This page has been archived and commenting is disabled.

Everything is a 'fiat' currency

RobertBrusca's picture




 

There seems to be a lot of interest in currency regimes with the failings in EMU and concerns about what might happen there next. The US and the dollar have become part of this dialogue as the dollar has over the years lost value and gold bugs are quick to propose gold as an alternative that would be better at preserving capital.

I don’t think there is really much doubt about that.

On a gold standard a country commits itself to fix its currency value to a certain price of gold. But such a link has its costs as a peg to gold eliminates flexibility. And, I know that to many that is a great benefit or even the point of having a gold-based system. But even a gold-based system uses currency, as we did under Bretton Woods. Gold cannot be the coin of the realm. It may back the coin of the realm but gold is not used in transactions.

When gold and other precious metal coins did circulate as ‘money’ there was always someone making an attempt to undermine the integrity of the circulating coin. Some people would shave them others might clip them, depriving them of intrinsic value. In today’s world we have heard of gold bars that are filled with titanium, another form of debasement.

Gresham’s Law describes the result of these sorts of antics on a precious metal circulating coin: ‘bad money drives out the good’. This is the earliest statement that I know of that referred to a phenomenon we have come to be call ‘adverse selection’. When you can’t know the value of something you are transacting for (or with) markets tend to drive the price down to its worst-case value.

So even with gold there can be problems. Gold does not circulate well. In light of this I would like to re-open the notion of what fiat currency means to make these sorts of risk more apparent. Economists refer to paper currency unbacked by a pledge to link it to another asset’s value as a fiat currency. A Fiat currency is backed by the law of the land and has no intrinsic value. This is supposed to be different from a gold backed currency or a silver backed currency and so on. But is it?

In looking at the expression I would like to focus on the fact that the fiat aspect relates to all currencies however they may be backed. Since a dollar put on the gold standard only has the implied value of gold as long as the governments stick to the gold standard gold also has a fiat element to it. . Essentially I think all currencies except those that actually circulate coinage made of precious metals are fiat currencies.

Gold bugs like to point out the fragility of the fiat currency system by pointing out that in history no fiat currency has survived (so far). I take their point. Maybe they should also take mine. It is that while many nations have been on gold standards no one in the history of the world has pegged to gold and stayed with it. No one? So does gold have any better record?

Adopting a gold backing for your currency is doing the one thing that you can be just about sure of that will come to an end. Gold standards are not flexible and they put government in straitjackets that they refuse to stay buckled into. Gold standards fail.

And as much as a gold bug might say that is why we need it, I will assert, again, the fact that its inflexibility is why it is impractical and why it is eventually rejected.

All currencies are fiat currencies in the sense that the value a currency has stems from the decision of a government to imbue that currency with certain features (a link to gold or not, for example). A nation’s money needs to fulfill the role of being a store of value, satisfying speculative demands and transaction demands. Modern fiat currencies are able to do those things.

I would urge anyone who is truly a gold bug to get off their high horse and realize that government is not in the preservation of value business. You will not replace the capriciousness of government by linking your currency to gold. When the government adopts a currency people in that country are free to invest as they like in the stocks and bonds of domestic companies that will be denominated in the currency or in the financial paper of foreign economies that will be denominated in another sort of paper. Or investors can invest in hard assets or gold.

In the end it is not a question of whether a country has preserved the value of its currency. It is whether the currency has helped to promote the business within that country. Business is the objective not the preservation of value. A currency that is sufficiently elastic for business may not hold its value relative to gold. That does not make it a bad currency. Indeed, I see one of the big problems with EMU as being that countries are undergoing all sorts of pain to preserve a currency while that currency is doing nothing for them but causing them pain. EMU has it backwards. Setting an economy up on gold might preserve the currency values but might do it at a cost of growth and higher unemployment.

On balance I think gold bugs take the arguments that are beneficial to them too quickly. No fiat currency system has lasted in the history of the world and that includes a system in which government fiat decreed that it would peg its currency value to gold.

The international community has become very fluid with new nations emerging and some ‘old ones’ running very high rates of growth. It would be hard to sustain a system like this with everyone stuck to gold. Gold is oversold by its advocates who are uninterested in looking the problems that gold standards have faced over the years. The problems are so great that they have caused every single country that adopted gold ultimately to reject it. Gold is no panacea. It might fix one problem you don’t like today but it would introduce many constraints that would impede us in the future. Better to have a fiat currency system and to let investors know that they have to manage their own risks to preserve their capital because that is true even in a gold-based system, it’s just that everyone assumes a gold-based system will not break down so that when it does everyone is completely unprepared. Is that really better?

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 05/17/2012 - 07:24 | 2434530 RobertBrusca
RobertBrusca's picture

'Fair enough, but I would submit that a stable currency is the very best environment for any business. '

This is the gist of it.

If you distrust 'bankers' so much you go for the straitjacket of gold. But gold IS a straitjacket and there will be other cots of doing that. Gold is no panacea.

I don't think bankers really 'caused' the crisis and more than 'regulators' or 'rating agencies' or 'greedy homebuyers' or really stupid politicians (ie Barney Frank). Greenspan was a pliant central banker and I'd just as soon throw him under this bus. I think a number of things did this...among them bad international monetary system that has encouraged the US to run ever larger current account deficits by allowing countries to use export led growth and target their currencies too low. This has flushed the US with capital it does not need and lead to misuse of it.

Thu, 05/17/2012 - 15:33 | 2436747 JeffB
JeffB's picture

Jeff: “'Fair enough, but I would submit that a stable currency is the very best environment for any business. '

RobertBrusca: “This is the gist of it.

“If you distrust 'bankers' so much you go for the straitjacket of gold. But gold IS a straitjacket and there will be other cots of doing that. Gold is no panacea. “

Thanks for your response, and taking the time to read through the comments to your article, it is appreciated.

I think that really is the heart of the matter. It sounds like you are in agreement that any “money” should have a stable value for an optimal business environment, and hence for the good of society as a whole. Is that true?

I do think that any fiat currency that can be printed by fiat by a central bank is inherently less stable in value than a commodity based money. Do you agree with that assertion?

I believe this is true for several reasons:

  1. Our central bank, though theoretically independent, is actually indirectly controlled by our government. (1) Because of that politicians, the President in particular, can put pressure on the Fed for their own political reasons, which may not necessarily be in the best interests of society.

  2. The Fed has a “dual mandate” of a) maximum employment and b) stable prices (2) and those objectives can be, and often are, at odds with each other.

  3. The bankers and Fed Chairmen's own individual personal and business interests may, and often do, present conflicts of interest between what is best for them and what is best for the economy and the country.

  4. Because of the Fed's enormous control over the economy, and because knowing what they will be doing in advance offers such tremendous advantages for individuals, companies, or countries there is a tremendous moral hazard that others will try and influence the Fed's policies to their advantage.

  5. For any beneficial Fed Intervention into the economy, whether that be raising or lowering interest rates, whether in the short or long term, or raising or lowering the money supply or reserve requirements etc., implies that their economic models and projections are accurate and will effect the changes in the economy they are attempting to bring about. It also implies that if/when those beneficial changes are effected, they will not bring about unintended consequences, either short or long term, that will have deleterious effects that negate or overwhelm the beneficial effects.

It is my opinion that the role of money is to facilitate trade, and as a store of value. The store of value, I suppose, is an outgrowth of, and necessary for the role of facilitating trade. It isn't as necessary, of course, for short term transactions, but certainly is for longer term transactions, such as long term contracts, or as savings for retirement.

RobertBrusca: “I don't think bankers really 'caused' the crisis any more than 'regulators' or 'rating agencies' or 'greedy homebuyers' or really stupid politicians (ie Barney Frank). “

This is a major area of disagreement between us, of course. I don't dispute that ratings agencies, home buyers, regulators etc. were at fault and played a role in the economic fiasco we're still trying to recover from, but still think the primary blame lies with the Federal Reserve, and those who may have influenced them to engage in the monetary policy that created the boom environment which was the perfect breeding ground for the all too apparent abuses we read about.

I see it as similar to a parent that provides the band and booze for a large marginally supervised party their teenage son hosts at their vacation home at the lake. We certainly can't excuse the behavior of the kid who threw the empty keg though the bay window, and the drunken 20 year old chaperone who crashed their boat into the dock killing 3 people and injuring numerous others should pay for his crime, but the parents bear the primary responsibility for the party that turned tragic.

I don't know if you were able to take the time to watch Professor Garrison's talk on the boom/bust cycle I linked to in the earlier post (3), when he explains Nobel Laureate F.A. Hayek's theory on the trade cycle, but I think it provides a coherent, logical explanation of why the easy money the Fed engendered for so many years may have provided “the great moderation” during the boom years, which everyone lauded so heartily, but set the stage for the inevitable crash we now call “The Great Recession”, which may yet morph into another “Great Depression”.

It not only passes the common sense test, but more importantly was borne out in the unfolding of the Great Recession. The Austrian economists who subscribe to the theory Mr. Hayek helped to develop, were all jumping up and down warning of the great catastrophe that lay just ahead because of the Fed's easy money, artificially low interest rate policy, while the mainstream economists laughed at them as it was at odds with their own economic paradigm which indicated the Fed was doing an excellent job.

As noted in my earlier post, in the modern era theories are tested by the scientific method. Hypotheses are put forward, and then we see how well they explain the world we live it, and how well they will predict what will happen in the future. In that regard, I think the Austrian theory of the trade cycle fared remarkably well, and the mainstream theory fell tragically on its face. See Paul Krugman's article, “How Did Economists Get It So Wrong” (4) as further evidence of how poorly the mainstream paradigm explained the world and how well it predicted the tragedy just ahead. A tragedy, I would assert, that it in fact caused and exacerbated.

RobertBrusca: “Greenspan was a pliant central banker and I'd just as soon throw him under this bus.”

Jeff: Perhaps he deserves such a fate, but then again, I think he was doing pretty much what the mainstream economists wanted & what would have been consistent with their prevailing economic theory. He was certainly lauded by mainstream economists for what he was doing at the time, when his policies brought about the “just right” “Goldilocks economy” known far and wide as “The Great Moderation”. It's pretty easy to throw him under the bus now in hindsight, but I don't think the mainstream economists' economic models were saying he was too easy with the money supply at the time. Time Magazine was lauding him for being so strong in cutting interest rates by “only” 50 basis points, the third such cut in a row, after the NASDAQ bubble he blew popped. (5)

In all honesty, were your models flashing red? Were you warning at the time that his rate cuts were priming the pump for a crash down the road?

RobertBrusca: I think a number of things did this...among them bad international monetary system that has encouraged the US to run ever larger current account deficits by allowing countries to use export led growth and target their currencies too low. This has flushed the US with capital it does not need and lead to misuse of it.

Jeff: I agree that a “bad international monetary system” played a major role in the 2008 crash that is likely to get worse, and yet I think that buttresses my point of view, rather than yours. That “bad international monetary system” is a fiat money system, of course, that we are a part of. Indeed we helped craft it and have had and continue to have much influence over it.

In any event, I think many of the problems, including some of those you detail above, are an inherent flaw in a worldwide floating fiat monetary system. We may see it as freeing us to play around with interest rates and the money supply to optimize our economy, but that also necessarily has effects on our trading partners around the world. They in turn are adjusting interest rates and money supply etc. to affect their own economies, but also must take into account how the adjustments in other countries around the world are going to affect their economy. Even if Japan, for instance, was able to finally tweak monetary policy to get their economy “just right”, the U.S. might lower rates which would tend to cause capital to flow from the U.S. to Japan. That, of course, would tend to devalue the dollar, making our exports more competitive and our imports more expensive. The Japanese could either just live with lower exports or would need to react, perhaps devaluing their own currency.

Countries wanting to engage in mercantilism or currency manipulation to help their own economies are rewarded for doing so, and it is relatively easy to do, compared to raising tariffs or other things that would more readily trigger trade problems for them. I doubt China or Japan really think U.S. bonds are a great investment at near zero interest rates in nominal terms, and negative rates when accounting for inflation. They hold massive amounts of our bonds as a way to boost the value of the dollar and reduce the value of their own currencies in an effort to goose their trade surpluses even more.

That's an inherent feature of fiat currencies with a floating rate relative to each other.

RobertBrusca: “But gold IS a straitjacket”

I don't see gold as a “straitjacket” any more than I would consider “gravity” to be some straitjacket we need to throw off. It is just a reality we are subject to. Sure we might wish things were different, but railing against such natural constraints or denying reality is no more a prescription for success or happiness than taking methamphetamines will safely allow us to push our bodies above their normal limits.

I think a free market economy using a commodities based money can make any necessary adaptations without a resort to some central bank artificially goosing it or slowing it down by playing around with the money or the banking system. Sure, a central bank can try to reduce unemployment by “printing” money, or lowering interest rates, but it is pushing the economy beyond its sustainable limits (see Prof Garrison's talk) and much like a rubber band stretched beyond it's normal state, will snap back at the first opportunity. In fact, it will snap back further than it was originally.

Having a stable monetary base wouldn't constrain adjustments, though perhaps it wouldn't do so as quickly as people might wish. Some ways it can do so are through people moving to other industries, or to companies that are better run and more profitable, or perhaps taking a wage cut, or moving to an area that is doing better economically.

When the Fed devalues a currency, it in effect cuts people's wages, making it more attractive for companies to hire them, especially companies doing a lot of exporting. But the same thing could be accomplished with less “sticky” wages. Fiat money just makes the fluctuations more frequent and dramatic as various countries jockey for position, promoting a race to the bottom as they try to “negotiate” lower wages for their workers by devaluing the money they are being paid in stealth fashion.

In a post in response to an earlier articly you posted here, I asked something along the lines of whether you felt California & other states and regions suffering more than their neighbors were in "a straightjacket" by being tethered to the same (fiat) currency as the rest of us. Would that not be similar to a country being tied into a currency value, such as gold, or the Euro (in the case of the earlier article) that they could not control?

In your opinion, would California be better off discarding the monetary straight jacket of a dollar whose value was being manipulated to benefit the country as a whole, and issuing their own fiat (the Californian perhaps?) currency that they could adjust to optimize their state's economic performance? They have very high unemployment, a crashing housing market and crushing government debts and pension obligations. "Printing" a lot more "Californians" would help alleviate such a problem, no?

In parting, I'd say that the Federal Reserve has done a miserable job over its history in its statutory dual mandate of full employment and a stable value for our currency. George A. Selgin, professor of economics at the University of Georgia makes that case quite well in my opinion in this talk recorded as an .mp3 (6)

A partial list of the Fed's “Report Card” that was compiled a few years ago, but is more extensive (read worse) now:

The Fed – Report Card after 80 years of “stabilizing the economy”

 

Crashes

1921

1929

29-39 The Great Depression

 

Recessions

53

57

69

75

81

 

Stock Market Black Monday 87

Dot.com bubble crash '01

The Great Recession '08

 

Endnotes:

  1. The Independence of the Federal Reserve

    Sarel Oberholser – Seeking Alpha

    http://seekingalpha.com/article/192377-the-independence-of-the-fed

  2. “The Congress established the statutory objectives for monetary policy--maximum employment, stable prices, and moderate long-term interest rates--in the Federal Reserve Act.”

    What are the Federal Reserve's objectives in conducting monetary policy?

    Board of Governors of the Federal Reserve

    http://www.federalreserve.gov/faqs/money_12848.htm

  3. Austrian Theory of the Trade Cycle

    Roger W. Garrison, Professor of Economics at Auburn University

    http://www.youtube.com/watch?v=zhoFOyy7rbo

  4. How Did Economists Get It So Wrong?

    Paul Krugman, NY-Times September 2, 2009

    http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?_r=1

  5. Alan Greenspan

    Frank Pellegrini, Time Magazine, March 23, 2001

    http://www.time.com/time/nation/article/0,8599,103574,00.html

  6. The Fed's Dismal Record, http://www.mises.org/media/4639

    Recorded at Jekyll Island, Georgia; 27 February 2010.

    George A. Selgin, a professor of economics in the Terry College of Business at the University of Georgia, a senior fellow at the Cato Institute in Washington DC, and an associate editor of Econ Journal Watch.[1] Selgin formerly taught at George Mason University, the University of Hong Kong, and West Virginia University.

 

Tue, 05/15/2012 - 22:48 | 2430096 valkyrie99
valkyrie99's picture

I'm with most of what you're saying here re: benefits of stability again. The oily thing I would rally have to disagree with of your statements is: These are some of our best and brightest people who are wasting their time on inflation which would not be an issue if governments kept their noses out of the money printing business.

As stated above, private banks began printing money before governments got into the game. Still today, private banks create most circulating money through fractional reserves.  Therefor they can expand and contract the supply of money and create inflation and deflation, even without central banks backstopping them or government involvement at all. This is why when the US had a gold-backed currency we still had inflation and malinvestment followed by panics and depressions; banks were creating money in quantity for their benefit. They are not more responsible then governments.

This was also the largest problem with the gold standard - it was too scarce to maintain usage as circulating currency even when it would hold value as didn't grow relative to the population or economy, thus creating an opening for banks to print notes claiming to be backed by more reserves then existed and although people would prefer gold they were forced to use these notes for daily transactions, for lack of an option.  

Tue, 05/15/2012 - 23:59 | 2430297 JeffB
JeffB's picture

I coiuld see a role for the government in setting rules for banks and perhaps prosecuting them for malfeasance.

But then again, perhaps the private sector could even handle much of these duties.  I believe that when there was little regulation, the rule of the day was caveat emptor and people were very wary of banks and they had to maintain a very good reputation to get those deposits.

I could see private institutions handling a watchdog role in the right environment, perhaps sort of like a Better Business Bureau. It might be worth it for people to subscribe to newsletters or whatever that would keep tabs on banks.

I think "runs on the bank" could be averted if there were accounts that did not allow the bank to loan the money out fractional reserve style, & accounts that did allow it had the reserve requirements listed up front and limits on how much could be withdrawn and how quickly, much like CDs or annuities.

People could then decide whether they wanted demand deposits where they might have to pay a monthly fee for the banks to handle their transactions, or an account with fractional reserves at a 50% level that would have lower or no fees, or one with 10% reserves that paid a little interest, but might have limits on how much they could take out at the bank's discretion (ie. a run on the bank).

I don't think that the physical quantity of money should be a problem, as long as it is stable. If the money is in greater demand, ie. relatively scarce, the value is higher and it can therefore buy more goods. Prices automatically adjust to the supply of money. The more stable it is the better, but the overall quantity itself shouldn't be a problem... ie. there's no necessary fixed amount that is needed, such as 17 million tons or whatever. If the government isn't involved, people can also use whatever they want, whether that be gold, silver, copper, nickel, platinum or whatever. As long as the parties involved are agreeable it shouldn't be a problem, and if there is a free market for them all prices should reach an equilibrium and people should be able to know what they are very easily. If someone wanted to pay them in silver, but they preferred gold or platinum, they would know up front what the exchange rate was.

Wed, 05/16/2012 - 00:45 | 2430404 valkyrie99
valkyrie99's picture

I agree, full reserve banking systems when they existed in history usually worked much like you say - banks would primarily offer full reserve gold storage with storage fees charged to the depositor, and other products that operated like time deposits, where you essentially made a loan to the bank where you received interest, but you took risk for the interest as you knew your  money would be lent in investments and you couldn't get it back while it was in use. 

That's the problem with fractional reserves - it attempts to eliminate risk which doesn't work, so it shifts it. Banks can make money without risking their own capitol, so risks are shifted on unwary depositors. Depositors collect interest on checking accounts and shift their risk onto government backstops. This disguising of risk causes malinvestment and boom/bust cycles, and then those risks are shifted to the taxpayer. 

Single-metal currencies have proved too scare at times, ie the silver famine after the fall of Rome or when the US demonetized silver in 1873. Multiple metals by weight has shown better results, although the governments were usually in some way involved like minting and sometimes thus altering valuations. Of course the population is even larger now but supplies of all metals are finite, and if we dedicate resources to mine and produce metals for at quality supported by currency values and for currency purposes, is society best allocating our resources? Not that there is a perfect solution, multiple metals is better then many.

Tue, 05/15/2012 - 21:00 | 2429731 JeffB
JeffB's picture

You sound like you're at least listening to our arguments, even if you are still rejecting them at the moment. I take that as a good sign. Perhaps there is hope that you indeed do have an open mind and are willing to be open to the possibility that a paradigm you currently reject might actually have something of value to add to the discussion.

I'll take you at your word and assume you aren't just trying to play us here. I've listened to the mainstream economists' arguments for years, in fact, I once believed them. I've come to believe the Austrians have a far better grasp on economic realities, however, and would like to at least point them out to you and ask you to humbly consider them.

One of the main tenets of the scientific method is to form a hypothesis and then test it to see if it bears out in real life situations. If we go back and look at what the mainstream economists were saying vs what the Austrians were saying in the years leading up to The Great Recession, I think any unbiased observer would have to say the Austrians were spot on in their predictions of what was coming, and the mainstream economists were caught with their pants down.

For instance, here is a YouTube segment of video clips of Peter Schiff's analysis of the economy at the time, and of Bernanke's and some guests on CNBC:

http://www.youtube.com/watch?v=V5sDKwMP6Pc&feature=player_embedded#

I know there's a list out there of dozens of Austrian economists who were saying the same things as Peter Schiff, though I don't happen to have a link handy. Perhaps someone here will give one, or a list off the top of their heads that would suffice to demonstrate that Mr. Schiff didn't just happen to make a random lucky call.

Here's an excerpt from an article Mr. Schiff had posted on Seeking Alpha:

As proof that the Fed caused the housing bubble, I offer a commentary that I wrote in May of 2004 and which was published as an opinion piece in the Orange County Register.

You can read the entire commentary here.

However, let me reproduce some key quotes:

That so many are currently opting for ARMs reflects a level of real estate speculation unparalleled in American history. Homebuyers have been lured into this foolish choice by... a Fed chairman desperate to keep the real estate bubble inflating. Unfortunately, the longer the Fed remains "patient" with regard to raising short-term interest rates to appropriate levels, the more homeowners that will be lured into the ARM time bomb.

The real losers in this whole fiasco are likely to be those who did not even participate in the mania. As over-leveraged borrowers walk away from properties in which they have no equity, the Fed will most likely attempt to bail out both debtors and bank depositors (and the government sponsored enterprises that insured the loans) with the most inflationary monetary policy ever undertaken in the history of central banking. The savings of an entire generationwill be wiped out, as it will have been squandered to perpetuate the biggest real estate and consumer debt bubbles of all time.

 

Now if I could have seen that coming as early as May 2004, why couldn't the Fed? Even with the full benefit of hindsight, Bernanke still cannot recognize the Fed's mistakes.

I think Roger W. Garrison, Professor of Economics at Auburn University does a nice job of explaining the Austrian Theory of the Trade Cycle in a power point presentation he gave to some students that has been posted on YouTube.

I would appreciate your thoughts on it if you have the time.

This is already getting to be a long post so I'll add my own personal thoughts on your post here, from what I think is an Austrian perspective in a separate reply.

Tue, 05/15/2012 - 20:46 | 2429720 williambanzai7
williambanzai7's picture

I'm no expert in this. But there a few things I know with certainty:

1. flexibility is a euphemism for Ponzi effect.

2. calling people "goldbugs" is an ad hominem type of attack, similar to calling someone a Luddite; and

3. at this point in history the burden of proof has clearly shifted over to the advocates of fiat currency and infinite growth; they are the one's reponsbile for the clusterfuck not the advocates of a more rigid monetary mechanism.

Tue, 05/15/2012 - 20:26 | 2429674 dexter_morgan
dexter_morgan's picture

check calendar....not April 1, ...........wow.........

Tue, 05/15/2012 - 20:17 | 2429635 mt paul
mt paul's picture

ten ,dirty hundred dollar fiat  reserve notes

will buy you a kilo of silver today...

thirty of them fiat reserve notes 

will buy you a 100 oz bar..

 

more ballast

for the boat..

 

Tue, 05/15/2012 - 20:09 | 2429621 blindman
blindman's picture

fiat money is a scam and a societal mental and
spiritual dysfunction manifest to enable them,
on the inside, to take things from them on the outside
of the inside scoop, just slavery by other means,
a modern way for the elite to continue to live
the way they have become accustomed to without
actually working. of course it is hard work to
live this way but the work is not done in the real world
of things though sometimes things are created and
altered to perpetuate the virtual description or
overlay, this being nearly infinitely plastic and now
not even plastic but just digital. credit itself is
a purely psychological perception and event. why is
it that we have a class of people who have no track record
of responsibility, conservation or frugality not to
mention assets, collateral or reserves to match or
justify the credit in the structural and functional position
of extending the money supply to the debt slave population.
it is simple. they jack the prices with easy credit,
creating a debt slave population in which everything is
financialized and securitized, then they withdraw the credit
money from circulation and foreclose on the desirable and
available assets. the rest goes to the survivors of the war
which is waged to extend the con onto distant and either unsuspecting
or resisting populations. aka civilization as we know it.
psychological and physical control of behaviour of people
bound by law to play by a set of rules designed to make them
desperate and miserable at the service of the con men.
here the ambassador sums it up.
http://www.youtube.com/watch?v=E2VCwBzGdPM
What a wonderful world - LOUIS ARMSTRONG.
and it doesn't have to be this way but it is.
sovereign people do not need to borrow their own money
from international murderers, drug dealers and con men.
not to mention it isn't even legal so we also have to
be humiliated by making a mockery of the legal system
which at one point was of such quality that people around
the world felt secure investing in the usa.
they know not what they do me thinks. finish with this ..
Sir James Richard’s motto “There are three kinds of man you must never trust: a man who hunts south of the Thames, a man who has soup for lunch and a man who waxes his moustache.” keep that in mind.

Tue, 05/15/2012 - 20:01 | 2429602 ali-ali-al-qomfri
ali-ali-al-qomfri's picture

It's like Brusca is a pilot pulling a drone over a shooting range, only the drone was never attached.

I have learned more from the comments section than from the article. Thanks all you wonderful commentators, and ZH

 

Tue, 05/15/2012 - 19:56 | 2429591 Thunder_Downunder
Thunder_Downunder's picture

If there is a poster child for everything that is wrong with PHD 'professional advisors', it's gotta be RB.

 

In the land inside his head, everything makes sense. If it all gets too much RB, when reality starts pushing in, just close your eyes repeat "I'm ok, I have a PHD. I'm ok, I have a PHD."... 

 

Tue, 05/15/2012 - 19:34 | 2429526 Peter Pan
Peter Pan's picture

The author's proposition is in my view a load of hogwash. If the purpose of currencies is to promote business rather than retain value, then what good would it do if your profits are losing value?

It's like saying the purpose of a bucket is to carry water and it matters not if the bucket has holes in it.

The present fiat system, given that it is one engaged to fractional reserve banking should at least be backed by gold or silver to the tune of 10% so as to curb the printing press enthusiasts.

Tue, 05/15/2012 - 20:02 | 2429606 Thunder_Downunder
Thunder_Downunder's picture

I'm starting to think he may be a badly written computer program. Assemble a random series of related keywords, overlay a little grammar, voila! Article complete. Doesn't seem to be any 'sentience' about the work.

 

Tue, 05/15/2012 - 19:33 | 2429518 ddtuttle
ddtuttle's picture

Close.  But you're confused.  Gold is NOT fiat.

All money is symbolic: it is money because people use it as money. It does not have value, it represents value.  This is  true of gold, so contrary to Aristotle, gold does NOT have intrinsic value, it has symbolic value.  But the laws of physcis preserve gold's real intrinsic propetries for all eternity. The simple fact is that these physical properties allow gold to fit into the human condition as a store of value so perfectly it seems like it's god's money, not ours.  This is where gold bugs get a little confused.  In the end gold's value is representaional just like paper money or electronic credit money.  

However, it is not fiat .  The 'fiat' part of the name refers to the fact that the government can devalue it at will by creating more of it out of thin air.  Since this 'printing' is actually a form of debt creation and they set the interst rate, they can control the demand for it too. Of course, they get to spend the new money on whatever they want before it creates inflation.  They can keep it in circulation against our desires by declaring it legal tender, so you have to have it to clear debts, legal obligations and taxes.

Gold on the other hand, cannot be created or destroyed.  An individual who owns it, has wealth regardless of what happens to the government, no matter how stupid or repressive it becomes.  His wealth exists because other people will always want his gold for same reasons he has it: real finacial freedom.

You mentioned Gresham's law.  With gold being the superior currency, it is driven out of circulation into savings.  By not being legal tender, Gold is relegated to its primary role as store of value. Electronic credit money circulates because it is the inferior money: its intriscally inflates making it useless as a store of value.  You'll note the paper dollars are vastly superior to electronic credit money, and in an inflationary scenario merchants will refuse to take checks or credit cards, and take cash only.  If that becomes common enough, cash will become scarce and more valuable than credit money.  The Treasury and Fed will be forced to print vast quantities real paper money to keep the economy going, just like in Weimar Germany.

The concept of 'fiat' is based on the government dictaing what will and what will not be money.  But they simply don't have the power to declare gold not money.  It always has been money and always will be, precisely because fiat is always abused into obvlivion. Gold has saved us countless times from the stupidity and greed of the printers, and it's about to do it again.

 

 

Tue, 05/15/2012 - 20:19 | 2429651 valkyrie99
valkyrie99's picture

I would question your claim that gold "always has been" money, because it hasn't, it just has been for recent history. Cows and wheat used to be money and had a lot more intrinsic use to the ancient public, actually had a longer and more stable history of usage then gold based on the hints from cuneiform. Gold became money about 600 BC when powerful temples created gold bars and labeled them with how much of a cow they would get you, started accepting only these bars for services and later taxes, convinced the more powerful merchants to accept these bars, and passed laws that no one else could create these stamped bars. Later the Romans gained enough power to create their own coins and Caesar decided when his picture was stamped on gold it was worth twice as much as the bars before by weight. By military force this became the reserve currency and the Romans ensured no one else created these coins and all foreign coin was re-minted when it entered the empire.

 

Surely gold does have some more value in itself without governments then paper pulp, but just like paper currency, most of golds' historic value came from government declaring it, accepting it, mandating it, and warring for it. It’s just the west invented fiat (nomisma was the word) before paper.

Wed, 05/16/2012 - 04:58 | 2430665 sof_hannibal
sof_hannibal's picture

historically Gold is time honored as a currency of value. Nothing comes close... Land as a commodity and as a use for resources/ power beats gold, but land technically isn't a currency; and you can go on and on about commodities/ resources; but gold will sustain value (prior to the dollar) and after the dollar as a currency. Val, your historical analysis is incorrect. Cows and wheat is a stretch to consider that currency, even in the context you are putting it )I would say it's bartering, you may disagree).

Wed, 05/16/2012 - 13:43 | 2432205 valkyrie99
valkyrie99's picture

I would say that cows and wheat became more then barter, especially when they (alond with other commodies at times) were given a fixed exchange floor based of the amount of other commodities the governments of Assyria, Sumeria, Egypt, ect. would exchage them for in other commodoties or their value and made debts for taxes or fees to the state payable in these things.

What is a currency?  Is it a widely accepted medium of exchange?  Traders would exchage less liquid goods for cows or wheat which they would then take and exchange for the goods they wished to purchase more often then not in markets and even more for trades over a distance.  Is it a store of value? For over 3000 years from what is today Ireland to Egypt, we know that one slave girl = 3-4 cows (other trades show stable value as well but this is the earliest and most recorded one from the time) That is a longer store of value then any currency since, including gold.

The value of gold had decreased at times, such as when societies overvaluing it to weight on coinage ended or when the Americas were conquered and their gold taken so its' supply vastly increased. It's been shown that the value of calories has had a steadier value being required for survival and thus in times of golds' decline the amount of calories exchangable for a house or a bronze sword or yolk remained more consistant.

Please note that land was almost a currency at one point in US history, or more accurately a land-backed money redeamable for fixed quantitly on of land scaled in value by productive quality, but the private fractional reserve bankers got laws passed and engaged in taking large amounts of this currency and demanding redemption in concert to end this system shortly after its' start. Aside from a few tribal economies this hasn't really been tried elsewhere to my research. This is a backing that I also agree is worth more research as to it's quality as a long-term preservation of value.

Tue, 05/15/2012 - 20:10 | 2429623 debtandtaxes
debtandtaxes's picture

Physical paper fiat already has more value than electronic money. It allows users to avoid being taxed on 1. the exchange (sales tax) PLUS 2. income gain (income tax or capital gains) AND 3. credit card fees if you are a retailer taking plastic.

The most common form of tax avoidance which saves consumers AND indie businesses about 20% per transaction in Ontario. 

Which is why some governments in Europe have already outlawed cash transactions over $10k.

Tue, 05/15/2012 - 19:42 | 2429551 Peter Pan
Peter Pan's picture

Of course gold has intrinsic value. Anything that has a use has an intrinsic value.

Tue, 05/15/2012 - 19:58 | 2429593 riphowardkatz
riphowardkatz's picture

its really just value. no real need to add intrinsic. Value is something a person acts to gain or keep. Gold is a commodity through out thousands of years people have acted to gain and keep. It had value to all those people and it has value to the people who act to gain and keep it now. It is therefore a commodity. The fact that it is a commodity gives it one of the attributes of being something that works well as money. 

Unfortunately there are legal tender laws or gold would show the world that it stands above everything else as the ultimate commodity to serve the function of money. Until those laws are repealed by decree or revolt it will have to serve as a store of wealth and unit of account which it has done a pretty good job of throughpout the years. 

Tue, 05/15/2012 - 19:33 | 2429516 tlnzz
tlnzz's picture

"In today’s world we have heard of gold bars that are filled with titanium, another form of debasement."

Actually, they filled them with Tungsten, not titanium.

Tue, 05/15/2012 - 22:15 | 2430012 sumo
sumo's picture

Mr Brusca, like his mainstream colleagues, has a two-fold handicap. He doesn't know how the world actually works, and couldn't be bothered to find out.

Tue, 05/15/2012 - 19:31 | 2429514 pissing_excellence
pissing_excellence's picture

Fredo Corleone: I'm your older brother, Mike, and I was stepped over!
Michael Corleone: That's the way Pop wanted it.
Fredo Corleone: It ain't the way I wanted it! I can handle things! I'm smart! Not like everybody says... like dumb... I'm smart and I want respect!

Something in this article made me think of this.

Tue, 05/15/2012 - 19:15 | 2429465 Kastorsky
Kastorsky's picture

here is a link for you, Robert

http://en.wikipedia.org/wiki/Fiat_money

Don't embarrass yourself.

Tue, 05/15/2012 - 19:02 | 2429408 ebworthen
ebworthen's picture

Using your logic, rubber-bands would be preferable to something immutable.

How about peanut shells?

Cotton balls?

Tue, 05/15/2012 - 19:04 | 2429407 SILVERGEDDON
SILVERGEDDON's picture

Flexibility benefits corruption, banks, and one percenters. Gold provides honesty to currency, and stability in the value of said currency. That is the mark of a truly democratic society. 

As for debased value of currency, where the fuck have you been hiding for the last 50 years as the value of the U.S. dollar has been flushed down the toilet of inflationary theft from ordinary people ?

You, sir, are a first class troll ass hat dip shit Klingon from Uranus. 

Tue, 05/15/2012 - 22:27 | 2430040 Titan Uranus
Titan Uranus's picture

I resent your casting aspersions on Uranus - to some of us, it is a very nice place - warm and fuzzy.

Tue, 05/15/2012 - 18:58 | 2429401 Joebloinvestor
Joebloinvestor's picture

He ruined his credibility when he didn't know the difference between titanium and tungsten.

Tue, 05/15/2012 - 21:25 | 2429837 moonstears
moonstears's picture

Maybe, the author is, in his own way, letting his ZH readers know what's now filling the good deliver gold dore bars. I know China produces 85% of tungsten, maybe they're man-i-pole-ate-ing it like rare earths and titanium's the new fill of choice? Good lookin' out Mr. Brusca!

Tue, 05/15/2012 - 19:15 | 2429468 Kastorsky
Kastorsky's picture

no surprise - he worked for NY FED

Tue, 05/15/2012 - 19:38 | 2429540 LudwigVon
LudwigVon's picture

His flexibility meant expansion, or theft

Tue, 05/15/2012 - 18:59 | 2429396 bankruptcylawyer
bankruptcylawyer's picture

excellent article but you didn't finish your argument which is WHY governments have all historically spent themselves and indebted themselves and their populations to unsustainable situations where the status quo economics could not be politically can kicked with more promises and printing. 

promises eventually come to an end. hyperinflation or hyper deflation are both the same thing. they are an unsustainable situation where people cannot go about the ordinary course of business where their food and life needs are sustained in a system that is interlocked with the business as usual of government promises. 

 

your point is that in the long run there are always cycles of unsustainabilty and too much promises being made to be kept. but so what? you dont' really offer any insight into why this is and you don't offer any insight into possible remedies for preventing or mitigating the cycle of overpromising. 

 

in the bible, joseph went down to egypt and made himself an important person to the pharoh by introducing the concept of grain storage. before gold was the medium of deposit savings, the pharoh's were using actual grain. which you could actually eat, let alone use for 'banking' and making pensions promises and loans. 

joseph was a genius and he laid the ground for a very fruitful career for himself. 

maybe you could start offering some basic wisdom. but your point is well taken. gold bugs are angry and willing to isolate themselves. and yet, on this point, they are not incorrect in a technical manner. it is an attitude about the future. and it is an attitude steeped in distrust of our institutions and our 'civility' should the time of reckoning for our institutions be nigh at hand. 

and i'm betting you now that people in greece who own gold now are far more at ease than the average pensioner or person with their meager savings wrapped up in the bylawys and political votes of an institution which is breaking down and will soon be reformed. there is a lot of uncertainty. 

 

Tue, 05/15/2012 - 19:57 | 2429598 valkyrie99
valkyrie99's picture

The ancient ox/wheat standard of money you referrence has actually lasted longer and with more stability then any other type, gold, fiat, anything. Although it was around a long time before Joseph in other parts of Mesopotamia and Egypt. Interestingly, the Babalonians were the first to also include silver in their fixed exchange rate tables that made the medium of exchange and to allow loans to be made in silver vs. just ox/wheat. About 70 years later they also had what many believe to be the worlds' first public debt crises until they did have the first documented debt jubilee.  There are many fascinating writtings fom the time that make you question the nature of money; it seemed the common belief was that money should only be loans in animals or crops that can reproduce because how else could interest be paid when silver does not multiply? Usury was defined in the day as loans in goods that couldn't reproduce. Many of these writtings make for interesting reflection on our debt-based money system today.

Tue, 05/15/2012 - 18:58 | 2429393 Greenhead
Greenhead's picture

Fascinating that "full employment" is the role of the government.  Central planning hasn't worked, won't work and can't work.  Gold hasn't lasted as a standard because government has been constricted and has always tried to throw off the shackles which have bound it to some norm of fiscal resposibility and minimalism.  It is always about power, who has it and who controls the purse.  Fiat gives government near unlimited power, until it poof... it evaporates with the loss of faith in the currency.  People will always trade if left alone.  Money came about because people agreed on what money was.  Government can decree, until it can't.

Imagine me stealing 4%-5% of your wealth every year, is it a problem?  Imagine me being your boss saying you have to work the same number of hours this year, next year, the year after and so on until you die.  Oh, and by the way, each year I am going to lower your pay 4%-5% on the average, and you can't do a damn thing about it.  Keep up the good work.

For the life of me, I don't understand how you even rate a post. 

Tue, 05/15/2012 - 20:59 | 2429768 Ranger4564
Ranger4564's picture

Not sure if you meant leave a rating on a post, or how Bob can achieve enough stature to be allowed to post.  The former is right below the article to the left... the latter I have no idea how or why.

Tue, 05/15/2012 - 18:53 | 2429381 jomama
jomama's picture

just gonna leave this here.

Tue, 05/15/2012 - 18:42 | 2429337 BeetleBailey
BeetleBailey's picture

Wrong Bob. Gold coins circulate very well.

I jokingly offered 30 gold coins to a homeowner selling at distress. He jumped at it. So please......

What I don't get is you yammering on and on about something that is de-based by the second.

Again - Economics 101: More of something - the less it's worth.

10k buy you ten years ago what is does today? No. Inflation.

Write a piece on simple economics - if you can. Go back to the books and start over. You've lost your way.

Tue, 05/15/2012 - 18:30 | 2429298 riphowardkatz
riphowardkatz's picture

Free banking. Separation of economics and state. Governments sole purpose should be to protect property rights and provide a judicial system for settling disputes.

Tue, 05/15/2012 - 19:48 | 2429570 valkyrie99
valkyrie99's picture

When we had what is today called 'free banking', the government played many more roles then you state it should - it issued charters to it's freinds and benefactors to allow banks to create currencies whereas without a charter one could be hung for the same act, it further legitimized the bank scrips by accepting them for payments of fees and taxes thus providing a stable entity which would always finally accept these notes despite how little gold the bank truely held thus assuring steady demand for the notes, government officials made false assurances about amounts of gold being held in vaults that didn't really exist, eventually scrips were declared legal tender in some communities, forcing the public to accept some of them, the government choose to hold its' funds in these private banks, and the government choose to not compete by them by creating their own currency, and restict other competitors, from foregn currencies like spanish silver to landowners who wished to create land-backed currencies, farmers who wished to create agricultural product based currency, etc., the government would choose to 'suspend redemption' to prevent a favorite bank from being discovered insolevant where others were left to fail and take the wealth of their depositors and note holders when it was discovered they didn't hold the reserves it claimned.

Without all this government assitance to ensure only privilaged and connected banking interests could create money, these banks would have never been so 'free' and their paper wouldn't have been so accepted.

Tue, 05/15/2012 - 20:57 | 2429757 BigJim
BigJim's picture

  When we had what is today called 'free banking',

and then you go on to list numerous reasons why the previous 'free banking' regime... wasn't anything like the free banking regime that free-banking advocates are calling for.

Hmmm...

Tue, 05/15/2012 - 20:04 | 2429614 riphowardkatz
riphowardkatz's picture

A charter to create currency isn't free banking. It means exactly what it says the right for anyone to create a bank and currency. Now if you say your currency is backed by 10,000 tons of gold and it isnt than that is fraud (violation of property rights) and the government should step in and prosecute. That doesnt meen you will necessarily get your gold back and if you do there may be a loss of time, interest so it is then in the best interest of every individual to deal with honest banks that have built a reputation through time and transparency. 

Its pretty simple really.

 

Tue, 05/15/2012 - 23:38 | 2430275 valkyrie99
valkyrie99's picture

I always try to understand monetary proposals through reflection of history - typically I have seen free banking advocates point to the early 1800's US (which worked as in my comment above) and are speaking of competing fractional reserve banks independently issuing script in my reading.

Are you saying that not having 100% backing of all deposits would be prosecution in your system, as fraud?  This is how private banking worked in ancient Greece with positive results.

Or are you saying banks can create currency through printing over reserve amounts or fractional reserve, but wouldn't be chartered as corporations with this purpose? Somewhat like early dutch goldsmiths? Pls clarify

Wed, 05/16/2012 - 07:12 | 2430757 riphowardkatz
riphowardkatz's picture

I am not talking about what was I am talking about what ought to be. As far as I know there never has been true free banking. 

I am saying that a currency could have any backing that both parties agreed to. Each note in essence is a contract. Some of the currency could be backed by a fractional reserve but most likely very few people would accept this as long as someone had a fully backed currency. 

If the contract was broken by the issuer the government would step in and pubish the bank or its principles for fraud. 

Wed, 05/16/2012 - 14:27 | 2432448 valkyrie99
valkyrie99's picture

Sorry, historical analysis strongly suggests economic theories based off historical precedent perform much better then ideas based off pure theory :) However, I suppose sometimes a base sense of fairness gets it right.

The closest historical parallel I can find to the system you speak of is ancient Greece. Banks '(major temples at the time) offered deposit banking with full reserve backing and fees charges to depositors and separate investment accounts where the depositor knew they couldn't access their money for a time as it would be loaned out and they gained interest in compensation for their risk.  At times banks would attempt to falsely represent  what was done with depositors funds, but this was recognized clearly by the professional jurists of Greece as fraud. In one case court records show a banker took deposits in full-reserve accounts and made bad investments so they could not redeem a clients' gold when requested.  The jurists found the banker guilty of fraud and ordered him to work as a servant for the depositor until he paid off their deposit, as well as storage fees depositor had paid, and the interest that would have been granted had the client willingly chosen an investment account.

Of course this system still leaves the question as to what is to be used as bank reserves (in Greece it was gold bars then coinage overvalued to weight by gov't decree, functioning somewhat like currency backed by partial gold reserves) but I do agree this banking system functioned well without causing instability and I do see this system as a much better way for banks to operate. I have not heard it referred to as 'free banking' before.  Typically it what full-reserve advocates are purposing.

Tue, 05/15/2012 - 18:53 | 2429375 LawsofPhysics
LawsofPhysics's picture

Yes, but you can not allow the representatives to be bought as is the case today. Only a complete reset will fix this. No consequences for bad behavior remains a major issue.

Tue, 05/15/2012 - 18:28 | 2429284 Angus195
Angus195's picture

The points made are well taken.  The question remains how do we 'construct' a framework for a nations currency.  I have thought about this for sometime.  The only thing that I can come up with is to have each nation using a currency which is somehow tied/restricted to a formula (the amount of the 'float' or base money in the system being limited by this formula) which includes a number of different measuring 'factors'  such as the amount of gold and silver in reserves, the GDP of the country, maybe the amount of oil that country has access to within its borders and with certain 'relaxation' allotments allowed (i.e. increasing the float) in some direct correlation to unemployment percentages with 'reign in requirements' given the amount of measured inflation (actual numbers not the lies we are now told).  It seems clear however that the real problem is not the FED printing money from thin air, but the ability of commercial banks to 'create' money from thin air using the fraud that is fractional reserve banking.  One wonders if this practice alone were eliminated if many problems would not be solved.  Clearly, it is this 'artificial' expansion of the money supply by fractional reserve banking (including credit cards) that is the real thief in the night.  Further, the FED's ability to create money as a debt would need to be eliminated.  Creating only the principal, and demanding its return with interest is a system that is designed to fail - at some point. 

Tue, 05/15/2012 - 19:27 | 2429508 valkyrie99
valkyrie99's picture

Yes, I agree with a lot of what you're saying.  Too often those advocating for a gold-standard only with to replace the Fed, but in reality not just the quasi-public-really-private Fed creating currency that causes most instability, it's the completely private banks who create 94-98% of the circulating currencies in all nations tied into the global banking system! 

We very well may have reasons to question the wisdom of our government, but to say panics are caused by 'government' money printing is false - banks control the supply of money and choose to expand or contract its' quantity.

Ending fractional reserve banking is absolutely necessary to create a functioning economy (or a funtioning government; if banks can print money, they will always buy the government, eventually).  What to replace it with?  Gold has advantages due to scarcity and history, but its' also improtant to remember that the states individually started chartering private banks to print currency in the US because gold was in such short supply commerce was extremely liimited in the late 1700's...I fear we'd wind up needing additional circulating money again and would prefer elected reps printing it to banks, which has been the major choise that has played out through societies since the 1700's....I would prefer it to be printed by individual states then the Fed gov't to assure checks and balances of power, and I may like currency backed by and exchangable for a basket of commonly held commodoties, like food-stuffs, even better... I have been reading monetary history long enough to believe there isn't one magic bullet, just that every monetary system ever used works better then debt-based money created by bankers.

Tue, 05/15/2012 - 21:18 | 2429816 Augustus
Augustus's picture

If there was not Fractional Reserve Banking,

there would be NO bank loans.

No loans would be made by banks but only between individuals.

Wed, 05/16/2012 - 14:37 | 2432494 valkyrie99
valkyrie99's picture

Bank loans existed before fractional reserve banking, just in less quality and only where the loan was really a good investment enough the banker would choose to risk their own assets - so a better return for lower risk was required then when they started loaning out other people's money.

Additionally in actual full-reserve systems mechanisms aside from fully backed deposit accounts could be used to invest in making loans, where the client knew they were taking risk of losing  a principle they could not access for a time as the back would be loaning it out in exchange for paying them interest (time deposits and stock sales functioned this way at times)

Do NOT follow this link or you will be banned from the site!