Our monetary system is debt based. It is unsustainable by design. At the root of the problem is this simple fact: Every dollar in existence, either paper or digital, is created by the Fed. The Fed has monopoly power over money creation. When a dollar is created, the Fed creates it from thin air. The Fed hands the dollars to the US Treasury. The US Treasury in exchange for this dollar gives the Fed a U.S. bond for representing 1 dollar of debt PLUS INTEREST.
And the "plus interest" is the kicker. That's where the insanity resides. Every year the goverment pays the Fed interest owed on the money supply. Think of it as a minimum payment on a credit card balance. A portion of all taxes collected annually goes right to the Fed for the priviledge of letting us use the Fed's paper money. So when you boil it down, the Fed gives us paper to use, and we give them in return our labor, our "money". Basically a portion of our lives in return. Like it or not we are enslaved.
We are at the moment in American history where the debt in proportion to all taxes collected is about to "hockey stick" if you were looking at a graph, and consume an exponentially increasing portion of the Federal Budget. What does this mean for us? Less money for entitlements. Less money for social security. Less money for medicaid. Less money to repair roads and bridges. At some point the total taxes collected number will be overtaken by the minimum payment amount owed. No amount of money printing can stop this process. In fact, the faster money is printed, the faster we approach the point where the entire thing falls apart in an inflationary spiral that cannot be escaped.
My final analysis is that the US dollar will die a death from inflation combined with a total loss of confidence from the general public in the dollar. Noone knows when, but it is mathematically provable that the dollar will die in this manner. It has to. It was born to do this, and only this. Google search "Modern Money Mechanics". This creation was the origin of our current monetary system. "Modern Money Mechanics" is a genius and diabolical method of silently transferring wealth and control from the masses to the very most wealthy.
The average life span of a fiat currency system is 40 years. Fiat meaning, money that is not redeemable for a commodity. Nixon cut all ties between the dollar and metal in 1971. We are in our 40th year of fiat here in the United States. Conclude from this what you will.
Wednesday, December 28, 2011
Tuesday, December 27, 2011
Questioning The Idea That Large Corporations Are Evil, And That We Should Only Support Mom-N-Pop Shops To Restore Economomic Prosperity In America
The current, popular economic myth goes something like this: In order to thwart large corporations such as Wal-Mart, consumers should band together and go out of their way to purchase goods and services from small local businesses rather than larger business such as Wal-Mart for example. The idea is that large corporations are somehow degrading America and that consumers making local purchases with Mom-N-Pop stores will starve the beast by the act taking their business to small businesses.
The problem with this belief is really very simple. In most cases Mom-N-Pop stores cannot compete with the lower prices of the larger, more efficient corporations offer. If Mom-N-Pop are able to offer the exact same product at the same price level (or lower) than Wal-Mart, then by all means it makes sense to support them.
This usually isnt the case however. Take note: In this example we need to assume that the customer service and politeness of both the staff at Wal-Mart and the staff the local Mom-N-Pop shop are identical. If this is the case, and identical widgets are being purchased, there is no logical reason throw charity at an inefficient business. Here is why...
When a consumer goes out of his or her way to purhcase goods from the more expensive Mom-N-Pop option, it means that the consumer's wallet will be emptied faster. Money saved at Wal-Mart can be spent ELSEWHERE in the economy. It could also be saved and put to use by a person with an idea who needs credit. The point is that when everyone receives the highest quality widget for the least amount of money in exchange, the economy has been optimized.
The topic we are discussing is a classic example of what Henry Hazlitt would call "Broken Window Fallacy". To break it down, "Broken Window Fallacy" implies that its best advised to destroy something intentionally because the person who repairs the damage will benefit. This type of behavior is not capitalism. Its a form of protectionism. Other examples of "Broken Window Fallacy" are as follows:
-Bombing a foreign country, then using war spending reconstruction efforts to stimulate GDP numbers
-Enacting tariffs on imported goods to protect domestic manufacturing at the expense of the domestic consumers
-Burning crops during the Great Depression to keep certain groups of farmers in business at the expense of every person who needs to eat
Common sense says that these above examples are an overall loss for the human race yet we
hear examples very similar to these items on the nightly news as if they were unquestionable economic miracle cures for depression. These strategies always fail in the long term because in a "Broken Window Fallacy", the massses always suffer at the expense of the few who are protected.
The problem with this belief is really very simple. In most cases Mom-N-Pop stores cannot compete with the lower prices of the larger, more efficient corporations offer. If Mom-N-Pop are able to offer the exact same product at the same price level (or lower) than Wal-Mart, then by all means it makes sense to support them.
This usually isnt the case however. Take note: In this example we need to assume that the customer service and politeness of both the staff at Wal-Mart and the staff the local Mom-N-Pop shop are identical. If this is the case, and identical widgets are being purchased, there is no logical reason throw charity at an inefficient business. Here is why...
When a consumer goes out of his or her way to purhcase goods from the more expensive Mom-N-Pop option, it means that the consumer's wallet will be emptied faster. Money saved at Wal-Mart can be spent ELSEWHERE in the economy. It could also be saved and put to use by a person with an idea who needs credit. The point is that when everyone receives the highest quality widget for the least amount of money in exchange, the economy has been optimized.
The topic we are discussing is a classic example of what Henry Hazlitt would call "Broken Window Fallacy". To break it down, "Broken Window Fallacy" implies that its best advised to destroy something intentionally because the person who repairs the damage will benefit. This type of behavior is not capitalism. Its a form of protectionism. Other examples of "Broken Window Fallacy" are as follows:
-Bombing a foreign country, then using war spending reconstruction efforts to stimulate GDP numbers
-Enacting tariffs on imported goods to protect domestic manufacturing at the expense of the domestic consumers
-Burning crops during the Great Depression to keep certain groups of farmers in business at the expense of every person who needs to eat
Common sense says that these above examples are an overall loss for the human race yet we
hear examples very similar to these items on the nightly news as if they were unquestionable economic miracle cures for depression. These strategies always fail in the long term because in a "Broken Window Fallacy", the massses always suffer at the expense of the few who are protected.
Saturday, December 24, 2011
A Response To Paul Krugman's Understanding Of Austrian Economic Theory
http://krugman.blogs.nytimes.com/2011/12/15/inflation-predictions/
The above link contains a few responses from Peter Schiff about some of his inflation predictions for 2010, back in 2009 during an interview. Krugman gives his response to Schiff and appears to be confused about two things; Schiff's definition of inflation and also, his understanding of Austrian Economic Theory in regards to the relationship between an increase in the supply of money and the effect it has on prices.
The following link contains a graph of the True Money Supply, up until 2011, which clearly shows that there was in fact inflation.
http://mises.org/content/nofed/chart.aspx
Krugman's comment in regards to his knowledge on Austrian Theory was, "In their version of reality, it really isn’t possible to triple the monetary base without dire effects on the price level. In my version of reality, of course, that’s not only possible but what the model predicts in a liquidity trap."
This is false. Nowhere in Austrian Theory is an attempt made to say exactly when prices will be effected and also what prices will be effected, due to an increase in the supply of money. When new money is created, it is impossible to know which sectors will obtain this new money and when. One thing that Austrian Economic Theory does mention is that when this money finally does make its way to a specific sector, then yes, prices in that given sector will increase. But it must be understood that the theory does not make an attempt at saying when and where the money will go to have this effect.
The above link contains a few responses from Peter Schiff about some of his inflation predictions for 2010, back in 2009 during an interview. Krugman gives his response to Schiff and appears to be confused about two things; Schiff's definition of inflation and also, his understanding of Austrian Economic Theory in regards to the relationship between an increase in the supply of money and the effect it has on prices.
The following link contains a graph of the True Money Supply, up until 2011, which clearly shows that there was in fact inflation.
http://mises.org/content/nofed/chart.aspx
Krugman's comment in regards to his knowledge on Austrian Theory was, "In their version of reality, it really isn’t possible to triple the monetary base without dire effects on the price level. In my version of reality, of course, that’s not only possible but what the model predicts in a liquidity trap."
This is false. Nowhere in Austrian Theory is an attempt made to say exactly when prices will be effected and also what prices will be effected, due to an increase in the supply of money. When new money is created, it is impossible to know which sectors will obtain this new money and when. One thing that Austrian Economic Theory does mention is that when this money finally does make its way to a specific sector, then yes, prices in that given sector will increase. But it must be understood that the theory does not make an attempt at saying when and where the money will go to have this effect.
Peter Schiff Interviews Ann Barnhardt, Has To Initiate Damage Control Mid-Interview
Listen as Peter is forced to backpedal when he realizes that Ann's open letter to the market is not in the best interest of Euro-Pacific Capital. Peter knows that what Ann is saying is valid but Peter is conflicted by his own desire to preserve what he has worked so hard to create. I can't blame him.
Ann's story is a canary in the coal mines of the global financial system. Her story is an important one of caution and should be heeded by anyone who's wealth and future well being is represented in a computer system.
Ann's story is a canary in the coal mines of the global financial system. Her story is an important one of caution and should be heeded by anyone who's wealth and future well being is represented in a computer system.
Wednesday, December 21, 2011
The Stock Market Has Not Kept Up With Inflation During The Past Decade
These numbers show how the DOW as a broad measure has not kept up with inflation during the last decade. We chose the items below to demonstrate that the cost of living in the past decade has doubled on average. Dow Jones represents stocks. Crude represents fuel/transportation costs. Sugar and Wheat are food items Americans consume every day. Cotton represents the cost of clothing while Gold represents the cost of converting fiat currency into hard money.
Compiled by B2BE On December 21, 2011
Sources: Yahoo Finance Historical, Index Mundi Dot Com
Compiled by B2BE On December 21, 2011
Sources: Yahoo Finance Historical, Index Mundi Dot Com
| Date | Dow Jones Opening Price | Crude Oil (Price Per Barrel) | Sugar (Cents Per Pound) | Gold (Dollars per Troy Ounce) | Wheat (Dollars per Metric Ton) | Cotton Daily Price |
| Jan-2001 | 10,790.92 | 25.95 | 10.06 | 265.49 | 132.84 | 64.18 |
| Jan-2002 | 10,021.71 | 19.15 | 7.31 | 281.51 | 125.31 | 43.42 |
| Jan-2003 | 8,342.38 | 30.77 | 7.89 | 356.86 | 149.60 | 56.71 |
| Jan-2004 | 10,452.74 | 31.40 | 6.03 | 413.79 | 166.33 | 76.24 |
| Jan-2005 | 10,783.75 | 42.89 | 8.92 | 424.03 | 153.59 | 51.26 |
| Jan-2006 | 10,718.30 | 62.36 | 16.19 | 549.86 | 167.16 | 59.01 |
| Jan-2007 | 12,459.54 | 53.40 | 10.90 | 631.17 | 196.07 | 59.05 |
| Jan-2008 | 13,261.82 | 90.82 | 11.66 | 889.60 | 369.59 | 73.25 |
| Jan-2009 | 8,772.25 | 43.91 | 12.24 | 858.69 | 239.36 | 57.70 |
| Jan-2010 | 10,430.69 | 77.12 | 21.91 | 1,117.96 | 201.51 | 77.40 |
| Jan-2011 | 11,577.43 | 92.66 | 29.74 | 1,356.40 | 326.55 | 178.93 |
| Percent Change | % 7.29 | % 257.07 | % 195.63 | % 410.9 | % 145.82 | % 178.79 |
Full Employment Is Not Something We Should Strive For
The reason that people work and have jobs is not to make money. This may seem to be the case on the surface but in reality making money is only a side effect of being employed. We strive to earn money because we are confident that the money we earn in exchange for our labor will allow us to demand goods and services that we want and need. Ideally we all agree to produce a good or service because someone else demands it. In reality government involvement in markets causes workers to spend time performing tasks that are wasteful. Tasks that do not generate a good or service that is being demanded in the real economy. The reason that governments do this is not because they are malicious, but rather because governments do not operate on a profit/loss mechanism like the private sector does (We shall save this idea for an article in the future).
Thus, full employment is not an indicator of economic prosperity. For example, the government could use tax dollars to hire thousands of workers to dig holes. They could then hire thousands more to fill the holes back in. The workers would receive pay for this, but society as whole would actually be worse off than before the project started. Money and labor has been channeled into a process that is of benefit to noone.
An economy runs best when the most efficient producers of goods and services rise to the top and the least efficient producers are bankrupted due to incompetence and inability to compete. What we are describing here is capitalism. If we lived in a more capitalistic economy, humans would progress much faster.
The problem facing our modern economy is primarily government interference in markets. This interference disrupts our overall efficiency and causes more people to have to work than ever before while at the same time our standard of living continues to decline. Everyone now needs a job because the currencies of the world are being devalued gradually over time. At the same time there are more government employees than ever who perform tasks that are of questionable usefulness to the greater good of society. These 2 factors combined causes more household members on average to have to work (Father, Mother, Children) whereas this was not the case in previous generations in the USA. But jobs are not what we need. We need the highest quality goods and services at the lowest prices possible.
Below are steps that we could take to improve our collective standard of living:
-Free market money (money or moneys chosen by the market, not by official decree and legal tender laws)
-Absence or minimization of government regulation (businesses would be regulated solely by consumer choice)
-No bailouts or secret loans from the Fed to businesses in distress
-No income tax loopholes to benefit one group at the expense of another
If we were able to make those bullet points mentioned above a reality, two things would happen. First, our standard of living would increase. Secondly, leisure or "free time" would also increase. The consequence is that people would not need be concerned about having both mom and dad and the children of a household all employed. Mom (or Dad) and the children would be able to stay home. Leisure time would increase as technology improves and performs the tasks faster and more efficiently than humans. Folks would have to do less work to generate more output. This is a very important point to remember. Again I'll restate, the reason we go to work is not because we desire money, its because we desire goods and services that we need. Somewhere along the way, we collectively decided that money was an end in and of itself which is not the case. If you were stranded on an island like Tom Hanks in "Castaway" a billion dollars would not help you. Remember this the next time you hear a government official talk about creating jobs. This is not something to be desired for all of the reasons stated above.
Thus, full employment is not an indicator of economic prosperity. For example, the government could use tax dollars to hire thousands of workers to dig holes. They could then hire thousands more to fill the holes back in. The workers would receive pay for this, but society as whole would actually be worse off than before the project started. Money and labor has been channeled into a process that is of benefit to noone.
An economy runs best when the most efficient producers of goods and services rise to the top and the least efficient producers are bankrupted due to incompetence and inability to compete. What we are describing here is capitalism. If we lived in a more capitalistic economy, humans would progress much faster.
The problem facing our modern economy is primarily government interference in markets. This interference disrupts our overall efficiency and causes more people to have to work than ever before while at the same time our standard of living continues to decline. Everyone now needs a job because the currencies of the world are being devalued gradually over time. At the same time there are more government employees than ever who perform tasks that are of questionable usefulness to the greater good of society. These 2 factors combined causes more household members on average to have to work (Father, Mother, Children) whereas this was not the case in previous generations in the USA. But jobs are not what we need. We need the highest quality goods and services at the lowest prices possible.
Below are steps that we could take to improve our collective standard of living:
-Free market money (money or moneys chosen by the market, not by official decree and legal tender laws)
-Absence or minimization of government regulation (businesses would be regulated solely by consumer choice)
-No bailouts or secret loans from the Fed to businesses in distress
-No income tax loopholes to benefit one group at the expense of another
If we were able to make those bullet points mentioned above a reality, two things would happen. First, our standard of living would increase. Secondly, leisure or "free time" would also increase. The consequence is that people would not need be concerned about having both mom and dad and the children of a household all employed. Mom (or Dad) and the children would be able to stay home. Leisure time would increase as technology improves and performs the tasks faster and more efficiently than humans. Folks would have to do less work to generate more output. This is a very important point to remember. Again I'll restate, the reason we go to work is not because we desire money, its because we desire goods and services that we need. Somewhere along the way, we collectively decided that money was an end in and of itself which is not the case. If you were stranded on an island like Tom Hanks in "Castaway" a billion dollars would not help you. Remember this the next time you hear a government official talk about creating jobs. This is not something to be desired for all of the reasons stated above.
Monday, December 19, 2011
Book Review: "When Money Dies" By Adam Fergusson...Highlights, Lowlights, A Lesson From History
"When Money Dies" is a historic, by the numbers account of the german hyperinflation of the early 1920's. Some sections will draw you in, and in some places our author Adam Fergusson delivers facts Rothbard style and murders you with numbers. You'll be sick to your stomach as you read along and see the exchange rate of the German Mark fall off a cliff, never to recover again.
Facts that readers might find helpful:
-The heart of the book spans about a 6 year window from 1918 to 1924 when the german mark finally died
-At no point did any of the german political leaders, or the general public for the most part, establish a link between the printing press and the rising prices. 1 man did, Dr. Rathenau. He was pinched in his car like Denzel at the end of the movie "Training Day". The assassins blocked him in the front with a vehicle, "riddled his body with bullets", then tore his body in half with a bomb
-Stores stopped changing price tags on items and had a multiplier written on a board that they changed several times per day
-The author makes no mention of the people having access to bullion to buy or sell. They only had jewelry to hawk for food. Most people speculated in stocks and foreign currencies. Making nominal gains but losing purchasing power almost always
-Everyone young and old, had to learn how to avoid the govt's brutal taxation or else go hungry
-People who visited germany from places such as the USA were called the "gold currency people". They could empty out a merchant's entire shop in one visit
-One wealthy lady from Germany was forced to trade a grand piano for a sack of potatoes. She rented a tiny room in her house and charged the man more for 1 month's rent than she paid 10 years ago for the entire house. She also used her dead husband's cigar collections as barter for food for her children
-In 1924 the mark was able to be exchanged at the banks for the newly issued Reichsmark at a ratio of 1,000,000,000 to 1. (1 Billion to 1)
-Prior to the Reichsmark's issuance, in 1924 the total number of marks in circulation was 690,000,000,000,000,000,000. That's 690 quintillion.
Some important quotes from the author in the epilogue:
"What broke the germans was the constant taking of the soft political option when it came to matters of money" <--- Sound Familiar?
"The point of no return therefor, was not a financial one, but a moral one" "germans learned that their traditional repository for wealth had disappeared, and thus the only mechanism for determining the value of an item was its immediate necessity"
"Mans values became animal values"
"A prositute in the family was more valuable than a baby, a kilo of potatoes worth more than a grand piano, clothing more essential than democracy, food more needed than freedom"
Meet The Author:
In November of 2011, James Turk interviewed Adam Fergusson to discuss the possibilities of a hyperinflation of the US Dollar. This interview is absolutely essential and is a must watch. The major take away is that there is no equation or data set that can predict hyperinflation. Hyperinflation is driven by both social AND economic factors. It is primarily triggered by a loss of confidence in a governments ability to back its currency. Since humans are not predictable, hyperinflation is also not predictable.
Rehypothecation Explained In Simple Terms
The dictionary definition of rehypothecation is as follows:
What this means for you as a depositor:
- "Pledging to banks by securities brokers of the amount in customers' margin account as collateral for broker loans, which are used to cover margin loans to customers for margin purchases and selling short."
What this means for you as a depositor:
When you deposit money into a bank, the bank is LEGALLY able to take your deposit and use it however it pleases. You agree to this when you sign the agreement when opening an account at a bank or with a broker. To give an example of how absurd rehypothecation is, imagine a homeowner was able to take out 17 home equity lines of credit against 1 home. Then imagine that the homeowner is unable to make payment, and thus defaults on his obligations to his creditors. In this situation, there will be 16 creditors who are unable to claim any collateral while 1 creditor (the strongest and most well connected) ends up with the home. To restate this argument, we can say that by depositing funds into a bank or brokerage account, the depositor may unwittingly have his or deposit become collateral for someone else's leveraged bet. At this point as a depositor, you do not really have control of your money until you execute a withdrawal and resecure your assets in the form of cash-in-hand.
What are the implications of this? Very simple but also potentially catastrophic. There are at this time an unknown number of investors, pensioners, 401K, and IRA holders who's bank statements have positive balances in them. If the bank or brokerage house that these people are invested in take customer funds as collateral for leveraged bets, and the bets go the wrong way (see MF Global), the customer's accounts can be taken to zero with no warning. In bankruptcy court, the customers will be the last in line to reclaim assets and will most likely end up with an account balance equal to zero. The customer has no recourse.
Another factor to consider from the example above is that 16 out of 17 creditors will be in immediate danger of bankruptcy if they issued credit to another institution who has repledged, or rehypothecated their creditors deposits. There is a potential for a chain reaction type of bankruptcy event that could potentially dwarf the events in 2008. In the event of a 2008 type crash, Central Banks will have the god power to choose life or death for any given creditor. Central Banks can back-stop any firm that they deem worth of saving, while letting others fail.
Another factor to consider from the example above is that 16 out of 17 creditors will be in immediate danger of bankruptcy if they issued credit to another institution who has repledged, or rehypothecated their creditors deposits. There is a potential for a chain reaction type of bankruptcy event that could potentially dwarf the events in 2008. In the event of a 2008 type crash, Central Banks will have the god power to choose life or death for any given creditor. Central Banks can back-stop any firm that they deem worth of saving, while letting others fail.
Rehypothecation creates the illusion of widespread wealth. The truth is that whoever holds the actual collateral is, in the end, the true owner of asset. If the asset is not in your hands, it is not yours. Secure your wealth now or risk taking losses that are out of your control.
Take Your Ball And Go Home
In our current system, your financial power is the most imporant power that you have. How you choose to allocate your wealth has more of an impact and "voice" if you will, than any action that you could ever make inside of a voting booth.
Do not allow this final, and important power to be taken away from you as a citizen. If we as a people collectively go broke due to financial calamity, what would the ruling class need to consult with the general public for? The answer: Nothing. Consider making moves now to protect yourself from paper ponzi schemes. Take personal responsibility for managing your assets. Do not rely on a 3rd person or group of persons to safe guard YOUR savings. If there is any counterparty risk in your "porfolio", consider the idea that this portion of your savings could be taken to zero with no notice, just like the unfortunate people who held accounts at MF Global. There are more bankruptcies on the way. Use this time that we have to make whatever financial preparations you can. Talk to your loved ones and find out what they are doing. Hope for the best.
Why Interest Rates Need To Be Set By The Free Market
Interest rates need to be decided by free market forces, not a group of persons in priviledged positions. Ideally, businesses should be able to use interest rates as a planning tool. If set by the free market, interest rates will tell a business whether to engage in either short-term or long-term projects. Stated another way, interest rates are a sliding scale that moves back and forth between two ends. High interest rates represent the public's preference to consume in the near term (a preference for spending rather than saving), while the other end of the spectrum, low interest rates, represent the public's preference to consume at a later date (a preference for saving rather than spending).
In a scenario with artificially low interest rates, producers assume that there is general preference from the public to save rather than spend. Thus producers are inclined to borrow and invest in long term projects. This results in shortages for goods that consumers are demanding in the near term. In a scenario with artificially high interest rates, borrowers assume that the public is generally interested in spending their money immediately. Thus borrowers undertake projects to produce goods for the near term. But the artificially high rates have actually incentivised people save, so we end up with a surplus of goods that few consumers are interested in purchasing.
The manipulation of interest rates by central banks and governments interrupts the natural balance between producers and consumers. It causes the producers and consumers to pull in opposite directions, instead of efficiently sharing the current available pool of resources in a symbiotic manner. The manipulation of interest rates by governments and banks causes the booms and recessions that we experience repeatedly. If decided by the free market, the interest rate would constantly move. It would fluctuate based on public preference to either spend now, or later. There is no man or group of men who can effectively manage the cost of borrowing. No single person or group of persons is smarter than an entire market.
In a scenario with artificially low interest rates, producers assume that there is general preference from the public to save rather than spend. Thus producers are inclined to borrow and invest in long term projects. This results in shortages for goods that consumers are demanding in the near term. In a scenario with artificially high interest rates, borrowers assume that the public is generally interested in spending their money immediately. Thus borrowers undertake projects to produce goods for the near term. But the artificially high rates have actually incentivised people save, so we end up with a surplus of goods that few consumers are interested in purchasing.
The manipulation of interest rates by central banks and governments interrupts the natural balance between producers and consumers. It causes the producers and consumers to pull in opposite directions, instead of efficiently sharing the current available pool of resources in a symbiotic manner. The manipulation of interest rates by governments and banks causes the booms and recessions that we experience repeatedly. If decided by the free market, the interest rate would constantly move. It would fluctuate based on public preference to either spend now, or later. There is no man or group of men who can effectively manage the cost of borrowing. No single person or group of persons is smarter than an entire market.
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