Exploiting the Delusions of Money
Liberty's enemies, when it comes down to being specific,
are the social architects of the New World Order; the one world government;
and the one world currency.
Liberty's enemies oppose money as the basis for peaceful
relations in society. Instead, they prefer a morality governed by some
democratically arrived at principles to the moral discipline thrust
upon them by "sound" money. Naturally, they can't differentiate
between honest and dishonest money. It's all evil.
Liberty's enemy is socialism, fascism, or big government
- particularly when totalitarian (as if it ever wasn't). For then,
individual liberty is less important.
But these are not primarily external dangers.
Socialist economies typically haven't been able to sustain their armies
for long absent the constant conquest of new resources to exploit,
which would make them more like fascists by the way. No. The enemy
of liberty is not external. It is from within - all of us.
Large numbers of the conservative right on this continent
have no idea. Anybody not with the US government today is perceived
to be left wing.
Let me tell you something. Anybody that doesn't understand
our criticism of the US government today is not anywhere as right of
center as we are. If you think being fascist represents a right wing
choice of any kind, you're wrong. There are very few differences between
socialism and fascism. Both are totalitarian, and involve big government.
At dinner last night, with another libertarian, we wondered
why it is that amid all the right wingers in America today, the government
continues to grow. And despite one privatization scheme after another,
or one promise after another to reduce taxes here or government there,
the government continues to grow.
The American Constitution, as I understand it, was set
up initially to protect the individual's liberty by making it incumbent
on Congress to limit government. How else do you protect the market's
(consumer's) sovereignty? But despite all the hoopla about how capitalist
the Republican right appears to represent themselves today, most of
them are simply part of the winning argument - big government. The
rest of us, libertarians included, are irrelevant. Individuality is
irrelevant. Because government continues to grow, somehow, and despite
all the conservatives in power.
Today you're going to find out how, if you don't already
know.
Inflation Funds Big Government
It's really a two-step process in the big scheme of things, and it has
everything to do with money.
- Inflation leads to economic problems beginning with
monetary debasement and ending / resulting in malinvestment, unemployment,
capital thinning, excessive indebtedness, financial volatility, and
political corruption.
- Then everyone blames the markets and capitalism for
all the bad outcomes and asks the government to help them out of
the mess it helped create. Government expenditures, taxes, inflation,
and regulatory power increase.
This is how the government grows over time. It's how
inflation is a confiscation of wealth, or a means of wealth transfer
to political circles. It's the reason inflation is a hidden form
of taxation - because people don't generally come to realize it to
be the main problem, and so they beg for more of it in order to cure
the economy of the symptoms or imbalances caused by it in the first
place.
But if not corrupt, our governments are smart today.
They know some of its citizens are hip to their desire to grow. So
they (Republican or Democrat) engage in PR campaigns to persuade the
markets that they are subjugated to them. Whether it's the promise
to lower taxes, or the deficit, or to privatize an industry here or
there, in the end they too must know that somehow, it's all an illusion,
because government continues to grow.
To
the extent the markets believe it, the immediate result is for market
confidence to rise in the government's economic policies. To the extent
they are stimulative and the market's confidence reflects in new currency
/ loan demand, the inflation can start. GDP can grow with or without
profits this way. The phony growth in economic activity allows the
government to grow unnoticed. And it can claim that its growth is modest
- relative to the growth in GDP.
However, here's the catch. Much of the growth in GDP
is not real. We never know it at the time, since there's so much money
sloshing around in a boom. On the other hand, the growth in government
is real. Moreover, so are the obligations of government, and its citizens
who become increasingly dependent if not addicted to their government's
easy (money or economic) schemes.
There
you have it. Inflation finances the growth in government, both present
and future. It's a vicious cycle of promise, deceit, and corruption.
Central banking is the mechanism that sustains it. The cost is your
liberty. At first it's only economic. Through inflationary error,
the government creates a crisis that it promotes itself as the best
cure for.
In place of the market, the government increasingly dictates
the economy's resources - through higher taxes, price controls, greater
spending, economic planning, consolidation of banking/media power,
etc. The process is gradual, and real. I sincerely believe we
only have to figure out where we are on the timeline to hyperinflation.
It's no longer a matter of "if."
Understanding what is inflation and what isn't is basically
like determining what is real and what isn't. The Federal Reserve still
has much more power than most individuals do in the information war.
They've convinced people inflation doesn't exist and that the nineties
was just a little euphoria owing to the productivity shock, and even
the "soundness" of the preceding monetary policy.
Central banking is a failed doctrine, but people today
look to our central banks as if they were Gods.
If ever there was a delusion, it is the general validity
of central banking in a capitalist society. Essentially, weak banking
policies are simply sustained longer than they should. If the Internet
is the potential instrument of overcoming this delusion, gold is the
barometer.
The problem is that few of us would like to see central
banking go, for all the negative consequences its departure would produce
(in the immediate aftermath). But that is a sure sign of the corruption from
within; as any half-ass analysis would show those consequences
would derive from imbalances created by central banking in the first
place. It's a classic cop-out... an unwillingness to take the real
medicine.
Big government will no doubt continue to grow until the
market itself is burdened with the task of proving that central banking
is economically unviable. This means a future crisis that will be blamed
on capitalism no doubt. But while an economic crisis is perhaps already
unavoidable, there is the opportunity for politicians to end the Fed's
almost 90-year reign, and bring America back to its market roots. I'm
sure it will be fleeting.
The Federal Reserve's Congressional mandate expired in
1999 amid what most people would call success in its stated goal
of full employment - under the Humphrey Hawkins Full Employment
Act of 1978. Since then (1999) both Congress and the Fed Chairman have
conducted the Humphrey Hawkins testimonies semiannually as normal.
We haven't seen any sign of a new mandate yet (which
doesn't mean there isn't one). However, nor are the results of the
20-year experiment all in yet.
I predict that before gold's bull market is over, the
prospect of the Fed's dissolution will be considered by Congress. Or
can you think of a more relevant topic for Congress when gold is trading
at $2000? Don't get too excited though. It's not like the topic will
even get a hearing before $2000 gold. It would take too strong a moral
conviction to consider dissolving any central bank before a crisis
materializes.
Central Banks Sell Gold, But Need Gold Reserves to
Sell
Perhaps the most effective delusion with respect to gold is the idea
that central bank gold represents an overhang of gold that has yet to
come to market. It's not an overhang, it's ammunition. Big difference.
Here's how we see it.
Central banks essentially liquidate the public's real
wealth in order to redistribute it, or achieve political objectives.
The thing is, the ability to do that is what makes them an ongoing
concern, and the moment they run out of gold they cease to have any
real power. They need real gold reserves in order to fuel their imaginary
world of easy money.
Sound money is like oxygen to capitalism. But central
banks don't give us sound money. They give us fiat money, sustain its
value for long periods of time artificially, and choke off capitalism
in the process... it runs out of air if you will.
In the nineties, central bankers explained that the intention
to sell their gold reserves was influenced by the opportunity costs
of owning and storing it, which were rising with every uptick in stock
prices during the period.
That was the official reason. The inference was that
gold had lost its monetary value. But despite the fact that it hadn't,
the threat of liquidation helped them perpetrate yet another delusion.
And yet again, the perpetuation of it drew us to what ails the monetary
system. Unsound money.
It is in the interest of a central bank to sell gold,
but only while it has enough to sell. In other words, when a central
bank threatens to sell its gold, it doesn't really want to get rid
of all of it. It only wishes to sell it continuously in order to support
the value of a currency it makes worth less each day the bank's inflationist
dogma exists.
The advent of derivatives markets and other structured
finance opportunities during the nineties enabled a myriad of new ways
for central bankers to do this without having to actually reduce
their stock of gold. Or so they thought.
This is the problem they've found themselves in right
now, as it costs increasingly more to close the outstanding arrangements
(5000 to 10000 tons) made at lower gold prices.
To avoid acknowledging this problem as originating from
the delusion that gold is a worthless asset requires the conviction
that the dollar is sound money, and that it didn't benefit from the
leasing of too much gold in the nineties - even at the margin.
The subtle difference between the central bankers' desire
to sell some gold at the right time and getting rid of it outright
is in reality quite enormous.
But if there's no gold left to sell, the central banks
are out of business (bad news for the BOE - hey, maybe that's another
reason why they're going to adopt the Euro now).
In our view, it's precisely the reason the Washington
Agreement was signed. It wasn't to support impoverished gold producing
nations. It was to prevent the delusion from getting out of hand… from
the banks believing it themselves.
The average investor is confused by the bank's desire
to sell.
If the gold is the public money, what are they doing
selling it? So the investor has a choice. He or she could believe the
metal is worthless, or that the central banks are dishonest. If they
choose the latter, they've arrived at the same conclusion we have.
Central bankers sell gold to persuade the market that the dollar is
really money.
To understand this, however, investors have to understand
the "economic" difference between money and an asset (financial
or otherwise), capital good, or currency. The main difference of course
being that money is "the" most liquid (preferred) medium
of exchange chosen by the market. Currencies are glorified money
substitutes; assets produce income streams; and capital goods produce
consumer goods.
Be careful though. Once you understand what money is,
everything your central bankers say begins to sound like a con, and
everyone else will seem increasingly deluded…
Delusions will appear everywhere. It could drive you
mad, or you might just want to exploit them. Exploit doesn't have to
be bad. You could look at it this way - you'd be making the market
more efficient. Heavens knows it needs some sense knocked into it.
Ed Bugos
Editor - The GoldenBar Report
www.goldenbar.com
April 21, 2003
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