Yesterday we took our fellow taxpayers for a detour which is leading us into what, for some, may be uncharted waters. These waters are commonly known as the Bible, or the Word of God. While seemingly unrelated to the discipline of economics and specifically monetary theory, it is important to gain an understanding of the Bible for two reasons:
It is the most widely read book in the history of the world to date
In its labyrinth of narratives, poetry, song, and prophecy, it provides the only coherent framework within which humans, who have been given the gift of reasoning, can understand the world in which they inhabit and what they are to do with their time here.
If only for these reasons alone, it is of the utmost importance that the Bible be understood if we are to gain any meaningful understanding of what is called the “economy” and our specific area of interest, monetary theory, as these disciplines make absolutely no sense without an understanding of the framework in which they operate.
Regardless of one’s preconceived judgments about the Bible’s ability to provide this framework, it is important to understand that a number of one’s fellow humans believe that the Bible provides this framework. With this given, it can be inferred that this belief is, in whole or in part, is driving their choice of actions.
However, if you remain unconvinced or simply do not have time or motivation to undertake a careful study of the Bible, we will relate what we understand, it is in no way a substitute for one’s personal and corporate study of the Bible, but we appreciate your confidence.
The lessons of the Bible are important and we reiterate, without an understanding of the framework of the Bible, nothing that is going to take place in the future will make sense but will appear to simply occur at random:
Truly we tell you, the events to come have been foretold. The Kingdom of God is advancing.
What does it have to do with money? Why is a proper understanding of what we use as money important?
We are glad you asked, allow us to explain:
The current monetary system which most of the Western world uses to each day is built on debt. Debt, at its essence, is built a faith that persons will perform certain actions in the future. Performance of these actions from the debtor’s perspective is homogenized as being able to order delivery of the debts of others to the creditor in order to satisfy the debt.
We have been cooking up a project here at The Mint and have been remiss in our faithful correspondence to you, fellow taxpayer. For this, we offer you our humble apologies.
With our mission partially accomplished, we are back in the saddle and riding the monetary range. The days have been uncharacteristically sunny here in the Northwest, and it should come as no surprise that the outlook has cleared up, along with the skies. While Europe remains in the dual grip of debt and cold, the US is once again tying its shoes and heading out to dance.
Official unemployment is down and inflation is nowhere to be seen according to the government.
Yet no matter what the official statistics say, there is something much more important occurring as we write, something that will adversely affect every person who is long the current US Dollar via holding the currency directly or indirectly via some vague promise to have the currency delivered in the future (Read: Bonds, MBS, and any derivative of such).
The fateful occurrence is this: The US Dollar is about to carry out its suicide mission.
Suicide mission? Wouldn’t the Government inform us of something as important as the severe devaluation of the currency?
Yes and no.
Allow us to explain. First and foremost, the Government, who, behind the banks in the Federal Reserve system, gain the most from a weak dollar, have a tremendous incentive to devalue the dollar as well as a tremendous incentive to hide this fact.
However, the truth can easily be deduced by simply observing what the stated Federal funds rate is at any given time and waiting approximately three years for the effects of that rate to hit main street.
39 months, to be exact, but here at The Mint there are no extra points given for accuracy.
Where were we, something about a suicide mission, ah yes…
Join us, fellow taxpayer, on a journey back to the lazy days of August and September of 2007. The world could not have been brighter. Everything seemed to be turning up roses, which in retrospect should have been the first sign of trouble.
In early September, Ben Bernanke, the Chairman of the Federal Reserve, has just parked his avatar, “Benky” and logged off of World of Warcraft after completing a quest during his third day of “work” after a much undeserved vacation when the phone in his office rang.
“It’s time,” said the voice on the other end, and Bernanke slowly hung up the phone. Nothing more needed to be said.
The Federal Reserve was finished; it was only a matter of time. 100 years of subtle confiscation was about to go into the history books, and it was time to execute the plans which had been laid for its chief agent, the US Dollar, to go out in spectacular fashion.
Mr. Bernanke and his colleagues held a cursory open market meeting to say a tearful goodbye to the currency which they had been sworn to defend. They then set in motion a series of rate cuts which to this day have not been reversed.
The US Dollar was off on its suicide mission.
It had been on many similar missions before, all with overwhelming success in what were increasingly high risk operations against multiple targets, and it had always returned to its home shores with the spoils of war in its train, stronger and more arrogant for the experience.
But this mission was unheard of. Delving into short term interest rate depths never before attempted by a currency its size. Infiltrating foreign bases and confiscating wealth on an unimaginable scale. Only this time, it was not foreseen that it would return. A bigger, stronger, and more efficient model was waiting in the wings to swoop in and bring the spoils, which the US Dollar was to so painstakingly confiscate, home.
The mission, as in the past, was to take three years. Beginning at the FED, it would make a slow and steady descent through the short term funding markets and then plunge, in the span of 15 months, to the unexplored bottom. There it would lurk, setting mines and nets for the next 39 months which would confiscate the wealth of not just individuals and corporations, but of nations and multinationals as well.
It would be a grand climax to an illustrious career.
For their part, Bernanke and his colleagues at the FED would provide all of the cover fire they could muster in order to give the US Dollar as much time as possible to carry out its terrible work. In the end, however, there was little doubt that the currency would be found, tried, and executed during this tour of duty.
So certain was this fact, that neither provision nor measure was to be taken by anyone at the FED to rescue the US Dollar. No further resources would be used in its rescue, save the empty words of Bernanke and his colleagues.
The US Dollar’s orders were clear: To remain at the ultimate depths of short term funding markets, laying as many traps as possible, until it expired in this effort.
It is a grim mission, to be sure, with a grim outcome for those who are long the US Dollar and, ultimately, for the dollar itself.
Circa February 7, 2011, it appears to the greater world that the US Dollar has descended to the 1% level, the exact level it had been perceived to be at on that fateful day in late summer of 2007 when Mr. Bernanke got the call. For most people, it feels that all has returned to normal after four years of what can only be described as an economic nightmare.
Nothing could be further from the truth.
For in one short month, it will be clear that the US Dollar, rather than returning to base at the FED, as it has for nearly 100 years, has gone deeper and further into the pockets of the world than any currency has ever dared go before.
And it is about to pick each and every one of them.
If there was ever a time to own real assets instead of US Dollars, it is now.
Free money also renders null and void any arguments as to what constitutes good or bad money, for this determination will be made on a daily basis by producers and consumers rather than a monetary authority who is acting on mere theory with severely limited data.
Absent the government declaration of what is money and how much said “money” is worth, there is no longer bad money driving out good money, as Gresham’s Law so perceptively observes. What remains, then, as the ultimate determinant of what is money and how much it is worth are the two parties to a transaction, who are generally in the best position to determine such matters.
“But this would destroy exchange as we know it!” comes the cry from apologists of legal tender laws. “No one will know what anything is worth, let alone how to pay for it!”
On the contrary, the free operation of the money supply would, by necessity, cause everyone engaging in exchange to be acutely aware of both what constitutes money and how much it is worth. It is legal tender laws which serve to pull the wool over everyone’s eyes as to the true value of money.
When seen through a different lens, that of the free operation of the money supply, the absurdity of legal tender laws becomes clear. Commodity (free) money is unhindered by the artificial restraint of existing debts and is constrained only by the productive will of society. Commodity (free) money is free to accurately reflect the price of goods and services in light of the perceived supply and productive capacity of both goods being exchanged, that being offered in exchange and that offered in payment as money.
Money, as most people instinctively understand it, is simply an ordinary good whose utility and value are greatly enhanced by its wide acceptance in trade. If one strives to remove the “cost” of producing money, as Adam Smith so nobly aspired to do, it is clear that the best way to do this is to allow the good which is acting as money to be produced in the most efficient way by the greatest number of artisans as are necessary to fulfill the present demand for money.
But how would all of these artisans, blindly creating all of this commodity money, know when to stop producing were it not for legal tender laws?
Here, there is no risk of oversimplifying the answer, for the answer is painfully simple. As persons competing in the free market who have chosen to produce money, they are likely to be the first to know when there is too much money in circulation, for their orders for new money will uncannily drop when the economy has enough money to function efficiently.
Further, any commodity that is only marginally used in the production of money will quickly and smoothly have its supply directed to other, more efficient uses as the incentive (realized margin) to use it as money is incrementally reduced as supply begins to overtake demand. Each producer is therefore free to choose his or her exit point.
Take the case of copper. If copper becomes monetized by the free will of the participants in the economy, it stands to reason that it could be demonetized by the same free market operation. Should economic activity slow to the point where the pace of saving and exchange no longer calls for copper to assume a role as money, as copper is demonetized those holding copper will find it more efficient to melt the copper that they have in monetary form and sell it as a consumer good.
The process of demonetization is simply a matter or free choice when something occurring in nature is used as money. It first moves to the fringes of use as money, as a Jeton or modern day casino chip is used in place of money. In time, the material will be demonetized completely.
Debt, when used as money, enjoys no such elasticity. By necessity, when debt is forced into a role as money, it causes an unnatural proliferation of credit, so that when the inverse of Gresham’s law begins to operate (good credits push bad credits out of circulation) the unnatural restriction on the money supply assures that even the best of credits will go bad, and the money supply along with them.
When debt is demonetized, usually by force, the result is more often than not a severe hyperinflation followed by war.
Legal tender laws, such as the modern laws which declare that debt is money, are futile at best and generally destructive. They do, however, permit a small group to reap the monetary margin that the artificial monopoly on money creation allows them for at time.
Accepting that an inanimate object is no longer worth what one thought it was can be disappointing, but at least one still has said inanimate object. In the case of debt, accepting that someone cannot deliver what they promised tends to create feelings of resentment and remorse which, depending upon the size of the failure, can lead to violence.
Soon, the world will learn that using debt as money is a dangerous violation of the very laws of nature. As with any violation of natural law, the consequences may be withheld for a time, but they are never avoided. The longer they are artificially withheld, the more swiftly and severely the consequences will be meted out when they can no longer be repressed.
For no man, or group of men, regardless of their number, clairvoyance, or special powers they profess to have, can suspend or accelerate the operation of natural law. The Creator alone reserves that power for himself.
There is a perfect balance in God’s creation. Yin and yang, male and female, mercy and justice, heat cold, money and debt. Calling one extreme the by the name of other is futile and leads only to confusion and destruction.
Natural law is always operating, always demanding a balance of accounts in the real world, not simply on an accountant’s ledger or numbers on a bank statement.
It is then foolishness for anyone to assume that a central authority, no matter how clairvoyant, can properly estimate the money supply necessary for human economic activity to continue at the optimal rate, balancing both the quantity of debt and money to provide for both the present and future using all of the information which is collectively available.
It is for this reason that it is imperative that people be free to declare both what will serve as money as well as its value in exchange. History has shown that, if people chose gold or anything natural as money, economic activity and the resulting benefits to society will accumulate so rapidly that the supply of gold will quickly act as a constraint. If gold is money by decree, this becomes a problem.
However, if gold has simply been chosen for use as money by the majority, the same majority will quickly and tacitly gravitate to a secondary natural source of money with which to augment the primary natural money supply. Historically, this secondary source of money has been silver.
Once economic activity further accelerates and the benefits continue to accrue to a larger portion of the population, the supply of silver will act as a restraint. Again, if left to their own devices, the majority will quickly and tacitly adopt another item occurring in nature to be used as money. Historically, this third source has been copper.
Yet even the supply of copper, abundant as it may be, will eventually serve as a restraint, and so on, and so forth. Eventually, in this example of what we like to call “Free Money,” gold will tend to operate as a form of savings and settlement only in the largest of transactions, with silver serving as money at an intermediate level while copper would be the most widely circulated currency for smaller transactions.
The beauty of free money is that, should the supply of copper become a constraint, steel, nickel, or some other more abundant natural resource will take the place of copper for use in smaller transactions, and so on, so that the money supply, in a general sense, will always be perfectly suited for the rate of economic activity which is occurring.
It is important to note that, while history has shown a preference for metals to be used as money, in the free money (and by extension, free banking) theory there is no requirement that what be adopted as money be metal. In fact, money can be anything that those participating in exchange bilaterally accept as payment for goods and settlement of debts. As you will recall, the only thing that money should not be, by definition, is debt.
Yes, Mr. Cheney, Deficits do matter
While it is obvious that debt can be exchanged in the place of money for a time, as the past 100 years have shown us, common sense, logic, and natural law will demand that the debts which circulate be settled in real terms. The creation of debt as money severely distorts economic reality and the more debt that is created, the greater the demanded settlement in real terms will be, regardless of how many times one chants the Keynesian mantra recently made famous again by former Vice President of the US Dick Cheney “Deficits don’t matter.”
The superiority of free money is that the money supply is free to adapt to the rapidly economic activity, which is nothing more than an expression of the changing wants and needs of consumers. The money supply is not hindered by unnatural constraints which have nothing to do with economic reality and are imposed by what is at best an uninformed or disinterested and at worst a malicious monetary authority.
The current debt as money system, far from providing a perfectly elastic money supply, has created the economic equivalent of concrete, which is now hardening the economy instead of providing it with the much needed lubrication. If this insanity carries on much longer, society will be shattered as economic reality takes a jackhammer to it.
As the world descended further into depression which eventually led it into the Second World War (Editor’s Note: It should come as no surprise that the only two World Wars have come after the declaration that debt is money), The Keynesian adherents clamored for more debt as the only answer to the world’s economic ills.
What Keynes and his Harvard trained legions fail to comprehend is that the only permanent cure for an economic depression is to allow each individual to declare what he or she will use as money and allow market participants to coalesce around what at that time is best suited for the role of money. For balance sheet recessions, such as the one the world is currently experimenting, are merely symptoms of a rigid money supply which has failed to keep up with the demands of a dynamic economy.
Under current theory, the government sacrifices the dynamic economy in the name of preserving the “integrity” of the monetary system.
When it is quite obvious that it is the monetary system that has failed, the government’s response can only be seen as idiotic at best.
What makes the situation of the past 100 years even more untenable is that money, instead of operating as a lubricant for economic activity, is more like concrete. Such is the inherently destructive nature of debt as money.
For the only rule with regards to money which is imposed as a matter of natural law is that debt cannot ever be money. It is a concept so clear that it escapes most academics and government officials.
Now, the Keynesian indoctrinated readers of these words are no doubt dusting off the “silver bullet” of Keynesian theory: That gold, which is widely held as the logical alternative to the “debt is money” insanity, is a “barbarous relic.” In layman’s terms, Keynesian theory holds that any attempt to limit the money supply via natural means, the most popular being a gold standard (fixing the price of gold in terms of monetary units) will cause a deflationary spiral which will bankrupt the entire world.
Even Adam Smith argued that the mining of metals for use as currency was essentially a lamentable waste of resources.
We could not agree with them more. The limited amounts of gold in the world make it wholly unfit for everyday exchange. Gold, rather, is generally agreed upon to be the most perfect savings vehicle that the world has yet discovered.
So Keynes, despite promoting a theory which sacrifices the yang (savings) and glorifies the yin (debt) is right after all? Not quite…
Using the same logic with which the Keynesian so adeptly slays the gold standard, it quickly becomes obvious that by declaring that debt is money is not only a violation of natural law, it makes debt, rather than gold, the new barbarous relic.
Debt has a distinct disadvantage to gold in that it can be quickly and completely destroyed. Once it is assumed by the majority that a certain debtor will not be able to make good on their debts, the debts owed by the debtor, and any money in circulation which is either directly or indirectly related to the existence of these debts, is destroyed. For debt, at its base level, is a figment of the imagination until it is settled in real terms by the delivery of money in settlement of the debt.
It would hold, then, that debt, the new “barbarous relic,” is exponentially more dangerous than gold when used as money. The reasoning is the following, while the quantity of debt in the world can be suddenly and permanently reduced, the quantity of gold, which is admittedly difficult to increase, is at the same time extremely difficult to decrease.
Yet even given the strong advantage of gold over debt as money, it is obvious that both the Keynesians and the gold bugs are sadly mistaken in formulating their ultimate solution to the eternal problem of the money supply.
When it comes to determining the proper money supply, Adam Smith’s invisible hand of the market can be seen slapping both Keynesians and gold bugs silly!
For the problem with declaring anything, be it gold, debt, or white elephants as money, has nothing to do with the fitness of gold, debt, or white elephants for use as money, rather, it lies in the act of the minority attempting to dictate what will be used as money by the majority.
Money, in a general sense, is a good of the highest order. There is nothing in nature which states that gold, silver, seashells, or anything else must be used as money. The historical association of gold and silver as money is the result of their superior fitness for the role of money. It is simply a product of the collective wisdom of mankind, gleaned from experience as free exchange and the division of labor began to bring order to man’s chaotic surroundings.
However, just because gold and silver were superior in their role as money in the past does not necessarily mean that they enjoy some sort of divine designation as money.
Gold and Silver, like all things occurring in nature, are in limited supply. The fact that they occur in nature gives them a distinct advantage over debt (which is simply a promise to pay in the future) in that debt, which is theoretically in infinite supply, quickly loses value against scarce real goods due to the fact that debt, in theory, enjoys an infinite supply.
Anyone can make promises to pay in the future, it is the function of debt markets to determine what those promises are worth today. Ironically, the value of debt today is perilously tied to speculations about the money supply, which is in turn dependent upon the issuance of debt. Thus, declaring debt as money provides the economy with yet another hindrance in that the debt markets are increasingly disconnected from their noble origins; the debtor’s perceived productive capacity.
It is clear that mankind is in a perilous predicament. Will we take hold of the simple answer, which lies in free banking and free determination of what will serve as money?
In 1913 the US Congress passed the now infamous Federal Reserve act. Not unlike the recent passage of the 2012 NDAA, it happened during the winter holiday when the populace was largely distracted by the festivities.
While the Federal Reserve act has wrought many injustices on the earth, undoubtedly the greatest injustice which continues to cause the greatest amount of damage to mankind was the subtle replacement of money proper with Federal Reserve notes. This action effectively declared that debt is money, in direct violation of natural law.
The Federal Reserve, in direct violation of Natural Law
While this fact may have seemed like a minor detail with regards to custodianship at the time, the declaration was, in essence, handing Frodo’s One Ring to the financial and governmental authorities of the earth. For it gave them largely unfettered access to the accumulated savings of the entire earth and, in the case that the savings ran dry, the unhindered ability to incur debts against the future production of the entire earth as well.
The only thing that they needed was to compel the entire earth to accept debts as money in everyday exchange. In the west, they have largely succeeded. In the east, the acceptance of debt as money has been violently forced upon the populace through a series of wars.
Yet as we stated yesterday, debt and money are polar opposites. To declare that debt is money was not only insane, it was a direct violation of natural law. This violation of natural law began to reap its terrible harvest in 1933 with the onset of the great depression. Yet instead of admitting defeat and leaving the quantities of debt and money in the hands of the people, where it naturally belongs, the authorities presented an academic apologist to confirm for them that debt was indeed now money and that all that was required was more of it.
Enter John Maynard Keynes, best known as the father of the Keynesian school of economic thought. Mr. Keynes developed a thesis which “correctly” diagnosed that the economic problem facing the earth was a lack of money. What Keynes and those who subscribed to his theories have failed to realize is that the Federal Reserve, in declaring that debt was money, had placed a significant impediment to the creation of money, the remedy which the earth desperately needed.
Instead, Keynes and his colleagues skipped over the only viable solution, namely, allowing the free market to determine what constitutes debt and money and in what quantities each was needed, and offered the world a solution which has been the equivalent of injecting poison directly into the veins of the ailing economy. The poison of which we speak was injected as a result of the testing erroneous hypothesis:
“The problem is that there is not enough money. Because debt is now money, it follows that more debt must be incurred to create the money necessary to spur production, employment, and all the things that people now associate with a healthy economy. Further, there is not enough money precisely because the people are not sufficiently indebting themselves. Since the people are not inclined to further indebt themselves (Editor’s note: the people are naturally reacting to natural law, which naturally calls for less debt and more saving), it is the duty of the government to increase overall indebtedness, and therefore the money supply, on behalf of the people. It must force the people to do what they cannot (or more accurately, will not) do for themselves.”
As insane as this line of thought sounds, it is today generally accepted as natural law by nearly every Harvard trained economist, and therefore government and central bank official, on the planet. The only difference between the 1930’s and today is that today, circa 2012, this disastrous line of thought is practiced on a much grander scale.
Stay tuned for tomorrow’s installment: The Barbarous Relic and Trust Jesus!
It is turning out to be an unusually dry winter here in Portland. It is a refreshing break from the usual incessant pounding of rain which blesses this part of the world between November and May each year. Perhaps we are just now getting back the lost months of June and July of 2011, as nature has a way of evening things out over time.
We have observed that there is a perfect balance in God’s creation. Some call it a yin and yang, male and female, mercy and justice, freedom and slavery, heat and cold. For every extreme, there is a force which, given enough time, will work to counteract the excesses wrought by the seemingly uninhibited operation of its polar opposite.
It should come as no surprise, then, that in the economic sphere, debt and money fall into the same category of opposing natural forces.
Yes, debt and money are two completely different forces. One takes from the future to provide for the present, the other takes from the past towards the same end.
Simple, right? Male, female, Yin, Yang, case closed.
Yet circa 2012, for some odd reason, there seems to be an abundance of debt and a dearth of money in the world. The world as we know it is perilously out of balance.
How can this be? Why are things so far out of balance? In the interest of time, we will sum up what is otherwise a long and painful explanation in the following way. Roughly 100 years ago, by decree of the financial authorities, debt was declared to be money.
Ever since then, man has lived in a state of economic confusion. On one hand, He has seen an unprecedented level of technological advances and a resulting rise in his standard of living. On the other hand, on net, he, or someone acting in his name, has borrowed an unprecedented amount of money from the future in order to achieve these advances and consequent rise in his living standards.
How is this possible? Didn’t simply declaring debt is money relieve man of having to save? After all, if everyone simply assents to accepting promises to pay in the future for goods or services delivered or performed today, haven’t we trumped the need for savings, the Yang, as it were?
More to the point, have the laws of nature with regards to money been permanently altered?
If only it were so. Unfortunately, the longer man labors under the false assumption that debt is money, the greater the pain which will be incurred by mankind as nature unilaterally brings the earth into balance.