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Gold Versus Paper

-- Posted Wednesday, 29 April 2009 | | Source:

By: Adam Brochert


I wanted to return to a theme that got me to start writing my blog as an attempt to contribute to society: Gold versus paper and what it means. Gold bugs know what it means but there is real value to looking at the contrast between the two for those who have not yet experienced the fever that makes any strain of flu pale in comparison. It is essentially asset-backed or "honest" money (i.e. Gold) versus paper money and other instruments backed by the promises of men and women and the institutions they represent (i.e. fiat currency or "dishonest" money and its derivative products).


The founding fathers of the United States, say what you want about them and they weren't saints, intended for this country to have gold and silver as the foundation for the monetary system of the country. Paper or fiat money backed only by promises is not a new invention and it has been used for centuries. Every time it has been tried, it has failed. EVERY SINGLE TIME. The U.S. Dollar has now been off the gold standard for close to 40 years and the course the United States is now on is typical for societies that make the decision to use fiat currency.


Every problem we have is "solved" by throwing money at it, because creating money requires no effort. However, every issuance of money in this country is an issuance of debt or the creation of an I.O.U. When the unconstitutional, for profit, private federal reserve1 bank creates money, it doesn't cost them anything. Whether they create one dollar or $1 trillion, all that is required is a few key strokes on a computer - paper and ink aren't even required any more. When the federal reserve gives the instantly created digital money entry to the U.S. government to pursue their policies, it also creates a digital ledger entry saying that the federal reserve has bought some U.S. Government Bonds. The federal reserve then collects interest from the U.S. government on the bonds, which it purchased with money it created out of thin air. Talk about risk and effort-free profits!


Put another way, the U.S. and its citizens are basically debt slaves to the private, for profit, unconstitutional federal reserve. This is not a conspiracy theory; this is actually how our country and monetary system works. The government apparatchiks don't mind, as a paper system requires no fiscal discipline and allows all kind of hare-brained schemes to be funded as debt is meaningless when any problems can be papered over with the creation of even more debt (at least this is the misguided thought of those only thinking about their re-election campaign next year). Thus, schemes like paying farmers not to grow food make sense in a fiat world even though they don't pass the common sense test.


When money is dishonest and can be obtained easily by those close to the "printing press," more and more money is always required. Like a narcotic, easy money is addictive. Those close to the printing press are also given an unfair advantage over everyone else, as they can buy up assets immediately after receiving the newly created money. By the time the average citizen wants to buy the same asset, the currency has already often been debased, as every creation of a new dollar necessarily decreases the scarcity and thus the value of the remaining dollars in circulation, and thus the asset price rises in an amount often proportionate to the degree of paper money debasement.


A system of money backed by Gold or another "hard" asset makes money creation more difficult as it creates a disincentive to be a spendthrift. If a paper currency can be exchanged for physical Gold (as citizens could do in the U.S. for a decent stretch of time before 1933) and the government starts to create money out of thin air, guess what citizens (and foreign trade partners) start to do? You guessed it - they turn in their paper for Gold to protect themselves from the monetary debasement.


When France did exactly this to the United States in the early 1970s (i.e. asking to turn in or redeem their U.S. paper Dollars for Gold), Nixon did what any dishonorable politician would do - he completely defaulted on our obligation to redeem our paper for Gold to foreign nations. Earlier, way back in 1933, Roosevelt had already defaulted on the American public. Not only did Roosevelt rescind the ability of Americans to convert their paper U.S. Dollars into Gold, breaking a sacred contract with the public, he actually had the gall to declare Gold ownership illegal and threatened prosecution of those who failed to turn in their Gold to the state. To add insult to injury, Roosevelt then declared in 1934 that the state's Gold, including that stolen from its citizens, was suddenly worth 69% more than when it was stolen (i.e. the gold exchange rate was changed from $20.67/ounce to $35/ounce by decree). How many were taught this fact in their history classes and how significant such an event was and still is?


Once the final monetary link to Gold was severed in the United States in the early 1970s, everyone was placed in a casino, most without even knowing it. Because without any restraint imposed by a Gold-backed currency, the printing presses and debt immediately started to spiral out of control until Gold reached $850/ounce in 1980 and the short-term interest rate spiraled up to 16-17% at this time. Don't forget that this interest rate is what new debt taken on by the government cost! The for-profit, unconstitutional, private federal reserve must have been laughing hysterically every time a request for more money came in from Uncle Sam when the interest rates were this high. Such rates are, of course, the definition of usury.


Such a situation of monetary chaos is inevitable when politicians are given a seemingly unlimited ability to create money out of thin air. Inflation not only affects the daily cost of living, but also mandates schemes and risky bets to maintain one’s standard of living. And by the way, the mainstream economists of the time (i.e. those “sanctioned” by government and given media attention and awards like the current Mr. Krugman) actually predicted that gold would go down significantly in value relative to U.S. Dollars once we were taken off the gold standard!


The market driven response to high interest rates in the early 1980s was enough to calm the storm temporarily (and please don't believe the revisionist history story that Paul Volcker did anything special - he followed the market set interest rates, just as current fed chairmen do). Now, decades later, we are in a situation where the debt, interest payments on the debt, and entitlement obligations of the United States cannot realistically be paid back. Many U.S. citizens essentially are in the same debt saturation boat, having learned from their bureaucratic leaders how to run household finances. The citizens will have two choices and will do either an unintentional default where debt payments can't be made due to unemployment, declining wages, etc. or will intentionally default by doing things like walking away from underwater mortgages.


The government thinks both of those options are bad marketing for re-election campaigns and will instead try the third option: keep printing money and pay back the debt with the newly created money. This is essentially counterfeiting in my book since there is no longer any reasonable hope of paying for all the functions our government has pledged to society that it will perform (e.g., Medicare, Medicaid, Social Security, etc.) and still having something left over to service the debt already incurred. The losers in this battle are the value of the currency and the integrity of the country.


When the intrinsic value of our money is really only as good as the promises made by the private corporation backing it and that corporation is corrupt and secretive, the underlying society starts to deteriorate. Do McDonald's dollars make intrinsic sense (no offense to McD's, as a burger-backed dollar is better than what we have now)? Corrupt money creates a corrupt society. It is not that a society on a Gold-backed currency has no corruption - humans are prone to corruption regardless. But when a private, secretive organization can control money and its issuance and is given a no-bid contract to create money out of thin air at the whim of centralized and insulated politicians (who are pursuing their own schemes), isn't this the definition of absolute power? And doesn't absolute power corrupt absolutely?


I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.” - quote from Thomas Jefferson


The current fiscal, economic and market shenanigans and manipulations are the classic hallmarks of the later stages of a system using fiat currency before collapse. The good news is that we should eventually come out of this with a new currency and it is my hope that it will be Gold-backed. The bad news is that the level of suffering coming to the United States is going to be shocking to those that did not live through the previous so-called economic depression of the 1930s. The only difference is that this time around will be worse due to our debtor status.


The boom cycle this time around was unprecedented and the bust will be disproportionately severe as a result. The Dow to Gold ratio is a marker for the Gold versus paper debate (using the Dow as a proxy for stocks/paper/financial assets) and is calculated by dividing the “price” of the Dow Jones Industrial Average by the price of Gold. The chart below is from (a great site!) and shows the instability of this ratio introduced by giving control over our money to a private group of people whose interests are by definition not aligned with those of the United States. I agree with the prediction of the chart author that we will get to a ratio below one this cycle to restore equilibrium (i.e. the price of one ounce of Gold will be greater than the “price” of the Dow Jones Industrial Average). I am not happy about this and it is not good for our country, but one can only prepare for the inevitable.




During this crisis, Gold will once again rise from the ashes (as it has already started to do) and help to restore order during the chaos. The next stage of the bear market in almost everything besides Gold (i.e. stocks, bonds, real estate, and commodities) will start to get dangerous with counterparty risk coming to the forefront. Those playing in the casino need to realize that the owners are pretty desperate at this point, even after drinking trillions from the government teat.


When your electronic internet-only broker says your stock or option order filled, how do you know what you own or if you even own anything at all? Trust is a valuable commodity these days, as it is scarce (and rightly so).  Return of capital will be more important than return on capital at some point relatively soon. Banking holidays, stock market shut downs, goods and/or service shortages and civil unrest are all a likely part of the adjustment needed to restore our capsizing ship.


Deflation is the poison du jour of our unconstitutional central bankstas and it will likely last longer than most gold bugs think. Hyperinflation is not necessary for Gold to maintain its value, one the functions money is supposed to perform. Most who have not studied history don’t realize that Gold is a better protector of wealth during deflation than during inflation.


It is my sincere hope that we will emerge from this ongoing crisis relatively unscathed and appropriately angry at the root cause - the unfettered and unchecked creation of debt (i.e. fiat money). In the mean time, Gold offers you a cheap financial insurance policy with no counterparty risk. If you do not have at least 10% of your liquid assets in physical Gold (no, I am not talking about the GLD ETF, which is highly suspect and likely to default when the real crisis hits), Mr. Market is giving you yet another buying opportunity as I write this.


1. Footnote: Please note that I intentionally refuse to capitalize “federal reserve” as they don’t deserve that respect in my opinion. My spell check feature on Microsoft Word never fails to recommend that I capitalize this institution’s name, since it is apparently proper to do so in the eyes of those who enjoy fleecing and/or being fleeced.



Visit Adam Brochert’s blog:

-- Posted Wednesday, 29 April 2009 | Digg This Article | Source:


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