Bills vs. Bonds

In the heyday of the classical Gold Standard during the nineteenth century, a common saying among bankers was that ‘Being a banker is easy, as long as you can tell a bill from a bond’. A lot of assumptions are attached to this simple statement; today’s bankers do not even know what a bill is, never mind telling a bill from a bond.

In order to understand how a Gold Standard operates, we must understand bonds and bills, and the chasm that separates them. More precisely, we need to appreciate and understand how the clearing system of the Gold Standard –the Real Bills Doctrine of Adam Smith- worked. We need to understand how it must be allowed to work again if an Unadulterated Gold Standard is to become the honest, stable foundation of the world’s monetary system.

Bonds today are pretty well understood, but Real Bills are virtually unknown. In this day and age, even the fundamental difference between money and credit seems to have been obscured! Money must extinguish debt, or else it is not money. To extinguish debt, money must be a present good, not a promise… credit, all credit, is but a promise. The definition of credit is; ‘the exchange of a present good for the promise of a future good’. The definition of money is; ‘money extinguishes all debt’.

Gold is money; it is a present good, a thing of positive value. Gold is not a liability on anyone’s balance sheet. Any and all credit, in contrast, does represent a liability. The bond that is an asset on the bond holder’s balance sheet is a liability on the bond issuer’s balance sheet. If the liability and the asset are netted out, the result is zero.

By comparison, with claims on Gold, the asset on the Gold Bond holder’s balance sheet… the Gold bond… is matched by physical Gold on the issuer’s balance sheet. When the asset and liability are netted out, Gold remains as a positive value. Gold, unlike debt paper, never disappears or loses value. In more detail, Gold borrowed is used to invest in productive enterprise, and does not simply sit in the borrower’s vault. Rather, the Gold will become available at the same time that the bond comes due.

In contrast, Fiat paper does disappear when asset and liability are netted out. So called ‘debt money’ by definition is borrowed into existence, and if the debt thus incurred is ever paid back, the ‘money’ created to buy the new debt also disappears. No debt = no money! Gold is not debt, it never disappears.

The two forms of credit, represented by bonds and bills, must be just as clearly differentiated from one another as money and credit must be differentiated from one another. Bonds represent debt, and bills represent commercial credit. There is a world of difference between bonded debt and commercial credit.

The definition of a Real Bill is; ‘a bill drawn against urgently needed goods on their way to the ultimate consumer’… bills that will come due in not more than 91 days, bills that will be paid in Gold, bills that naturally circulate and thus assume a monetary function. This is fundamental to the Real Bills doctrine. A bill that does not circulate naturally is not a real bill.

Suppose a refrigerator truck with three thousand frozen turkeys arrives at the retailer, and the wholesale cost of this truckload of turkeys is $30,000. Clearly the clerk at the retail store will not hand $30,000 cash to the truck driver… nor will he issue a check for $30,000. He will simply sign a bill, accepting the terms, confirming that the previously placed order for 3,000 frozen turkeys has now been fulfilled.

The terms were likely something like ’60 days net’ or ’90 days net’; the payment for the load of turkeys will only come due in sixty or ninety days. Merchandise (real turkeys, present goods) have been exchanged for the promise of a future good; payment in 90 days. Clearly, credit has been granted… but there is no borrowing in sight. No interest rate, no collateral, no debt… simply commercial terms. Indeed, money has not changed hands… only merchandise.

Such terms are the backbone of commerce; only a company with a really poor credit rating will be denied ‘terms’ and be forced to buy under conditions of COD… a grave disadvantage, sufficient to drive companies with such poor credit rating out of business altogether.

So far so good; the wholesaler now holds an invoice due in not more than 90 days… and clearly holds many other invoices, due at various dates in the future; the sum total of these maturing invoices is the accounts receivable of the wholesaler. This account is valuable; it can be used as collateral to borrow against, indeed a whole industry called factoring exists to lend money against accounts receivable.

Invoices and accounts receivable however are not Real Bills. They do not qualify; they do not mature into Gold, and they do not assume a monetary role; that is, they do not circulate. The value of receivables is diluted by the costs of borrowing against them… and the benefits of bill circulation are not realized.

If  bills are paid in Gold, or more precisely mature into Gold, bill circulation will arise spontaneously; the quality of Real Bills maturing into Gold is much higher than the quality of bonds, no matter how well secured the bond may be. The quality of Real Bills is also higher than the quality of any fiat currency; this is why Real Bills do not exist today. Only a fool would trade a Real Bill that produces income and matures into Gold for fiat paper that constantly loses purchasing power, and never matures into anything.

Real Bills will assume a monetary role in clearing credit, whereas bonds will not. Bonds must first be sold into the market, and turned into money; their capital value is too variable for bonds to be used as a direct substitute for money. This is a key difference; Real Bills do take on the role of Gold money in clearing debt. Merchants will gladly accept Bills as payment in lieu of Gold; after all, Bills earn profits in the form of the discount, whereas Gold does not… and sure as the Sun rises, the Real Bill will turn into Gold upon maturity.

Most importantly, Real Bills are repaid and retired on their due date, thus Bills are not inflationary. Bills are only drawn against real consumer demand, and only against real goods delivered; thus they are market driven and market limited. If consumers choose to buy fewer turkeys, fewer turkey based bills will be drawn. If the turkey farm has no more turkeys to sell, even in the face of growing demand, no bills can be drawn.

No sales, no bills… no merchandise, no bills. Under Real Bills circulation, consumer demand and the physical constraints of the real economy rule. There is no way for greedy bankers or corrupt politicians to interfere with vital market forces.

The ramifications of Bills and Bonds reach deeply into the fundamentals of the economy; the result of ignoring the laws of economics are onerous, as we see in the GFC happening today. In the next article I will further address these ramifications.

Rudy J. Fritsch

Editor in Chief

The Gold Standard Institute

Gold Standard Murders Bernanke

If you have not yet heard of Mr. Bernanke’s great blunder, you should before reading this article; see http://www.businessinsider.com/ben-bernanke-explains-why-well-never-see-another-gold-standard-2012-3

The gloves are now off; Bernanke reveals that the emperor truly is naked. He exposes the abysmal ignorance of his Keynesian school. Either abysmal ignorance, or else Mr. Bernanke is spouting outright lies.

There is not enough Gold;

This is Gold myth Number One. In fact, Gold is the most abundant resource in the world… if measured by its stock to flow ratio. There are at least 160,000 Tons of pure Gold known to exist above ground, while primary mine supply is about 2,000 Tons per year. This means that there are 80 years or more of Gold supply on hand, compared to a few weeks of stock for other commodities like crude oil or copper or grains.

Why is there so much Gold around? Because Gold is money, Mr. Bernanke!  People treasure and save money… not IOU’s. Gold has positive value; it is not a debt note like a Dollar bill or Euro masquerading as money. Gold is not just a ‘precious metal’ like Platinum. Platinum is NOT money, never was and never will be. Platinum has a stock to flow ratio no different from that of copper or lead.

Gold is the monetary metal par excellence.  Gold is the ultimate extinguisher of all debt. IOU notes like Dollars or Euros do not extinguish debt, merely shuffle debt around. Fiat currencies cannot extinguish debt; they ARE debt. Dollars and Euros appear as liabilities on the Central Bank’s balance sheet. In stark contrast, Gold is nobody’s liability… Gold is a pure asset. It needs no ‘backing’ as do bank notes. Bank notes today are ‘backed’ by treasury bonds… and treasury bonds are more IOU’s, liabilities of the treasury. Gold is never a liability on anyone’s balance sheet.

Any suggestion that there is not enough Gold is nonsense; and at best, suggests that Gold is undervalued in terms of the USD or the Euro. Do you know that the British Empire under the classical Gold Standard ran world trade on 150-200 Tons of Gold held in the vaults of the Bank of England? Do you know that the USA alone has 8,000 Tons of Gold in its vaults? Silly to say there is not enough Gold. The bottom line is that the quantity of Gold is not the problem; quality trumps quantity every time.

Not convinced? Crude oil is the single largest trade item in the world today; about 80,000,000 barrels change hands every single day. At $100 per barrel, this amounts to about 8.5 Billion dollars… per day. Gold at today’s price of $1,650/oz. is $39,000,000 per Ton; so 215 Tons of Gold is enough to support all this trade if a daily netting out occurs, like in commodity markets. If a bit of modern computer technology is introduced, and netting out is done 3 times per day, only 72 Tons of Gold would be sufficient to support the enormous and vital international oil trade.

The magic of this netting out is accomplished by multilateral circulation of Real Bills, as recognized by Adam Smith. Real Bills in circulation serve as the clearing mechanism of the Gold Standard, allowing a ton of Gold to do the work of a hundred tons. As long as trade nets out, as long as there are no trade imbalances, not an ounce of Gold has to move; Real Bills do all the work. Gold only moves if grievous trade imbalances are allowed to develop. Gold imposes desperately needed discipline on international trade. Does Mr. Bernanke understand any of this? Is he truly this ignorant of Gold Standard fundamentals… or is he lying by rote?

Gold is deflationary;

Gold is dug out of the ground at real risk and expense, not borrowed into existence like fiat paper. More fiat paper borrowed into existence equals more debt… period. Extinguishing any given quantity of fiat debt is impossible without the destruction of a corresponding quantity of fiat paper. What is borrowed into existence as debt must disappear on repayment of the debt.

Gold never ‘disappears’… unless it is forced into hiding, perhaps by fear of Government confiscation. There is never a true reduction of Gold stocks; how would Gold supply be reduced? Would people grind up their Gold, mix it with dirt, and stuff it back into the mines it came from? Please!

Deflation under freely circulating Gold is impossible. In contrast, paper ’money’ can indeed deflate, or literally disappear; but before any deflation is possible, there must first come inflation. Paper money must be created before it can be destroyed… not the other way around. If previously created credit ‘money’ disappears, we experience deflation. This is pretty obvious, is it not Mr. Bernanke? Of course, Mr. Bernanke does not admit this, but blames all on Gold…

Throughout the history of the classical Gold Standard, countries repeatedly went ‘off Gold’, usually in wartime… inflated like mad… then went back ‘on Gold’. The so called ‘business cycle’, which in reality is a credit cycle, is caused by this very process; leave Gold, inflate, go back on Gold. As the inflationary paper disappears, blame Gold; but the cause of deflation is not to be found in the return to Gold… the cause is to be found in going off Gold in the first place. Going ‘off Gold’ sets the inflation/deflation cycle into motion.

Prices do not remain stable on a long term basis;

Prices are an essential market signal, and while wild short term price swings should be avoided… as they indeed are under Gold… long term steadily declining prices are marvelous. This is the very situation that prevailed under the classical Gold standard. Increasing productivity reflected in slowly, steadily dropping prices. By contrast, ongoing Central Bank fueled inflation punishes savers, pensioners, and all productive members of society. Gentle, steady ‘deflation’, or more exactly steadily increasing purchasing power is beneficial for all… except for banksters and politicians.

The real benefit of Gold is not long term price stability but long term interest rate stability. Gold regulates interest rates admirably, so well that interest rate speculation under Gold is unprofitable. Speculation that is unprofitable does not come into existence… who in their right mind would start up an inherently unprofitable business?

The Great Depression was so long and so bad because of Gold;

Government interference with natural market feedback mechanisms is what prolonged the Great Depression. The root cause of the Great Depression was Central Bank interference in the credit markets, made possible by the abandonment of the Gold Coin Standard and the Real Bills Doctrine of Adam Smith before WWI. The proximate cause of the Great Depression was the injection of excess credit into the economy through expansionary Central Bank policy during the credit fueled boom of the ‘roaring twenties’. Under an Unadulterated Gold Standard the creation of excess credit is impossible.

No depression, great or otherwise, is possible without fiduciary (promise based) bank notes in circulation. Fiduciary bank notes are backed not by Gold or by fully liquid Real Bills… but are issued fraudulently against long term (Government) bonds… Government promises. In plain terms, cash obligations in the form of Federal Reserve Notes … aka Dollar bills… are backed not by liquid assets like Gold or Bills that mature into Gold within 91 days, but by long bonds. Bonds are illiquid because if there is a sudden demand for cash, selling bonds for cash causes bond prices to fall. Falling bond prices decimate the bank’s balance sheet… as the asset side now holds bonds, not Gold or Bills.

The inevitable collapse comes when confidence in the system is lost, and the short term borrowing offsetting long term obligations cannot be rolled over… and the run on the banking system starts big time. Such a run is starting right now. Even Bernanke’s famous helicopters cannot drop Dollar bills fast enough to stop the run.

Gold standards leave central banks open to speculative runs;

As we saw above, bank runs are not possible under an Unadulterated Gold Standard. Indeed, there is no need or any use for a central bank under an honest Gold money standard. No wonder Mr. Bernanke is a mortal enemy of Gold. The central bank system was created to offset the evils of property rights invasion with regards to money. Specifically, laws were passed in the nineteenth century decreeing that once money is deposited in a bank, that money is no longer the property of the depositor, but becomes the property of the Bank. Central banks were also chartered at that time. Coincidence?

Imagine taking your furniture to a warehouse for storage, and having the law deem that your furniture has suddenly become the property of the warehouse owner. The warehouse owner can legally do whatever he wants with your furniture; lease it out or sell it… meanwhile leaving you as a common creditor of the warehouse company, with no rights to your money… er furniture. If the bank… er warehouse… goes bankrupt, you have no legal recourse to recovering your property… as it is no longer recognized as being your property.

This is unconscionable, but is exactly what happens to your money today. Inevitably banks grab demand deposits and lend them out long term at great profit. This is why a ‘lender of last resort’ is needed; to help banks in trouble when they cannot meet calls for depositor’s money. The depositor’s money is not available; it has been lent out long term.

The answer to this problem is to let the true owners of money decide what they want done with their deposits. Do they want their money in a demand deposit that pays no interest, or in a term deposit that does… but locks up their money for an agreed length of time? If loan maturities match deposit maturities, runs are impossible. Demand deposits remain available for immediate withdrawal… and time deposits must stay with the bank until maturity.

Even if ALL demand depositors were to ask for their money at the same time, the banks could deliver. Of course, in such an honest banking system banks would have to forego the illicit, dangerous, but profitable practice of borrowing short to lend long.

Furthermore, Bernanke never talks about what happens when the ‘lender of last resort’ is tapped out, as it is right now. Today not only central banks but government treasuries are bankrupt; see Greece, Portugal, and the ‘sovereign debt’ crisis. Only tax payers are left to bail out the CB’s… and they cannot possibly do this, as the amount of debt in existence is impossible to repay, or even to hold steady. The debt tower keeps growing… and the real economy supporting the tower is collapsing.

The gold standard tends to cause interest rates to rise during downturns and interest rates to fall during good times;

More mythology; in fact, Gold serves to maintain steady interest rates; rates so steady, that interest rate speculation did not exist under Gold. Such speculation was not profitable. Steady interest rates are most important to industry, pension funds, producers, etc. Along with the steady value of the Golden numeraire, or Golden unit of account, low and stable interest rates allow the real economy to thrive.

Managerial attention is focused on running and improving the business, not on planning for inflation or deflation, and not on ‘hedging’ –or speculating on- interest rate swings and ‘forex’ swings. Under Gold there is no forex; Gold is Gold in any language. Without forex, there can be no forex speculation. With interest rate speculation and forex speculation impossible, the only way to profits is the old fashioned way; one earns profits by serving ones customers… better than ones competitors do.

Mr. Bernanke does not (yet) seem to realize that he has a tiger by the tail; even Allen Greenspan, the ‘Maestro’, has admitted that ‘in extremis, fiat has no place to go except to Gold’. The process of ‘remonetization’ of Gold is under way; Iran is already buying food for Gold… as it has no choice but use Gold or go hungry; extremis indeed.

The sweet irony of this is that Washington, the very epicenter of Dollar printing, is putting extreme pressure on Iran, literally forcing Iran to turn to Gold. As the trend toward Gold remonetization accelerates, as fiat paper collapse puts intolerable pressure on other countries as well, you can be sure that it is Bernanke who will be murdered by Gold… not the other way around.

Rudy J. Fritsch

Editor in Chief

Economic Superstructure on a Three Legged Foundation

My last few articles talked about the Golden Triangle, the ‘Nirvana’ of Economics; about what is needed to achieve an honest, stable foundation for the world’s economy. A stable economic foundation comprises Gold (and Silver) money, credit sharply differentiated from money, and credit in turn sharply differentiated between borrowing as represented by the bond market and clearing as represented by the Real Bills market.  Money, Borrowing, and Clearing are the three legs necessary and sufficient to ensure a stable economic foundation.

This foundation is ready and able to support any level of legitimate economic activity. It is time to start building on the foundation; to see how the vital economic functions of the economy relate to the foundation. Most importantly, to build the economic superstructure without compromising the stability of the foundation; compromise by introducing fraudulent, dangerous practices such as borrowing short to lend long… or compromise by issuing legal tender notes against irredeemable promises backed by ‘faith and credit’.

Bond markets represent long term borrowing used to finance fixed capital. Equities in turn represent the ownership of fixed capital. Money borrowed through bond markets and money acquired through equity markets is closely related; the relationship between bonds and equities is one major link between foundation and the superstructure. I will talk more about this link in an upcoming article.

Another vital link between foundation and superstructure is the relationship between commodity markets and the Real Bills market. Just as bond and equity markets support the financing and ownership of fixed capital, bill and commodity markets support the financing and ownership of flowing capital. Real Bills finance the movement of vitally needed goods on their way to the consumers. Commodity markets represent the ownership of many of these goods; foods (grains and meat products) as well as fuels (crude oil, natural gas, gasoline) and other essentials.

To fully understand the importance of commodity markets, we need to take a look at their history. Commodity markets, more precisely commodity futures markets, grew out of the need for producers of commodities, like farmers and ranchers, to reduce the risk of their inherently risky enterprises. A farmer is much at the mercy of weather, crop disease, locusts, and other naturally occurring conditions not under his control; he certainly does not want to add price risk to this already heavy risk burden.

There is no way to reduce natural risks… only to ameliorate their effects. Fortunately for the farmer, it is possible to remedy price risk. Price risk is avoided through the technique of forward sales. In a forward sale, the producer and the user of the product sit down and negotiate a sales price for crops about to be planted, crops to be harvested months in the future. The crop is sold ‘forward’ in a temporal sense, well before harvest. Future sales are voluntary; the buyer and seller must both benefit, or else no transaction would take place.

The benefit to the buyer is the very same as the benefit to the seller; the elimination of risk. A poor crop could lead to shortages, soaring prices; the buyer would be hurt. A bumper crop could lead to a glut, collapsing prices; the farmer would be hurt. By agreeing on a mutually agreeable price well before the harvest, both participants avoid the destructive effects of adverse price swings. Of course, they also give up the opportunity to benefit from beneficial price swings; the farmer will not profit if prices soar, and the buyer will not profit if prices collapse. So be it; neither farmer nor end user are willing to risk possible excess profits against possible major losses; major losses could easily lead to bankruptcy.

But there are problems with forward sales; each farmer is obliged to find a buyer for his full crop, and each buyer wants all his product needs satisfied. It is unlikely that one buyer and one farmer will offer or need the same quantity of product; more than one farmer and/or more than one buyer would need to participate in most forward sales. Such deals are hard to negotiate, costly, and risky; what if a buyer or a farmer defaults? This is a form of direct barter, difficult under any circumstances… and more difficult in the temporal sense; far more difficult than an immediate barter of ‘fish for eggs’ in a farmers market. Not only spatial, but temporal obstacles must be overcome in order to negotiate a deal.

An opportunity thus arises for a ‘clearing house’, an entity that accommodates the needs of both sellers and buyers of corn, or wheat, or cattle. The clearing house issues standardized contracts for these and other important agricultural commodities, and guarantees acceptance and delivery of the commodity to both buyers and sellers. This makes the farmers life much easier; no more need to find an appropriate counterparty and negotiate a deal, simply call the commodities clearing house and sell contracts. No risk of counterparty failure to worry about… or to insure against. The clearing house takes care of all this.

Same for the buyer; to ensure receipt of the right product at the right time for a known price, a flour mill buys wheat futures and waits for delivery… at a locked in price. A slaughter house does the same; buys appropriate cattle futures, and later takes delivery. The only remaining problem is one of market liquidity; what if a bunch of farmers decide to sell wheat contracts all at the same time, and there are not enough buyers present… or vice versa? Prices would become unnecessarily volatile, and the clearing house could not assure timely transaction of all contracts… without the services of the third protagonist in commodity futures markets; the often reviled speculator.

Unlike the farmer and miller who are looking to avoid risk, so they can concentrate their capital in their respective business, the speculator risks his capital… hoping to capture the profits the producer and buyer choose not to seek. He neither grows crops, nor makes use of them; he simply studies the markets, and decides to buy if prices seem low, and to sell if prices seem high… thus accepting risk in return for an opportunity to profit. In effect, when he buys when the farmer wishes to sell, he seeks the excess profit the farmer chose not to seek, and in return takes on the farmer’s risk. He does the same for the buyer; by selling when the user wishes to buy, he seeks the excess profit the buyer chose not to seek… and in return takes on the buyer’s risk.

Clearly buying at low prices tends to support prices, and selling at high prices tends to cap prices; the ‘nefarious’ speculator is doing society a favor. Collapsing prices hurt the farmer, perhaps pushing him into bankruptcy; bankruptcy of farmers is not to the benefit of any society. Skyrocketing commodity prices hurt all commodity users. The speculator’s work, his risk taking, tends to level prices to the benefit of all.

Indeed, the so called ‘speculator’ may better be called an arbitrageur; an arbitrageur who works in the vertical –time- dimension rather than the horizontal –space- dimension. An arbitrageur by definition works, and profits, by reducing price unbalances, or the ‘spread’. Temporal arbitrage tends to reduce extreme price swings over time, just as horizontal arbitrage tends to reduce extreme price swings between geographic areas.

So, what does all this have to do with ‘economic Nirvana’? Very much indeed. Speculation as a means of ameliorating naturally occurring risk is one thing… speculation on man-made risk is another thing; it is called gambling. Risking one’s own money to speculate is one thing; using other people’s money to gamble with is another thing altogether… especially if the rightful owner of the money has no say in the gambling being undertaken with his money… and double especially if gambling losses are charged to the rightful owners of the money, while gambling profits end up in the pockets of the gambler. This can no longer even be called gambling; it is called stealing.

This of course is what is going on today, so much so that this particular type of theft even has a name; it is called ‘socializing’ losses. Heads I win, tails you lose… this is what happens to you if you have any of your money ‘deposited’ in our fiat based banking ‘system’. The legitimate owners of deposited money have their property rights invaded; the money deposited in the bank is no longer considered the depositor’s under the law; the depositor has no say in the ongoing swindle.

As if this legalized theft were not bad enough, it gets worse. The biggest casinos today are not the commodity futures markets, but the ‘enhanced’ futures markets. It is today possible to speculate on future interest rates. It is today possible to speculate on foreign exchange, the relative value of fiat currencies. Since both these factors are under human control… namely under the control of central banks and treasuries… it is not correct to call betting on future interest rates or on foreign exchange values speculation; it needs to be called gambling.

The so called ‘carry trade’ is the illicit bastard son of futures speculation; it combines interest rate gambling with forex gambling… a double whammy. Just think about it, billions of Dollars are put to risk in this type of gambling. Gains… we should not call them profits, as legitimate profits are hard earned… are enormous, and are risk free to the participants, the ‘too big to fail’ banks and financial houses. These gains come at the loss of the real economy. Of course, losses that are ‘socialized’ also come at the loss of the real economy. The tax payer is forced to foot the bill for both gains and –inevitable- losses.

Not only monetary capital but human capital is devalued by this gambling, instead of being put to good use solving the world’s endless problems; poverty, war, desertification, hunger, disease, pollution, on and on. The ‘best and brightest’ minds are busy inventing ever newer, ever riskier derivatives to ‘game’ the system… instead of putting their talents to good use.

The problem seems insoluble, and so it is; under fiat. The real solution is not ever more regulation, not ever more infringement of property rights, not ever more ‘oversight’… not more ‘hacking at the branches of evil’. The solution is very simple; destroy the root.

The way to destroy the root of interest rate speculation, and forex speculation, and carry trade speculation, is to destroy the profitability of the casino. Put the world economy onto the stable three legged foundation of the Unadulterated Gold Standard… and the casino is out of business.

The Unadulterated Gold Standard stabilizes interest rates, making bond speculation unprofitable. Once it is clear that there are no profits to be made, the speculative edifice collapses, with no regulation required… without any new bureaucracy or new government ‘oversight’… without a shot being fired.

The Unadulterated Gold Standard eliminates forex gambling… after all, Gold money is money anywhere, unlike Dollars and Yen, or Euro and Yuan… and if there is no forex, then how can there be speculation on forex? With interest rates stabilized, and no forex to ‘fluctuate’, then the carry trade also disappears without a trace. No more destructive ‘hot’ money flows; there is no more ‘hot money’. If there is no ‘hot money,’ how can there be ‘hot money’ flows?

With all the obscene gambling demolished, badly needed capital -both monetary and human- will look to where real profits can be made; in the real economy. Speculation will be reserved for natural risk amelioration, where it belongs. As Professor Fekete so aptly puts it, fire insurance is prudent and worthwhile; unless arsonists run the insurance company!

Rudy J. Fritsch

Editor in Chief

The Gold Standard Institute

January 4 2012

 

A Four Legged Paper Stool…?

My last article talked about the natural stability of the triangle, both as a structural element and as the basis for a stable, three legged stool. Clearly chopping off a leg or two will make a three legged stool unstable; but adding an extra leg, making it into a four legged stool, also undermines the stool’s natural stability.

If the floor is uneven, or if one leg is longer or shorter than the other three, a four legged stool will rock. This is a pretty good analogy for how the ‘Classical Gold Standard’ worked. ‘Rocking’ is seen in recurring ‘booms’, ‘panics’ and ‘recoveries’ experienced throughout the nineteenth and early twentieth centuries. This ‘rocking’ of the economy between overheat and collapse is generally called the ‘business cycle’.

This name is highly misleading; what correlation is there between cycles of widely disparate businesses making up the economy? What correlation is there between an apple orchard and a hair comb manufacturer… or between a shoemaking business and a ship line? In fact, there is only one; money, or more precisely credit.

Credit is the only factor that affects all businesses; thus the so called ‘business cycle’ is actually a credit cycle.  If we take a look at how credit influences all business, we can see that there is not only correlation but causality between the availability of credit, or rather excess credit, and the boom/bust credit cycle.

The roots of the credit cycle can be traced back to seventeenth century England. At this time, English common law set the noxious precedent that if anyone deposits money in a bank, that money is no longer the property of the depositor, but is deemed to have become the property of the Bank!  This precedent was confirmed by further British jurisprudence in 1811; see this link for more information: http://www.cobdencentre.org/tag/carr-v-carr-1811/ Remember, the depositor does not sell or trade his money to the bank, merely deposits it. This breach of property rights is staggering if you think about it.

Consider what happens to your furniture if you deposit it in a warehouse… does it become the property of the warehouseman, to do with as he sees fit? Suppose he sells your furniture, or lends it out while it is in his warehouse…? I think if you showed up to reclaim your furniture, and were told that it had been sold, but he has other furniture ‘just as good’, you would not be a happy camper. Or suppose it was lent out, and will not be available to you till next month… why you may call the police and have the warehouseman arrested.

Furthermore, the law sides with you. If the warehouse company went bankrupt, the bankruptcy trustee would separate the furniture being warehoused from the warehouse and its equipment, like the fork lift truck or the building… and after returning all the deposited furniture to the rightful owners, would sell the warehouse property to settle with creditors. As a depositor of furniture in a warehouse, you are not considered a creditor but a customer… and any property being warehoused belongs to you and to other depositors… not to the warehouse. So why is Money different?

Oh, you say Money is fungible, and any coin of the same weight and fineness (we are talking real Money here, Gold or Silver) is as good as any other… thus you have no claim to a specific coin or coins… and this is true. Just like a grain elevator in fact; if a farmer were to deposit 100 bushels of hard red winter wheat with a grain warehousing operation, then he will clearly not get the very same grains back; but he will get back 100 bushels of hard red winter wheat… not corn or oats, and certainly not an excuse that the grain has been sold or LEASED!

So why is Money different?

Is it just a simple coincidence that the Bank of England was franchised at about the same time this legal precedent was set? Indeed, this invasion of property rights goes quite against the times. England was leading the way in the recognition of property rights… an Englishman’s home was his Castle, and even the King of England had no rights there. The Magna Carta was written in England not long before this time. Even more tellingly, the Industrial Revolution took off in England, not elsewhere.

Sure, England had coal… but so did France and the rest of Europe. England had scientists… but so did the Continent. The fundamental reason that the Industrial Revolution started in England is that property rights in England were extended to intellectual property rights as well as physical property rights.  James Watt had a flash of genius in understanding how to radically improve the efficiency of Newcomen’s steam engine; but the years of effort it took to develop and manufacture the Watts condensing engine that kick started the industrial revolution took much capital and much perseverance.

This capital only became available through the newly written patent laws. Profits for inventors… who are not tenured academics or government supported bureaucrats but entrepreneurs competing in a free, capitalist marketplace… only became available through the recognition of the inventor’s intellectual rights. The enormous burst of energy devoted to improving the machinery of the industrial revolution sprang from this new recognition and respect for intellectual property rights.

Why on Earth then were property rights to Money invaded… in the very same country and about the same time?

It is no coincidence that his was also the time the bank of England was chartered; had this invasion of property rights not been legalized, then fractional reserve banking as we know it could not have arisen, the classical Gold Standard would have remained a three legged, fully stable system… and the current catastrophic collapse of the world financial system would have been preempted. This is how critical the legal precedent regarding money, property rights and banking is.

With the unethical transfer of property rights to the banks, the banks could legally do what they pleased with the money, with the depositor having only a claim against the bank… but no control over what the bank does with the deposited money. Banks inevitably lend the short term cash deposits out for long term rates; the notorious and illicit practice of borrowing short to lend long is thus legalized… instead of being outlawed and punished. This practice leads to creation of excess credit, leads to the credit cycle and leads to runs on banks. A run takes place when depositors ask for their money back, but the deposit money is no longer there; it has been lent out for the long term.

The so called inverted yield curve, whereby short term credit commands higher interest rates than long term… a very unnatural event if you recognize that longer terms involve greater risk and should and naturally do command higher rates to compensate for this, is a direct result of the illicit practice of borrowing short to lend long.

Had property rights stayed where they belong, with the depositor, then the banks would be obliged to ask each depositor exactly what the depositor wishes be done with HIS money; the choices are simple, but critical. The banks could offer a vault service, like the warehouseman does. This service would incur storage costs for the depositor, but his money would be fully guaranteed, segregated, insured, etc… as safe as possible, perhaps safer than home storage; after all, banks have serious vaults, and guards, alarm systems etc. to protect your wealth.

Alternatively, they could offer a fully liquid demand deposit account. This account would offer a small but non zero return to the depositor. Money so deposited would be available in the form of demand notes drawn against the bank, and offset in the bank portfolio by only truly liquid current assets. The assets behind demand notes could be only cash Gold, Silver, or Real Bills that mature into Gold in not more than 91 days. In fact, German banks before WWI were expected to hold 1/3 Gold and 2/3 Bills against their demand notes. Real Bills are an earning asset… the face value or maturity value is higher than the current or discounted value… thus the depositor would receive a modest but worthwhile return.

Finally, if the depositor agreed to tie up his money for a more extended period of time, then the bank could offer interest, based on prevailing rates, which is always higher than the discount rate. The amount of money available to lend long is thus determined by the individual depositor’s time preference.

There cannot be a run on the bank, as all notes are backed by liquid real assets, and only long term time deposits are available for longer term loans. The term structures match perfectly, automatically. A simple example of how this works is to assume 10 depositors show up at the bank, each with 100 monetary units they wish to deposit.

The first depositor decides that he wants to keep 20 units in his demand account, the rest in a time deposit. Further, to keep the numbers simple we assume that all ten depositors decide to do the same thing; 20 units of demand deposit, 80 units long term. The result is that the bank will end up with 200 monetary units in its demand account, and 800 in its term account.

Now it is perfectly legitimate and proper for the bank to lend out the 800 units; after all, that is what the owners of the money want. Thus, 800 units of money are available to be lent into circulation… and the borrowers of this 800 units will also decide what they want with their newly borrowed funds; put some into demand deposit, some into term deposits.

If the ratio that new depositors use happens to be the same, that is 20% demand and 80% time, then the next cycle of this iterative process will allow another 640 units to be lent out… 80% of the 800 is 640. Then another round, 80% of the 640 etc… This is the famous ‘fractional reserve’ process… but done with no ‘printing money from thin air’, with no arbitrary ‘reserve ratios’ and no central bank needed to try and ameliorate bank runs.

Deposits come and go, and money owners decide on their split between demand and time deposits all the time. If we simply add up all the time deposits and demand deposits in the whole banking system, then we can come up with a single number: the ratio between demand and time deposits, as determined by the myriad bank customer.

Today this number is called the Reserve Ratio! But there is an enormous difference between a naturally occurring number as determined by market participants, and an artificial number set by interested parties such as greedy bankers and power seeking politicians. The difference is polar, as is the difference between debt and money; the two numbers are 180 degrees apart.

The power to influence the whole economy now rests with one authority; the central banker. The credit cycle is controlled by one party, the central banker. No longer does the reserve ratio reflect the wishes of the populace. Think about this for a minute; the economy is solid, jobs are plentiful, the future looks peaceful and rosy. As a result, most depositors would be willing to keep a modest sum in their demand deposit, and more in the time deposit, happy to collect the higher interest available. Thus the reserve ratio would remain low. Perhaps only 15% of all deposits would be in the demand account.

But suppose the economy is showing stress, the job markets look less positive, the future looks more risky; depositors would naturally want to keep more money on hand, ‘just in case’; and the ratio would automatically grow to reflect this concern. No need for anyone in ‘power’ to ‘set’ or adjust this ratio; all economic numbers like prices, interest rates, discount rates etc… in a truly free market… are self-regulating. The ‘reserve ratio’ is optimized by simple but vital market feedback mechanisms.

Today these natural feedback mechanisms have been cut, and replaced by ‘authority’. In effect, the ‘numbers’ are set at the whim of the powerful, in the interest of the powerful… and the whole economy suffers the consequences. Instability of the four legged Gold standard was caused by exactly this; the ‘reserve ratio’ was set at the whim of the central banker… and the banker’s interest is to create more credit than the market needs or can support; in order to collect more interest.

The Government backs this policy, because the Government needs ever more cash… to gain and keep power. The only place they can get more, virtually limitless cash is from the Central Bank… so the instability and monetary destruction proceeds apace. Excess credit is force fed into the system… and once the debt reaches a level where the economy cannot carry interest on debt outstanding, the artificially induced boom suddenly turns to bust. After the collapse, the destructive cycle starts anew.

To achieve Economic Nirvana, a stable and honest monetary system, we need to first restore property rights; then central banks can close their doors, and market participants can reclaim their legitimate power over reserve ratios, as well as over interest rates, over money supply… overall economic ‘aggregates’. The three legged stool of the Unadulterated Gold Standard has only three legs… Really.

Cash Gold and Silver (Money), Bonds and Real Bills are the necessary three legs. No fundamental need exists for bank note circulation; but if bank notes are to be used, then they must be issued against Money in the issuer’s vault, and Real Bills in the portfolio; not against long term promises… especially not against promises with no intent of being honored. Such false promises backing Notes were the ‘fiduciary’ (trust) component of the classical Gold Standard, the forth leg that causes instability. No fiduciary ‘money’, no excess credit; no excess credit, no credit cycle. It is as simple as that.

The invasion of property rights is a slippery slope; today not only customer’s money, but their futures contracts are being ‘commingled’ with the capital of the depositories. The ‘furniture’ held in the MF Global ‘warehouse’ was used by the criminals in charge to try and save their own bacon. This theft shows what road we are on; the odor of burning sulfur grows stronger every day! If we do not establish an unadulterated, stable Gold standard under the world economy, our civilization is doomed.

Rudy J. Fritsch

Editor in Chief

The Gold Standard Institute

The Golden Triangle – Economic Nirvana?

My previous article, Golden Foot in the Door, suggested that if Gold coins and Gold bonds are in circulation, we are but one step away from Economic Nirvana;  the Unadulterated Gold Standard as the foundation of the world economy. Of course, the first two steps are not guaranteed; but if the new Gold Swiss Franc is adopted, and Gold Bonds are issued based on Sovereign Gold income, the third step to Nirvana is in reach.

So why is an Unadulterated Gold Standard ‘Nirvana’? Simply because all the abuses of the irredeemable paper money system are erased under the Unadulterated Gold Standard. This includes the original error… or was it original sin… whereby property rights to Money were curtailed by an early English law precedent. Set in the seventeenth century, around the same time the bank of England was chartered (big coincidence!) the ownership of money deposited in a bank demand deposit account was legally ceded to the bank.

The triangle analogy kicks in as the triangle is the most stable structural element; a three legged stool is stable and does not ‘rock’ or exhibit partial instability on uneven ground. If you add a fourth leg, it will become less stable. Of course, if you chop off one leg and try to make a two legged stool, stability will be lost in one plane… to say nothing of chopping off two legs.

The monetary ‘system’ in use today has only ONE leg! Talk about unstable, and talk about eternally ongoing, futile efforts to keep the balance of this poor damaged stool; constant manipulation of ‘money’ supply (printing), interest rate ‘twists’, bail outs, credit default ‘insurance’, etc. etc… ad infinitum. By contrast, a three legged stool is inherently stable; as is the unadulterated Gold Standard, the three legged stool of economics.

The one leg our monetary system rests on is the canard called ‘debt money’. In fact, even central bankers do not seem to know what money is; is it MZM, or M1, or M2, maybe M3…? Mr. Bernanke does not even admit that Gold is money… he calls it an ‘asset’. The truth of course is far simpler than he or his ilk make it out to be; Debt (or its flip side credit) is the exchange of a present good for a future good… and Money is that which extinguishes all debt (or credit)… period.

Truly it is a simple as this; money, that is Gold or Silver, is an item of positive value, a present good, which extinguishes all debt. Debt money is impossible… How could Debt possibly extinguish itself? A thing is either a debt note; a promise, a future good, two birds in the bush… or the thing is a present good;  Real money, a ‘bird in the hand’, something of positive value. There are no other possibilities; the concept of ‘debt money’ is just that, a concept… a nonsense concept that does not, cannot exist in reality… only in the fervid brains of Keynesian economists.

By clearly separating money and debt, we re-establish a two legged stool; a big step in the right direction, but still not quite there; we may have our Gold coin In circulation, real money, a present good item of positive value, and a Gold Bond, representing debt, that is future goods or promises of delivery of a present good in the future… but the third leg is still missing.

The way to reestablish the third leg is a bit more obscure, and hidden farther in the mists of time; after all, it was only about 41 years ago that money was finally removed from the system, and replaced by pure debt… under President Nixon’s default of the US international Gold obligations; the notorious ‘closing of the gold window’. The ‘third leg’ of the Classical Gold Standard was amputated just before WWI.

If you study history, the answer is easy enough to find; Adam Smith wrote about this many years ago… that is why this third leg is called ‘The Real Bills Doctrine of Adam Smith’… but the concept can be understood right here right now. All we have to do is look more closely at ‘Debt’… and we will see that there are in fact two distinct facets of debt; mixing up these two facets is just as deadly as confusing money with debt. The classical Gold Standard ‘failed’ and Great Britain went ‘off Gold’ after WWI mainly because of the failure to differentiate between the two facets of debt.

Close examination of credit shows that there are two aspects; there is credit applied towards fixed capital; for example machinery, farm land, orchards, oil wells, transportation equipment etc. There is also credit applied towards rapidly moving consumer goods in urgent demand; manufactured products, food stuffs, fuel, in fact anything that will be sold to the ultimate consumer in 91 days (one quarter of the year) or less.

Credit for financing long term fixed capital items comes from savings. The quintessential market for long term financing is the bond market. We are all pretty familiar with debt based on borrowing; the way the bond market works. The bond market is controlled by interest rates, and supported by collateral… bonded debt is NOT self-liquidating. This is a very important concept, and often misunderstood.

Consumer debt (borrowing) is clearly not self-liquidating, as the borrower will need to earn money to repay the debt. Commercial debt for capital investment is not self-liquidating either. This is not quite as obvious as in case of consumer borrowing, but is true nonetheless; money borrowed for the purchase of a machine for example will not be self-liquidating; the machine may earn enough money to repay the debt, but this is not certain; that is why borrowing demands collateral. If the machine does not make sufficient profit, the borrower will have to find another way to pay the debt; just like the consumer. If the borrower cannot pay, the collateral will cover any losses to the lender.

By contrast, Real Bills represent a form of self-liquidating credit quite distinct from ‘borrowing’. In fact, it is not fully correct to call this ‘credit’, as the word can be confusing. Better to call it clearing, or simply terms. In a commercial transaction, very few payments are COD; terms are part of virtually all sales. Only the poorest credit risk firms will have to pay COD; all with reasonable credit ratings will get 30 or 60 or 90 days net; terms that imply credit.

Bills or ‘invoices’ drawn against sales of consumer goods in urgent demand are the ‘fuel’ of the Real Bills Doctrine. Bills drawn on items in urgent demand will spontaneously go into circulation; other bills will not. Bills are self-liquidating; the upcoming sale to the consumer of the very item the bill is drawn against assures payment. No need for profit or earnings; the very fact that Bills are only drawn against urgently needed goods is enough to assure payment… and self-liquidation.

Real Bills drawn on real goods on their way to the ultimate consumer do circulate, thereby assuming a temporary but vital monetary role; they finance or ‘fund’ the production of much needed consumer goods… Real Bills entail no borrowing, no collateral, no payment stream, and NO interest rate. Instead, Real Bills are discounted; that is, they are paid in full on maturity, but trade at a discount that decreases linearly from the date of drawing to the date of maturity. Real Bills are the least expensive thus most efficient way to fund the production of consumer goods.

Most importantly, since bills are drawn on consumer goods, the funding for Bills relies on consumer’s propensity to spend; by contrast, interest rates on borrowing are driven by the propensity to save. There is no link between the two forces. Anyone with Gold earnings has three choices; hoard the Gold… as it is constantly, gently appreciating in purchasing power. Spend Gold on needed consumer goods, thus giving rise to new Real Bills… or ‘save’ the Gold, that is put it to work… if the interest rate being offered is sufficient to overcome the instinct to hoard.

There are the three legs of our Golden Stool; leg one is Money; fixed quantity, hard, stable, 80 plus years of mine supply on hand… and slowly appreciating as the economy grows ever more efficient. Leg two is the Gold Bond; sure returns, long term, a vehicle for savings suitable even for orphans and widows; bonds for saving, NOT for speculation. Leg three is the Real Bill; flexible, responsive to consumer demands, liquid enough to back Bank Demand Notes if such notes are in circulation, limited by physical constrains of the real economy.

This is the ideal, the Unadulterated Gold Standard; the Golden Triangle. Gold (and Silver) as Money, Bonds and Bills as the two other legs. So stable is such a system, that historically it survived for centuries… and even survived the artificial Government sponsored ‘demonetization’ of Silver in 1873… a loss of about ½ of total money in circulation!

But what of the panics and such, the so called ‘business cycle’ that seemed to plague the Classical Gold Standard? The cause of these effects is easy to discern; there was a fourth, artificially attached ‘limb’ that allowed indeed forced these cyclical instabilities to arise; this leg is called the ‘Fiduciary Component’. Fiduciary means trust, or ‘promise’. This component was the vehicle whereby excess credit was pushed into the system, by greedy bankers… and compliant governments.

I will discuss this ‘fourth leg’ and the invasion of property rights necessary to implement it in more detail in my next article. Stay tuned.

Rudy Fritsch

Editor in Chief

The Gold Standard Institute

When Debt Masquerades as Money

There is an amazing amount of confusion, or more accurately obfuscation, in the world of money, finance, and economy. The ‘powers that be’ at the Fed and the Treasury claim that one needs at least a PhD, if not a Doctorate to understand what is going on in the economy.

This is the worst kind of rubbish possible! At bottom, at the root, economics is actually simple, easy, and ‘common sense’. To clarify our understanding, we just need to have a clear grasp of a few basic concepts and the words used to describe them. For example, there is much talk about ‘debt money’… but this is a grievous contradiction in terms… debt and money, like fire and water, are poles apart. Just as water extinguishes fire, so money extinguishes debt.

Let us define debt and money before going any further…

‘Debt; the exchange of a present good for a future good’.

‘Money; that which extinguishes all debt’.

To understand what these definitions mean in real life, let’s look at a simple example of credit… or debt. Suppose I call my friend Joe and ask to borrow a pound of sugar; he agrees, and I write him an IOU that says ‘I owe you’ a pound of sugar, and I promise to give it back next week when I go shopping.

I am now in debt to Joe for a pound of sugar, or what is the flip side, Joe has extended me credit in the form of a pound of sugar. The sugar is a present good, and the IOU or debt paper, a future good… the promise of a present good. Come next week, I give Joe back the sugar, he rips up the IOU which is now fulfilled, and the debt has been extinguished… by the present good… as promised. Pretty simple and straight forward. So far, I don’t see any need for that PhD.

But suppose I forget to buy sugar, and when the debt comes due, I cannot pay it back; instead, I anxiously call my friend Jill, ask her if she has a pound of sugar, and if she is willing to lend it to me; she says yes, so I give Jill’s sugar to Joe, and transfer the IOU to Jill… to whom I now owe a pound of sugar.

Clearly Joe is out of the loop, that is he has been ‘paid’… but the debt has NOT been extinguished, merely transferred… I now owe the pound of sugar to Jill. This is exactly how so called ‘debt money’ operates; debt is merely shuffled around, never extinguished. More on this in a second, but the question is since sugar extinguished debt, should it be considered ‘money’?

Remember, the definition says money extinguishes ALL debt, not just some debt. If the debt your company owes you for your week’s work were to be paid to you in sacks and sacks of sugar, you would not be a happy camper… or if you tried to buy a TV set and showed up at the electronics store with sacks of sugar, you would not get very far. Sugar is a commodity, an item of positive value, a present good… but it is not money. It is not able to extinguishing all debt. To understand his concept, one does not need a Doctorate … does one?

So, how does ‘debt money’ operate in today’s world? Very simple; the Fed or any other central bank issues ‘notes’ called Dollar bills, or Euros… and these bank notes represent a liability on the bank’s books, just as my sugar IOU is my liability. When we ‘pay’ a debt with Dollar bills, or any other bank note, we are NOT repaying or extinguishing the debt, merely shuffling the Fed’s IOU’s to someone else. Debt is not extinguished, merely transferred.

Of course, it is not very clear as to what the bank note is promising to pay, unlike the sugar IOU that promises a given quantity of sugar. The reason for this lack of clarity? The simple fact that that the bank notes are fraudulent. They are promises to pay… nothing.

This is in sharp contrast to the meaning of bank notes before WWI, when the world was still on the classical Gold Standard. Back then, it was perfectly clear that bank notes were IOU’s that promised to pay money (Gold). In a word, bank notes were redeemable in real money.

All this changed drastically before WWI. The powers that be knew that a major war would be enormously expensive; as the prospect of war hardened, the ‘great powers’ started to recall their Gold, in effect calling their debts, and filling their treasuries. The Gold thus accumulated was substantial, but not nearly enough to finance a major war.

This was well understood; the pundits at the time predicted that a major war could not last more than a few months at best, as all the combatants would drain their treasuries, and run out of money (Gold) to finance a long war. In anticipation of this, ‘legal tender’ laws were passed, first by France then by Germany… laws decreeing that bank notes were to be considered… money! By waving a magic wand, Governments supposedly turned IOU’s into money. The legal tender laws were the first nail in the coffin of the classical Gold Standard.

All this chicanery was well disguised, and Gold coins continued to circulate alongside Gold; indeed banks still exchanged paper notes for Gold on request… for a while. By the nineteen thirties, this was no longer true; Roosevelt forbade American citizens from even owning Gold. This decree was the third nail in the coffin… the second nail was the destruction of Gold’s clearing system, the circulation of Real Bills.

Real Bills financed multilateral trade under Gold, at the lowest cost possible. In preparation for war, multilateral trade was destroyed. Sadly, once the war was over, neither was ‘legal tender’ legislation repealed, nor was multilateral trade and Real Bills circulation allowed to resume. The paper system rolled on… then Nixon put the last nail in the Gold Standard coffin by defaulting on US Gold obligations.

The remaining question is; what assets offset the liabilities in the Treasury’s balance sheet today? Before WWI it was Gold… but not today. Are these assets something else of real value, present goods like Gold is…? No, the assets of the Treasury today are the “Full Faith and Credit” of the US Government. In our topsy-turvy world, Faith and Credit are called assets!

But what does all this really mean? The assumption is that the government, with its ‘unlimited’ taxing power, can always pay back its debts… eventually. Or at least, the belief is that it can and will do so. In reality, Treasury debt is assumed in the name of tax payers, without their consent… in effect, once the debt becomes large enough, realistically unpayable, taxpaying citizens are enslaved. They have no say in the amount of debt assumed in their names… all their future labor is confiscated to pay these onerous debts. This is the very definition of slavery; working for a master, at the point of a gun, for the Master’s benefit!

But the issue goes beyond this; because debt is masquerading as money means that any statement using the word ‘money’ needs to be restated, using DEBT where the word money is now used. For example, there is a lot of talk about money supply, like the ‘growth of the money supply’… this needs to be understood as ‘growth of the debt supply’. The fanciful monetarist statement that inflation is a case of ‘more money chasing less goods’ needs to be restated as; ‘more debt chasing less goods’. Well all this is bad enough, but unfortunately reality is even worse than this.

The very mechanism of ‘money creation’ is synonymous with ‘debt creation’. If money is debt, it must by definition be borrowed into existence; else it would not be debt. This implies that if debt were ever to be repaid, rather than just shuttled around, then the money that debt pretends to be would disappear. If debt is money, the disappearance of debt equals the disappearance of money. This is logically inevitable, and it underlies the death spiral of catastrophic deflation that the ‘powers that be’ want to avoid at all cost. Retiring debt equals retiring money… after all, money is debt, right? The logic is clear;

If debt = money, then 0 debt = 0 money

The cost of avoiding such deadly deflation is very high indeed; more and more debt needs to be created to avoid deflation. This is true because debt is never extinguished, and new money needs to be created to pay interest; new money equals new debt… and even more interest payments. Sooner or later the debt growth becomes totally unsupportable by the real economies of the world. The interest payments mount until all wealth must be used to simply pay interest. We are fast approaching this point. The debt growth curve is not linear, is not geometric, but is exponential… the famous hockey stick curve… and we are well up the handle.

If deflation is avoided by printing ever more debt… er ‘money’… then the value, or rather purchasing power of all this ‘money’ soon reaches zero. This is the hyperinflationary blowout that is the only possible alternative to deadly deflation… if there is no systemic change. To stop this disaster, the masquerade of debt as money must stop; something of positive value must replace debt (negative value) as money.

Just as sugar can extinguish debt, and retire IOU’s, money of positive value must be used to retire or extinguish all debt. Five thousand years of human history as well as innumerable technical reasons insist that real money, the ultimate extinguisher of all debt, is Gold.

Rudy J. Fritsch

Editor in Chief

The Gold Standard Institute

A Golden Foot in the Door

In my last article, I asked ‘Is a New Gold Swiss Franc in the Cards?’ If yes, the consequences are awesome. Of course, there is a tremendous amount of pressure being exerted by ‘The Powers That Be’ to prevent the Gold Swiss Franc from happening;  these ‘powers’ being greedy bankers yearning after ever more profits through issuing ever more credit, and corrupt politicians yearning just as strongly after cash. Cash to pay the exorbitant costs of the welfare/warfare state … cash to buy votes for their own reelection. Under irredeemable paper greedy bankers continue to lend ever more ‘money’ to the corrupt politicos… and the poor citizens of the world get stuck paying interest on these loans… for ever! A new Gold Franc would put a sudden end to the deadly game of endlessly growing debt by putting the skids to the corrupt and precarious paper money system the world is currently suffering under.

Switzerland is unique in being perhaps the only truly democratic country in the world; if Swiss citizens decide  to, they can originate a petition for a referendum on any issue… including the issue of the new Gold Franc. If such a referendum passes, then the politicos and bankers are subject to a democratic end run. Such an end run would be sweet revenge for the disgraceful way the very same politicos caved to pressure from Washington, and re-wrote the Swiss constitution to remove the Gold backing of the (paper) Swiss Franc… without honest consultation with or input from Swiss citizens.

Once the Gold Franc is in circulation, amazing consequences start to fall into place. By ‘opening the Swiss Mint to Gold’, which is what the circulation of a Swiss Gold coin implies, and by charging a nominal 5% seignorage for striking coins from raw Gold bullion, the Swiss government will be assured of an income in Gold. This income will support the issue of Gold Bonds! The world needs Gold Bonds in a most desperate manner, even if this need is not generally recognized. Gold bonds are denominated in Gold units, mature into Gold, and pay interest in Gold.

Holders of Gold bonds know exactly what the value of their bonds will be upon maturity; the very same amount of physical Gold that they paid to buy the bonds. This is very far from the fortunes of paper bond holders… who will get back pennies on the Dollar cost of their paper denominated bonds… if they are ‘lucky’ and the Sovereign paper bond issuer does not default outright.

Bond issuers like the Swiss government will also come to love Gold bonds. Gold bonds carry the very lowest interest rates possible, because of the certainty that Gold will hold its value… and the certainty that paper will not. The current long term ‘lease rate’ for Gold is under 0.5% per annum. Lease rate means interest rate… the name ‘lease rate’ is simply an attempt to hide the fact that yes Virginia, Gold DOES indeed earn interest!

By comparison, even with Helicopter Ben and Tricky Trichet doing their best to hold rates down, USD and Euro long bond rates are around 3 ½ %. Of course, once Switzerland breaks the Gold Bond ice, other countries will follow; imagine if Greece were to refinance its sovereign debt at 0.5%… instead of 8% or more… with no German… er European… bail out needed? After all, Greek Gold -unlike Greek debt- is just as good as Swiss Gold.

Gold is the very best money ever used by Humanity. I quote Austrian economist Hans Sennholz;

“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.”

With Gold coins and Gold bonds in circulation, the world economy is well on its way to recovery, and the world financial system is well on its way to economic Nirvana.  The Unadulterated Gold Standard as the foundation of the new financial order is but one step away.

Is a New Gold Swiss Franc in the cards?

There is talk on the Internet that the Swiss parliament is looking at the possibility of putting a new, ‘official’ Gold Swiss Franc into circulation. If this talk is true, then the ramifications for a 21’st century Gold Standard are tremendous. The source of this story is Herr Thomas Jacob, and apparently the Swiss People’s Party, the largest political party in Switzerland, is supporting the introduction of a Gold Franc.
There are many good reasons why the Swiss parliament out of all the countries in the world should be first to look at Gold money seriously; Switzerland has a long, positive historical link to Gold. Switzerland was the last country to cave in to American pressure to abandon Gold after the collapse of Bretton Woods… and to sell Gold from its central bank vaults to help suppress the paper price of Gold. Indeed, to legalize central bank Gold sales, the Swiss constitution had to be re-written… under duress.
Switzerland has been a safe haven for Gold fleeing chaos, economic collapse and warfare for centuries. Also, Switzerland has the highest per capita ownership of Gold in the world; although admittedly most of this Gold is in bank vaults, not in citizens’ hands like in India.
The Bank of International Settlement, the ‘Central Banker’s Bank’ …located in Basel Switzerland… has until recently kept its books in Gold units, rather than paper; until pressure from Washington forced it to abandon this system.
Mind you, I for one am convinced that in a ‘back room’ of the BIS there are still Gold ‘Gnomes’ keeping the faith by keeping a second set of books in Gold units. It only makes sense; what other stable unit of measure can they possibly use… the rapidly depreciating Dollar, the imploding Euro, or the skyrocketing Franc? Maybe Zimbabwean Dollars, right.
The implosion of the Euro is the very reason that the Swiss are just now considering re-establishing a Gold Franc; the pressure being put on the (paper) Franc is intolerable. As the Euro disintegrates, Europeans are looking for a safe haven for their wealth. The USD is also collapsing, so moving wealth from Euro to Dollar would be like flipping from the frying pan into the fire… not good.
Consequently, there has been a growing demand for the paper Franc… Why? Because it is Swiss money, money within sniffing distance of Swiss Gold. This makes holding the Swiss Franc highly desirable… at least compared to holding the Euro or the USD. Unfortunately, relentless buying of the Franc is causing it to rise in value vs. the Euro and the Dollar. This makes Swiss products uncompetitive in international trade… and wakes up the old mercantile instincts.
In an effort to stem the tide, the Swiss National Bank (the central bank of Switzerland) recently intervened in the markets, selling Francs and buying Euros, in a futile effort to hold down the value of the Franc. They now hold a huge short position in the Swiss franc. This position has lost tremendous value already, and can only lose more and more as the Franc relentlessly climbs… or more precisely, as the Euro declines ever faster. The SNB’s intervention has been an unmitigated disaster.
Mr. Christoph Bloch, head of the Swiss People’s Party, has openly called for the resignation of the President of the SNB… claiming that Mr. Hildebrand ‘behaves like a speculator and is therefore not qualified for the job of President’.
It is clear what the situation is; the Swiss are between a rock and a hard place. Either they accept a declining competitive position due to the soaring value of the Franc, or attempt more intervention (i.e. printing more Francs, and buying more Euros) to try to stem the tide. Neither choice is conducive to a positive outcome for Switzerland… or the SNB. The ECB… and the Fed… can print a lot more paper a lot faster than the SNB can! The Swiss Franc is bound to lose the ‘currency race to the bottom’.
But there is a third way; if a new Gold Franc is put into circulation, the pressure on the paper Franc will disappear in a nanosecond… and demand for the real Gold Franc will soar to unprecedented heights. In one fell swoop, the Swiss can dodge both the rock and the hard place; the paper Franc will resume its fall along with the Euro, keeping Swiss industry competitive… and when the Euro (and the paper Franc along with it) hit zero… they will have a highly valuable Gold currency already in circulation.
In any race, the first horse out of the gate has a huge advantage… and the first country to openly embrace Gold will also have a huge advantage. If the Gold Franc is re-established, Switzerland will be first out the gate… with a bunch of also ran nags chasing it desperately; you can bet on that.

The New Real Bills series Videos are finally ready

It took a long time, and cost me a new laptop and DVD duplicator, but the results are worth the wait. The most important set of videos I have ever created is ready.

I say most important, because these videos record Professor Fekete’s seminal talk on the Real Bills Doctrine of Adam Smith. This very topic is what attracted me to study the Professor’s work in the first place. Real Bills are the natural clearing system of the Gold Standard. They are the most important -and most obscure- component of the monetary system the world ran under during the nineteenth century. The nineteenth century was the most peaceful and prosperous hundred years that Humanity has experienced since getting kicked out of the Garden of Eden…!

In a nutshell, under a Gold Standard the quantity of money is essentially fixed; mine supply adds not more than about 2% to the money supply per year. There are about 160,000 Tons of Gold in the form of coins, bars, and jewelry known to exist above ground. Mine supply is roughly 2,500 tons per year; thus the stock to flows of Gold are about 80 to one. It would take about 80 years for the mines to supply as much Gold as already exists.

All other commodities except Silver have stock to flows to be measured in days not years. This is the main reason why Gold is money… and nothing else except Silver can serve as useful money. Any other commodity will have wild fluctuations in price, or purchasing power, depending on sudden variations in supply and demand. The huge existent supplies -eighty years worth- ensure that Gold and Silver are immune to any rapid changes in value.

On the other hand, to accommodate seasonal fluctuations in commercial and consumer demand, there needs to be ‘flexibility’ in the ‘money’ (actually purchasing medium) available to commerce; … and Real Bills in circulation represent purchasing medium. The need for commercial flexibility is the very excuse used to dissuade us from accepting Gold as Money; it is just too ‘rigid’!

The truth is, a Gold standard without Real Bills really IS too rigid… too rigid to survive. Real bills drawn against vitally needed goods moving rapidly to the consumer, where they will be redeemed in Gold in not more than 91 days, supply the natural flexibility required by commerce. More bills are drawn if consumers do more buying… and all bills expire on maturity… thus avoiding any inflationary effects. Furthermore, no more bills can be drawn than whatever quantity of real goods the economy can actually supply. The creation and retirement of bills are vital parts of the natural feedback mechanisms that keep a free (voluntary) market economy on an even keel… far removed from the insane volatility that haunts our ‘system’ of Debt Money!

Debt Money is the worst conflation of ideas possible; debt and money, like fire and water, are poles apart; just as water extinguishes fire, so money extinguishes debt. If debt is masquerading as money, then how can debt extinguish debt? It cannot… thus the immense growth in debt that is bringing the current monetary regime down.

Much more information is provided by these new videos; a 16 DVD set, uncut and unedited, a faithful reproduction of the Professor’s twenty lecture seminar at Szombathely in March 2011. The cost of attending the live session was 1,000 Eu… plus travel expenses. The list price of the video set is only 500 Eu, a big saving… but as a special offer, and in view of the major crisis shaking the foundation of the world economy, I am offering a limited time special price of only 350 Eu.

If you are a member in good standing of The Gold Standard Institute, or an attendee of any of the Professor’s lecture series, your price is only 200 Eu. To order a set, contact me directly or visit The Gold Standard Institute at;
http://www.goldstandardinstitute.net/

Back from Szombathely, and second full session of New Austrian Economics

We just spent ten days in Hungary, at the Martineum in Szombathely. This institute of adult education, with a strong religious background, is the same venue where Professor Fekete held his first Gold Standard University Live session… and the very place where I got started with The Gold Standard Institute, and where I met Philip Barton, the man who created it.
This latest session was called ‘The Real Bills Doctrine of Adam Smith’. The topic of Real Bills is obscure, but super important. For various reasons I will not get into here, no true Gold Standard can possibly work without its clearing system… and this clearing system consists of the full circulation or Real Bills.
I am presently working on a new DVD set, of the whole ten day session… and will be putting it up as soon as it is ready.
in the meantime, if you are a friend of Gold… or simply concerned with the failure of the current paper ‘money’ system that the world economy runs on, do visit http://www.goldstandardinstiute.com for a lot more vital information.