed… regardless of promises of ‘backing’ Indeed, Mr. Bankster may  open the door to his vault, show us the Gold sitting there ‘backing’ our paper… and then print as much paper as he wishes… but he cannot print Gold.

 

Rudy J. Fritsch

Editor in Chief

The Gold Standard Institute

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Hey, been a long time since last post.

I use Explornet internet, and it is full of flaws. Cannot log in to my blog unless I go somewhere else. Any user who is thinking of using Explornet better check this out. Their service is nonexistent… have same issues for months, no remedy.

Anyways, here is next article;

 

Gold Standard, ‘ey? So, what’s in it for ME?

Really, I’m serious. I have published a lot of heavy articles dealing with important issues regarding Gold and the Unadulterated Gold Standard; articles about the big picture, about the mechanisms of the Gold Standard, about the history of Gold, about the economic impact of Gold circulation, etc. etc… but no articles about the effects of an actual Gold Standard on an actual, average person.

Well, this series of articles tackles this very issue. Why indeed should the average Joe or Jane, someone in the middle of the earnings range; the wage earner, the retiree, the new graduate starting their economic life… why should they be interested in Gold or a Gold Standard?

After all, Gold is for the rich, right? And isn’t Gold in the Central Banker’s vaults just a ‘tradition’? Isn’t Gold a ‘Barbarous Relic’? And surely, there is not nearly enough Gold in the world to replace the trillions of Fiat paper currency in circulation? And, if there was a Gold Standard, how would that affect ‘ME’…? The average ‘ME’ in the world has very little if any Gold… so introducing a Gold standard would not be fair to ‘ME’… would it?

Any time I start musing about the Gold Standard, I see a powerful, emotionally charged (for me) image. It is an image of my long departed father. Whenever my father recalled his youth, telling me about his adventures… and misadventures… as a young man in Hungary, he would inevitably end up reminiscing about the ‘peaceable days’… and every time he did, his eyes would take on a soft, far away glow; his features would become gentle, relaxed, indeed he looked like he was reminiscing about the Garden of Eden.

Well, as a young boy I was not sure what he meant, but the emotional impact stayed with me… understand that my father was not generally ‘soft’ or ‘relaxed’. Even so, I eventually came to understand that by ‘peaceable times’ he meant the times before the madness of ‘The Great War’, WWI.

Much later, after I studied Austrian economics and met Professor Fekete and attended his Gold Standard University Live, I came to understand even more; namely WHY pre WWI days were of such a magical quality, a magical quality never to be seen again… I learned that it was because before WWI the world economy ran on the Classical Gold Standard.

Imagine a world where your wages are paid in real, actual Gold and Silver coins… not scraps of paper subject to bankster and G’man whims ( G’man is American slang for all government… including corrupt, power seeking politicos, entrenched, uncaring bureaucrats, torturing secret service apparatchik…all of them ); but solid, real stuff that cannot be ‘printed’ at some crooked politician’s whim, real stuff that actually gains purchasing power over the years. Imagine that if you simply stash some of your wages in a pillow, and do nothing else… you will become richer every year.

Because that is what happens under a system of honest money; as the economy grows, as more productive technologies are created, the cost of producing, transporting, and retailing falls… so the price of everything slowly, gradually falls as well… and your wages and savings are worth more every year… without the need for a raise or a promotion… and without the need for some risky ‘investment’.

Imagine a world where you get to actually keep your hard earned money… instead of having it confiscated by G’man, by bankster interest charges, and most insidiously by so called ‘inflation’… more precisely, by ‘monetary debasement’.

Because that is our world under Fiat paper; prices of everything rise instead of falling, wages never keep up with price increases, and any savings you may be able to scrape up will be destroyed by the evil of ‘inflation’… but Mr. Bankster says ‘some inflation is good for us’… yeah, good for him and his bankster buddies… certainly not for the rest of us. He has a printing press… we don’t.

Imagine a world where war is very rare, because no G’man can afford a major war under Gold. Indeed, as the war clouds gathered before WWI, the pundits predicted that no major war could last more than a few months, because the combatants would run out of money… run out of Gold, that is. War is extremely expensive, both in wealth and in blood. The Gold Standard was sabotaged so the G’man could print endless paper currency to pay for the evil slaughter of WWI.

Because that is our world under Fiat paper; the G’man can afford war… so he thinks… because their bedfellows the banksters will simply ‘print up’ some more paper currency and lend it to the G’man… and of course hit ‘ME’ and you for the interest payments.

Indeed, if you look around, you see insane spending on the military, and wars on everything, everywhere. Our world is about as far from ‘peaceable times’ as you can possibly get. Destruction of humanity is but a button push away… and a psychopath has his finger on the button.

So, dear ‘ME’… would you prefer a world where you can accumulate real wealth just by earning regular wages, and saving some… or this Fiat world where you must run ever faster, work ever harder, ever longer just to ‘keep up’? Would you prefer a world where one wage earner can keep his family well fed, housed, clothed… or this Fiat world, where both man and wife must work ever harder just to ‘keep up’… while the children get indoctrinated in G’man youth gulag… er public school?

Would you prefer to live at peace with your neighbors, ‘live and let live’, while trading with them for mutual benefit; ‘let’s make a deal’… or would you prefer to keep our Fiat world, a world full of war, terrorism, tyranny, neighbor killing neighbor… a world where you should ‘kill your neighbor because if you don’t they may kill you first’? And vice versa?

If any of this gets your attention, I am glad. People must wake up, must see the truth instead of believing all the Big Lies they are told… and bring change to the world by living the change themselves.

In the next few articles, we will look more closely at some of the Big Lies that have been spread about Gold. We will address the concerns you may have about how a Gold Standard would affect you… and ‘ME’.

Rudy J. Fritsch

 

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Human Action or Human Folly?

It seems the ‘race to the bottom’ is picking up speed; the ‘race to the bottom’ in value of fiat currencies, that is. Conventional wisdom calls for a reduction of the (relative) value of a currency, in order to ‘support export industry’. The new government of Japan, headed by Mr. Shinzo Abe, was elected on that very ‘platform’; the intention to deliberately devalue the Japanese Yen, supposedly to ‘support’ Japanese export industries.

Indeed, this theme is very common; all countries on fiat currency… that is, all countries… are using devaluation to ‘support their export industries’, and their economies… indeed, conventional wisdom says that Greece is in trouble because it has no currency it can devalue, as it uses the Euro… and power to devaluate the Euro is not in the hands of the Greek government, but in the hands of the EU… and Germany.

It is obvious that devaluation eventually fails, as any currency being devaluated against… like the Yen vs. the USD… will lead to a counter devaluation; the USD vs. the Yen… and so if the race to the bottom continues, it must eventually lead to zero currency value… of all fiat currency. If you are on the road to Hades, and you keep walking, guess where you end up.

Nevertheless, this insanity continues, in the belief that devaluation gives an edge… if only temporary… to the country devaluating. Politicians never consider the future, only the next election… and a temporary devaluation is a typical ‘kick the can’ into the future action so loved by politicians.

The real question is this; does devaluation actually do what it promises to do, that is ‘support the economy’ by ‘supporting export industries’? This deserves a closer look… and a look at the causes, not the symptoms of loss of export competitiveness and economic decline… and the true consequences of devaluation.

Let’s do some simple numbers; simple like 2 + 2 = 4… and see where the truth is. Is truth found in ‘conventional wisdom’, or in the position taken by New Austrian economists? The New Austrians’ position is simple; currency devaluation is like soldiers heading into battle, but first throwing their bullets and ammunition away, because its ‘too heavy’…!

In the modern world, all economies are intertwined; a car manufactured in the US for example, is really mostly assembled from components manufactured off shore; components like the engine, gearbox, accessories, etc… Not more than 20% to 30% of the final value of a car ‘made in USA’ is created locally, that is around 70 % to 80% of the value is imported.

Some industries have more local value added; but even something as apparently local as farming has much value added from offshore sources; diesel fuel, chemical fertilizers, capital equipment like tractors and combines, etc.

For the sake of keeping the numbers easy, let’s assume that 50% of all value is local, and the balance is imports… and get on with it. Suppose that we consider 100 Monetary Units (MU) of an export product; these MU’s could be thousands of dollars, millions of Euros… whatever, the results are the same.

If 50% of 100 MU export is local value, then 50 MU worth must be imported. So, the sale of 100 MU of goods results in 50 MU of imports, and 50 MU of local salaries and wages. Remember, all costs are salaries and wages; the raw materials, whether ore for mining, tress for lumber, grains or whatever are freely given… all cost is in extraction, production, transportation… and parasitism like taxes, regulatory expenses, overhead, bureaucracy etc.

So, assume the export industry is becoming less competitive… for whatever reason; less stuff gets sold, less salaries are paid out… the economy is shrinking. What to do? Well, the first idea is to simply lower the selling price; this is the typical knee jerk reaction to falling sales. Discount it, put it on sale, give a special… this should restore sales and competitiveness, no?

Suppose we discount by 10%; this should give sales… or ‘competitiveness’ a kick. The problem is, if we discount our exports by 10%, even if sales return to previous levels, we will sell the same quantity of stuff as before, but will only get paid 90 MU… and our costs to buy the 50% imports stays the same, at 50 MU; we end up with local value added of only 40MU… a 20% discount. Ouch.

Other things being equal, local wages and salaries must decline by 10 MU… that is, by 20%. This is very painful; labor unions, employees, worse yet voters will be outraged… why, they may even vote the rascals out… can’t have that now, can we?

Let’s try plan B; instead of discounting, let’s devalue. If we devalue the local currency by 10%, our export product will in effect be 10% cheaper, (for offshore buyers) just like with the discount; our sales should rise, just like before. So far, so good… but what are the ‘unintended consequences’?

Why, first, the import component will now cost 55 NMU (New monetary unit) which has the same value as 50 old MU’s had. If we sell the same product for 100 NMU (rather than 90 OMU), then we need to spend 55 NMU (rather than 50 OMU) for imports, and we only have 45 NMU (the equivalent of 40.5 OMU) for local value added.

Wow; for the same sales as before, instead of getting 50 MU like before the evaluation, we only get to keep 40.5 NMU; we are about as badly off as if we simply discounted 10%. Under a 10% discount, our local value added is 40 OMU… well, at least we are 0.5 ahead… or are we?

What if the locals buy offshore stuff, like say Taiwanese TV’s with their ‘NMU currency’; remember, all imports are now 10% more expensive, as measured in old monetary units. In effect, the local standard of living took a dive. Or, ‘inflation’ took an uptick.

By golly, if this is the case, why do we devalue? Is it possible that our ‘leaders’ don’t give a rat’s ass about how much the real economy suffers… or about the standard of living of citizens, as long as they can keep their power, their perks, and their legal immunities?

Of course, this is the bottom line… devaluation is a sneaky way to hide a loss of productivity, to hide a drop in standard of living… and to find ready scapegoats to blame the ‘inflation’ on; greedy capitalists, speculators, the usual suspects.

New Austrians understand this situation clearly; that is why we consider devaluation to be sheer insanity… and the equivalent of throwing away your bullets before the battle. After all, if devaluation actually did some good, then Zimbabwe should be the most competitive, highest standard of living country in the world… and not the total economic disaster it in reality is.

If devaluation is not the way, what is? Simple; increase productivity, and achieve real competitiveness. Cut ‘overhead’ by cutting the parasites… and accumulate real capital. Real capital means more efficient machinery, more efficient infrastructure, inexpensive energy and a more productive, better educated work force.

Germany has some of the highest hourly wages in the world, yet their unit labor costs are the lowest… because of high capital investment. This is the way it must be, this is the law of economics; savings must come before investment. Debt does not replace real capital; in fact, excessive debt simply leads to capital erosion, and if carried farther, to capital destruction.

Fiat currency is indeed subject to devaluation… and thus capital destruction… but Gold and Silver are not; hence the term ‘honest money’. This is why the world must put Gold and Silver to use as honest money. With the fraudulent practice of devaluation eliminated, capital destruction can be replaced by capital accumulation, and the ongoing drop in standards of living reversed.

Rudy J. Fritsch

Editor in Chief

The Gold Standard Institute

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Financial Cliff, or Lemming Leap?

We keep hearing that the US economy is heading for a ‘financial cliff;’ the confluence of a congressional mandate to cut spending and raise taxes. This ‘cliff’ was created… or at least promoted from financial ‘hurdle’ to financial ‘cliff’… by the last, desperate attempt of the US Congress to ‘kick the can’ of fiscal responsibility down the road one more time. In other words, this is strictly a man-made ‘cliff’; and ‘going over’ the cliff is simply a euphemism for going ‘cold turkey’ on deficit spending.

Of course, the very same Congress can now annul these ‘laws’, pass new ones, and attempt to ‘kick the can’ just one more time. Can the ‘can’ withstand another ‘kick’… or is this when the can… that is, the real US economy, shatters? Time will tell, but clearly what cannot continue will not. Von Mises called this situation the ‘crack up boom’… the boom will come to an end, sooner or later, voluntarily or not. What cannot continue will not continue.

The question to be answered is whether to ‘go over’ the cliff, that is face financial responsibility now, or avoid responsibility and grow the cliff ever higher by continuing the ‘borrow and spend’ madness. The subject of madness brings us to lemmings… do lemmings actually go mad, and hurl themselves over cliffs in a suicidal frenzy, or is this just anthropomorphism?

Another, more materialistic take on lemmings is the recognition that lemmings are simple creatures, with a low eye level, and as they run in packs they do not, cannot see very far ahead. Indeed, those back in the pack see only lemmings directly in front of them; and if the pack leaders inadvertently run over the edge of the cliff, the rest of the pack simply follows them over, unawares, to their collective doom.

Do we as humans go collectively mad, and hurl ourselves over the ‘cliff’ in a suicidal frenzy, or are we simply, blindly following our ‘leaders’ to our collective doom? Indeed, does the reason why we seem to go over the cliff actually matter? The answer in either case is the same; abandon collective madness, and retrieve sanity one by one, on an individual basis… look ahead, with wide open eyes, see the looming cliff… and step out of the mad, collective rush to destruction.

The salvation of humanity resides in individual decisions, made in a rational, thoughtful manner… not in a collective, emotional frenzy. As more people get conscious and individually take measures to avoid the cliff, fewer will remain to collectively barrel over the edge. Indeed, if somehow we could all wake up and see what’s coming and all take action to avoid destruction, there would be no one left to actually take the plunge!

The action each individual must take to avoid the cliff will depend on the circumstances of that very individual, but the crux of the matter is the same; avoid dependence on the collective, as the collective is mad. The collective is rushing, seemingly unawares, ever faster, towards the cliff…

Specifically, each individual must take responsibility for themselves… by avoiding the Fiat world as much as possible. Instead of accumulating more debt in the form of Fiat paper… thereby growing the cliff taller… accumulate more real wealth; Gold and Silver easily come to mind, but so does a lot of other real stuff; barter goods, land, food supplies, fuel, clothing, etc. The kind of stuff any Boy Scout would understand to hold in preparation for a survival scenario.

Above all, avoid the collective madness of borrow and spend. Borrow and spend is the very process that built the cliff in the first place, and continues to build it ever higher and more lethal.

Rudy J. Fritsch

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Economic Stability

To paraphrase F. A. Hayek; an economic system based on central planning cannot possibly work, because any central planner would need to have information about all transactions going on in the economy… as well as ‘intelligence’ to use this torrent of information to make economic decisions… and such knowledge and such ‘intelligence’ is impossible.

Unfortunately, the connotation here is that if only a central planner did have sufficient (all!) information, and endless ‘intelligence’ (computing power) then perhaps central planning could work… at least in principle. This leads to ever more ‘information mining’ in the (utopian) belief that central planning could work if only…

Ludwig von Mises went beyond this in his thinking. Mises believed that central planning is impossible, even in principle; because no matter how perfect the planner’s information or intelligence may be, no planner can account for human action based in free will. Or, to put it simply, no one can predict how humans will react… therefore no central plan can possibly work.

I must agree with Mises on this; even I do not know what I will do tomorrow… never mind a central planner trying to figure this out for all Earth inhabitants! But I suggest that the reality we live in today goes beyond Mises; that is, even if a central planner could know everything about all transactions, and even predict with 100% accuracy what each and every one of the ~7 Billion economic ‘actors’ on this planet will do, central planning would still not work.

The reason is simple; there is no mechanism in existence to transmit the central planner’s intent to the markets in a timely manner. Suppose Bernanke and Draghi were truly honest, and had the best interest of all Earthly inhabitants at heart, and knew exactly what policy is best for all… (OK, I know am asking for a lot… but just assume this for arguments sake) they still could not implement any such policy.

In the last articles on Real Bills and Interest vs. discount, we saw how the discount rate differs from the interest rate, and how fundamentally different forces determine interest rates and discount rates. We saw how shortages can be resolved through the mechanism of the discount rate, without involving the price structure. This understanding is of fundamental importance.

The key is that the discount rate responds virtually instantly to any disturbance of the dynamics of the economy… while interest rates respond much more slowly. Furthermore, a change in interest rates will only take effect in about 18 months.

This makes sense; interest rates are tied to mostly long term debt, like mortgages, bonds, etc… and these markets do not, indeed cannot respond quickly. Debt contracted at previously existing rates has to be retired, and this takes time. By contrast, the discount rate can change on the proverbial dime. Indeed, all Real Bills will be retired in not more than 91 days; the half-life of the bill markets as it were is only 45 days. The half-life of the bond markets is measured in years.

So, why is this a problem? Why can’t control of interest rates be used to control the economy? Quite simply, the economy is a dynamic system… this is true without any doubt. To control a dynamic system of any description, the control mechanism or feedback loop must respond significantly faster than the natural response time of the system being controlled. This is servo engineering 101.

To see how this works, consider a simple, familiar servo system… a house thermostat connected to a furnace and an AC unit. The system being controlled… the temperature of the house… has a response time measured in hours. The house tends to cool off at night, and to warm up with the rising sun.

The thermostat and the heating/cooling unit responds in a matter of minutes; at night, as the house starts to cool off, and before much change of temperature takes place, the furnace starts to produce heat and restores the temperature to the set point… whereupon the furnace shuts off, and the input of heat tapers off in a few minutes… stability is achieved.

Same thing during the day; if the temperature starts to rise, the AC kicks in, and again stability is achieved. The key is that the furnace and AC respond quickly… much faster than the speed with which the house temperature changes.

Now, suppose we have a much slower responding heat source or sink; say this source takes hours to respond. Now the situation is much different; the house starts to cool off, the thermostat kicks the heat source in… but nothing happens for hours. The house keeps getting colder and colder.

Finally, just before sunrise, the heat source finally starts to deliver heat. The house starts to warm up… just as the sun also starts to heat the house up. Soon the thermostat shuts off the heat source… but the delay of several hours means that heat keeps being added… the house gets hotter and hotter…

No need to talk about the cooling effect, the same problem arises; heat is added when it is no longer needed, and cooling comes on when heat is needed… the system is out of phase, and unstable. Not a good way to try to manage the house temperature.

What applies to the heating system also applies to all dynamic servo systems, say like the power steering in your car… What if there was a several second delay from the moment you started to turn the wheel, to when the servo ‘kicked in’… and another several second delay before it would ‘kick out’? A crash about to happen, no?

Same principle applies to robotic arms, or any other servo system… the control circuit must respond fast enough, or the system will be unstable… basically out of control. Well, guess what? Our economy is out of control!

The interest rate mechanism simply cannot respond fast enough to control the dynamics of the economy. It responds slowly, leading to out of phase response, and consequent instability. In contrast, the discount rate does respond quickly… fast enough to avoid causing instability in the economy.

Furthermore, the discount rate is set by market participants… not by a central planner, whose plan is certainly not in the best interest of the world population… but is in the best interest of the planner and his bosses.

So, does this mean the Hayek was wrong? Does it mean the von Mises was wrong? Not at all… just that their thinking did not go far enough. It should be clear that central planning cannot work… and that only a system that incorporates the discount rate mechanism can work. In order for the discount mechanism to exist, Real Bills must be in free, unhampered circulation… and for that to happen, Gold money must also be in free circulation. Real Bills will not, can not circulate without Gold money.

To restore dynamic stability to the world economy, Gold must be in circulation… and Real Bills must also be in circulation, as the vital clearing mechanism of the Unadulterated Gold Standard.

Rudy J. Fritsch

Editor in Chief

The Gold Standard Institute

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