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Guest Post: Irredeemable Paper Money, Feature #451

Tyler Durden's picture


Submitted and copyright by Keith Weiner

Irredeemable Paper Money, Feature #451

I am writing this, having just returned from the fourth course at the New Austrian School of Economics, in Munich.  The single biggest theme was the rate of interest and its linkage to prices.  Kondratieff, among several others, have observed that rising prices lead to rising interest rates and vice versa.  And the opposite case is also true, falling interest rates go with falling prices (all else being equal).  I plan to write a separate paper on this topic.
One of the most important ideas proposed by Professor Fekete is that a rise in the rate of interest reduces the burden of debt that has been accumulated previously.  And a fall in the rate of interest increases the burden of debt.  This is because the present value of a future payment is:

If the payment is $1000 per year, and the interest rate is 10%, then the payment at the end of the first year is worth 1000 / 1.1 = $909 today.  The payment at the end of the 30th year is worth $57.31 today (1000 / 1.1^30).

But as the rate of interest falls, the present value of all future payments rises.  If the rate of interest fell to zero, then the present value of each future payment would be the nominal value of the payment (1000/1^30 = 1000).  The 30th year payment would be worth $1000 today.

Unlike under a gold standard, in paper money the rate of interest is subject to massive volatility.  Sometimes, the government has its way, fueling rising prices and interest rates.  Other times bond speculators front-run the central bank’s unlimited appetite for purchasing government bonds and the rate of interest falls.  We are now in year 31 (so far) of this latter phase.

As the total accumulated debt increases (feature #450 of irredeemable money is that total debt cannot go down), the effect of a change in the rate of interest becomes larger and larger.  Today, even very small fluctuations have a disproportionate impact on the burden of debt incurred at every level, from consumer to business to corporate to government at every level.  To say that this is destructive is a great understatement.

This, rather than the quantity of money, is what people and especially economists should be focused on.


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Fri, 04/13/2012 - 14:50 | 2342450 CrimsonAvenger
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I am clearly not smart enough to be here. All I know is paper=bad, metal=good.

Fri, 04/13/2012 - 14:51 | 2342458 Troll Magnet
Troll Magnet's picture

obviously, you've never tried Phillies Blunt Wraps.  they are some FINE papers.

Fri, 04/13/2012 - 14:56 | 2342471 Ahmeexnal
Ahmeexnal's picture

ever tried a sterling silver bong?

Fri, 04/13/2012 - 15:18 | 2342520 BKbroiler
BKbroiler's picture

scared to turn blue.  smurf chokes sound cool though.

Fri, 04/13/2012 - 15:43 | 2342578 Pladizow
Pladizow's picture

"Paper is poverty, it is the ghost of money and not money itself." - Thomas Jefferson

Fri, 04/13/2012 - 17:18 | 2342768 DoChenRollingBearing
DoChenRollingBearing's picture

"Gold: Basic Facts for the 99%"

I put up an article with basic information like physical properties, gold holdings, weights & measures pertaining to gold, specifications of popular bullion coins, fake gold and more.

Gold info for us in the 99%!

Fri, 04/13/2012 - 17:48 | 2342811 AldousHuxley
AldousHuxley's picture

You forgot to add American middle class family right in between the gears....

Fri, 04/13/2012 - 17:26 | 2342779 ATM
ATM's picture

Speaking of the British at the time:


"With only twenty millions of coin, and three or four hundred millions of circulating paper, public and private, nothing is necessary but a general panic, produced either by failures, invasion, or any other cause, and the whole visionary fabric vanishes into air, and shows that paper is poverty, that it is only the ghost of money, and not money itself. One hundred years ago, they had twenty odd millions of coin. Since that they have brought in from Holland by borrowing forty millions more, yet they have but twenty millions left, and they talk of being rich, and of having the balance of trade in their favor."  - Jefferson

Fri, 04/13/2012 - 18:03 | 2342836 Cadavre
Cadavre's picture

In times such as these, wise men might be best advised to embrace precepts of the Fabulous Furry Freak Brothers ...

        'Dope will get you thru times of no money better than money will get you thru times of no dope'

Fri, 04/13/2012 - 18:33 | 2342897 CatoTheElder
CatoTheElder's picture

The maxim you cite is properly attributed to Fat Freddy Freak in particular.

Sun, 04/15/2012 - 08:36 | 2346342 Freewheelin Franklin
Freewheelin Franklin's picture


Fri, 04/13/2012 - 22:18 | 2343164 Tijuana Donkey Show
Tijuana Donkey Show's picture

Amen Jesus, Amen! The lord has looked down on this man, and had him preach the gospel truth to the converted, as it is easier for a stoned camel to pass throught the eye of a needle, than a sober man to understand the false profit Bernake. Or in the immortal words of Master P- "Fuck the bitchez, gimme da money and da weed." I found that in my research, the Fed is a bunch of bitchez, proving my postulate. Amen.



Fri, 04/13/2012 - 18:26 | 2342885 IAmNotMark
IAmNotMark's picture

Oh, that's just some dead white guy talking.  What does he know?

I'm putting my faith in Obama!


Sat, 04/14/2012 - 04:47 | 2344523 Nukular Freedum
Nukular Freedum's picture

Author makes a false distinction between the quantity of money issue and the rate of interest issue. They are really different aspects of the same problem and the debt is a by product of it. Also the author fails to specify which version of the gold standard he is referring to. In my view the problems raised in this article are intrinsically insoluble for the reasons laid out in the following brief but pungent post:

Sat, 04/14/2012 - 20:02 | 2345861 Poor Grogman
Poor Grogman's picture

The answer is to not have a Standard. Just allow the market to decide what where and when it uses,( without coercion)
the answers the market chooses may vary over time and distance and would likely not be favourable to government or the parasite class.

But isn't that the point?

Fri, 04/13/2012 - 15:41 | 2342587 blu
blu's picture

There is nothing the least wrong with turning blue. It's a nice color.

And if you refer to me as a smurf one more time I will totally set you on fire. Fact.

-- the Archangel Fortran

Fri, 04/13/2012 - 21:36 | 2343132 MayIMommaDogFac...
MayIMommaDogFace2theBananaPatch's picture

I will totally set you on fire. Fact.

Sounding a little bit like Gargamel there...

Fri, 04/13/2012 - 22:20 | 2343165 Tijuana Donkey Show
Tijuana Donkey Show's picture

Didn't Gargamel want the smurfs to turn them into gold? Maybe Gargamel was modeled off of Ron Paul, and the Smurfs work for the Fed?

Sat, 04/14/2012 - 13:58 | 2345440 blu
blu's picture

Gargamel ... oh I get it. Ha. Ha. So what part of setting you on fire did not register with you jokers?

-- Love, Fortran 

Fri, 04/13/2012 - 14:54 | 2342460 easypoints
easypoints's picture

So when the burden of the debt is still, well, overburdening, with ZIRP-infinity firmly in place, then the emperor's have no clothes? Sounds about right.

Fri, 04/13/2012 - 14:55 | 2342469 twh99
twh99's picture

That may be too simplistic.  It should rather be, is the paper redeemable in metal?  If not then watch your wallet!

Fri, 04/13/2012 - 15:05 | 2342490 franzpick
franzpick's picture

Here's an interesting development in a country where inflation is running 18% and sellers have been accepting payment in gold in place of the local currency, and the story of what the government has done to prevent further acceptance of gold that could destroy the national paper currency: think Vietnam, and the Dong is wrong, and, could this happen here and elsewhere worldwide?:

Fri, 04/13/2012 - 15:26 | 2342542 Bear
Bear's picture

Thanks ... good article ... but this line really stood out for me:

"The government’s reasons for preventing the use of gold as a medium of exchange are officially to try and steady the shaky dong"

admirable goals abound

Fri, 04/13/2012 - 15:33 | 2342559 slewie the pi-rat
slewie the pi-rat's picture

you guys shoulda been trolling here the just recently while it was being discussed on zH

Fri, 04/13/2012 - 17:20 | 2342771 NotApplicable
NotApplicable's picture

Otherwise piss goes everywhere!

Fri, 04/13/2012 - 22:21 | 2343136 Cadavre
Cadavre's picture

Had to holdiback a "nose milk blow out" during an interview RT's Capital Accounts' Lauren Lyster had with John Thomas Financial Chief Economist (and ex FOX Dweeb Head), Mike Norman. Once Norman figured Lyster would not let him sell his "instant Water" (Just Add Water) sham wow unchallenged, old Mikey drifted into into vague doublespeak of tsunami metaphors that lacked the intelligibility to suggest a point of query. Norman did concede something about Glass Steagal, but like every other Florettes the mic picked up, he appear agnostically ignorant (two word Mikey, "Gingko Bilboa"). But boy could Mikey croon Keysnian dogma doody like .. like Chris Mathews pitching the beautiful truth that underlies Bambi's banner catch phrase of the moment, "Real Change You Can Believe In" ("change" is something seen - it don't require faith - well not yet anyway),

Norman dresses more like a broker working the true believers of denialsm grazing sacred pastures on a Sunday afternoon than an economist. Economists see no benefit in a pen stripe suit of amour and regimental tie - but Norman did make one point - he is still a shill!

That interview was almost as hard as the ZH art yesterday where Nanex nerds grilled the SEC on their flash crash analysis that concluded, when translated from the SEC's native non imaginative double speak news speak and trying to use all them fancy smancy business words from school (in reality, and most likely, the SEC's white shoe overlords faxed them the SEC the report the SEC published)l ... concluded not much of anything except that the SEC's rank file are chock full of nothing but the best that only a solid 3rd grade education can provide:

Essentially the SEC concluded: Canceled orders make the market liquid, and boy did the HFT hack shops liquefy the market on flash crash day! Of course, and needless to say, despite the SEC's big mum on the fact all that liquidity was flowing out of the pockets of family and individual portfolios managed by small money management firms working one minute ticks with allocation models. The smart shops, this time, were not the shops relying on models that reset and continued trading after all their stops were breached - some of those guys converted everything and lost their investment clients ass.

Maybe an unintended consequence of flash crash day was to get small investors to assign their portfolios to their New Delhi call centers.

What's an HFT to do when there are absolutely no retail millet left to chum? They have to migrate to shoals of less populated small, but nonetheless chum responsive  independent mom 'n pop money management shops. Next are the big non HFT brick and mortars. After those shoals have been milked dry, the HFT's become vampires eating each other's bailout cash. Since FED freebies are always in abundance, they can give the zero iodines barking CNBC's midway something to practice using their business school words for quite sometime to cum. Pretty soon the only audience CNBC will be able to claim are the HFT suck bots eating their RMS feeds and the techs looking at monitors in production room.

What was the flash crash? The flash crash was an HFT prototype whose liquidity milking subroutines, that, despite an excellent record during simulation, just lost it's mojo when it was fed a live market stream - and that's all it was. The SEC should have just used the old favorite agency standby, like NIST's "Thermal Expansion". The SEC could have called it "Liquidity Expansion" (or "Thermal Liquidity"), and it would have made just as much or just as little sense as any of the cagatha they shart on some smarty pants paste up pseudo analysis the WHite Shoes instruct them to write. And guess what - if someone blows the whistle the get the national security cattle prod ram rodded where the sun don't shine.

A year ago one HFT soup kitchen shop claimed they only canceled 65% of their orders (... right ... and Oprah's got a tight ass!). The Europeans charge for canceled HFT orders - and word is the same is being considered (meaning it ain't gonna f*cking happen) in The Banana Republic of Merika - land of the free - at least free to breathe another minute (maybe), and home of the brave, well cepting for them box cutters - dey can give give you a real nassitty paper cut - mean - gee willickers, you could get tetanus!

The reason the not quite redy for prime time market flash crash HFT prototype f*cked up be the same reason the SEC is so f*cked. The White Shoes, and dere entourage of prissy dandies pick their next crop of head lice from the guys that been massaging their zipper dragons as regulators. It's the "crappy guy syndrome" all ove again and again and again and again and ... infinity.

"The government’s reasons for preventing the use of gold as a medium of exchange are officially to try and steady the shaky dong"

admirable goals abound

Don't forget about price stability, solid monetary policy, high savings' rates and low unemployment. The reason they don't wan't gold is because printing gold reserve notes is called counterfeiting.

Waiting for someone to tell us how the the gold would be distributed. So many dollars have been printed - and so many dollars are held by so few that should the gold note worth be determined by possession of dollars outstanding, there gonna be a bunch of lotto really pissed off muggles down in the commons.

Fri, 04/13/2012 - 15:26 | 2342539 rwe2late
rwe2late's picture


Me Too.

 How stupid must I be to not have realized that my debt burden would be reduced by paying a higher interest rate?!

One of the most important ideas proposed by Professor Fekete is that a rise in the rate of interest reduces the burden of debt that has been accumulated previously.

I should rush down to the bank now and demand to pay a higher interest rate on my mortgage!!

Fri, 04/13/2012 - 15:33 | 2342560 LowProfile
LowProfile's picture

Pretty sure this makes sense...


Actually in the scenario presented by the article, your debt would be met by either:

A.) Paying it off

B.) Defaulting



If you figure that you're not the only serf in the kingdom, then even though some of your fellow serfs default, the others pay it off, thus preserving the quality of money - fiat or not.

But artificially low (non-market determined) interest rates destroy the quality of money, and the real purchasing power of those repayments over time.

Fri, 04/13/2012 - 15:53 | 2342614 slewie the pi-rat
slewie the pi-rat's picture

now you know why i call antF theNuttyProfessor

this guy here was probably ok up into the mid-300s, himself

  1. BiCheZ!
Fri, 04/13/2012 - 16:01 | 2342639 rwe2late
rwe2late's picture

But artificially low (non-market determined) interest rates destroy the quality of money, and the real purchasing power of those repayments over time.

Actually, the article argued the opposite:

supposedly,"all things equal":

HIGHER interest reduces the debt burden.

LOWER interest increases the debt burden.

I will grant the correlation, that higher interest would normally be charged by the lender when prices are rising. But to argue that those higher rates favor the borrower seems a stretch.

In the present circumstances, not "all things equal", the suppressed low interest rates hurt "lenders", including those commonfolk who "save". That may be one reason banks are reluctant to lend so long as it is more profitable to "invest" elsewhere the nearly free money handed to them by government .

Fri, 04/13/2012 - 16:12 | 2342657 akak
akak's picture

I have tried to understand this "lower interest rates = higher burden of debt" concept and argument of Antal Fekete's, even going so far as to contact and communicate with him directly, but in the end I can only conclude that either he is supremely poor in conveying the gist of this idea, or else I am exceptionally obtuse, because it still does not make one iota of sense to me, and indeed seems ass-backward.

Does anyone care to try to explain Fekete's cryptic and seemingly nonsensical argument in a manner in which mere mortals can comprehend it?  And HOW can prior debt, maintained at the SAME rate of interest, suddenly somehow INCREASE in burden while interest rates lower?  Or, if the rate of interest on that prior debt actually falls, again, how is its "burden" being increased, and not decreased as common sense would indicate?

Dr. Fekete, you are either amazingly bad in explaining your seemingly contradictory theory, or else your idea makes no sense whatsoever.

Fri, 04/13/2012 - 16:18 | 2342679 rwe2late
rwe2late's picture

Present Value = Payment/ (1 + Interest) ^time

ONLY if and when (so it would seem)

the interest rate = rate of inflation

If interest rate and inflation are different, then the final value (purchasing power) cannot be calculated by using interest alone.

Fri, 04/13/2012 - 16:50 | 2342702 slewie the pi-rat
slewie the pi-rat's picture

interest rates low:  ZIRP makes it eZ for fascism to borrow and re-fi;  anybody else who still qualifies, too;  b/c of the "need" to pay the protection rackets, the goobermint union, and for the "social and medical stuff" too;  hence the burden (amount/total weight)  of the debt increases near-exponentially while it's "costs" may even decrease due to centralPlanning and re-fi's

interest rates high:  people take out less debt-money from the future (fiat's source?);  i was here in the early 80's;  the primeRate was 18% and nobody borrowed a fuking thing!  the burden of debt decreased, as did inflation

slewie loves nuts, especially when they are among the few, the bad, and the ugly;  i have no idea if this is what antF means or not, ak

but, when a country can't keep the ponzi greased (greece'd) it is the total burden which they face;  this is why greece isn't borrowing any more than it absolutely 'must':  it can no longer increase the >>burden<<

cBs were s'posed to work this way w/ sovereign finances;  but you know how those print-monkeys love that fuking red button!

  1. this professorF is my favorite economist
  2. BiCheZ!
Fri, 04/13/2012 - 16:45 | 2342722 Banjo
Banjo's picture

Think of it in terms of the DEBT markets. Aka BONDS. This is why US interest rates will go up as more QE will wash away the debt with printed cash.

Thanks for playing China :)

Fri, 04/13/2012 - 17:43 | 2342797 NotApplicable
NotApplicable's picture

I'll admit, it took me a while to get my head around this idea. But it is logically coherent. The thing that you need to realize is that the burden of debt increases relative to all other borrowers who can go out today and get the same loan for less. This might not matter so much if you're buying a house, but what if you're funding a business with it? Rates drop, and suddenly new lower cost competition emerges as they've obtained cheaper financing. Meanwhile, unless you can refi, you're stuck, and can do nothing but watch business evaporate.

Remember the first time you encountered a "early-payoff penalty" on a loan? I was like, WTF, why wouldn't they want their money paid-back earlier? Well, it's because you're paying them LESS in interest as a result, and undoing all the work they did to obtain this rate of return.

And what about the financial system itself? If I go refi my house at the same bank due to lower rates, they will have a reduced interest income stream as a result of it. Now, you might push the duration out longer, which could make up for it, but if you didn't, the bank suffers. Of course, if you refi at a different bank, it just spreads out the loss to the system as a whole (one bank gains, but less than the other loses).

To those who keep the original note in a lowering rate environment, well, then you're taking a loss because you're paying more for the loan than you should be. Instead you should have a lower payment, meaning more money to spend on other things.

This is the essence of Prof Fekete's argument. Between this idea, and his idea of observing the gold basis as a sort of monetary barometer, I consider him one of the most tuned-in monetary theorists alive. It's too bad lots of people call him a quack because they mischaracterize his writings on Real Bills. (especially one named Corrigan, whose writing I otherwise love to read)

Fri, 04/13/2012 - 18:24 | 2342880 akak
akak's picture

The thing that you need to realize is that the burden of debt increases relative to all other borrowers who can go out today and get the same loan for less. This might not matter so much if you're buying a house, but what if you're funding a business with it? Rates drop, and suddenly new lower cost competition emerges as they've obtained cheaper financing. Meanwhile, unless you can refi, you're stuck, and can do nothing but watch business evaporate.

Thank you, NotApplicable --- this does help clarify the argument for me.

You hit on what I found to be the essence of the argument, one that confused me to no end: that Fekete's buden of debt in a falling interest rate environment would be relative, NOT absolute.  Thinking in terms of say a homeowner wtih a mortgage, or a person with a running credit card balance, I failed to see how falling interest rates presented a burden to THEM, not thinking about the competitve, and relative, position of a business in debt as well.  I think Fekete should refine his presentation of his argument to take those specific, and very different, debt positions into account.

Fri, 04/13/2012 - 18:43 | 2342921 DoChenRollingBearing
DoChenRollingBearing's picture

Let me take a crack at this one.

Say you had gone out and borrowed $100,000 for your business (say) 5 years ago and had to pay 6% interest.

Let's say your competitor today can borrow the same at 3%.  YOUR debt burden is now much higher than his.  It is harder for you to pay off your debt.

Sat, 04/14/2012 - 01:02 | 2343262 slewie the pi-rat
slewie the pi-rat's picture

hey, D_C_roll.ing_bear!

imo the "burden of debt" is not a micro-economic idea;  it is the burden of debt of the macro economy, the debt that must be "carried" in macro terms

going w/ his present value idea, when the rate is lo, the present value is hi (long bond  = 141+)

a higher discount rate lowers the PV of the debt

p.s.:  i "think" L0L! (theProfessor strikes again!)

Sun, 04/15/2012 - 10:59 | 2346485 PivotalTrades
PivotalTrades's picture

One of the most important ideas proposed by Professor Fekete is that a rise in the rate of interest reduces the burden of debt that has been accumulated previously. 

You barrow $100k today at 3%

5 years hence you lend that $100K at 6%.

Pay off the remaining loan and collect the difference.

Sat, 04/14/2012 - 00:49 | 2343300 Cadavre
Cadavre's picture

Maybe it meaning to be saying that higher (market?) rates reduce the rate of debt accumulation  - unless he be saying we don't need to pay no stinking interest cause it's not debt, therefore not owed no more (all for that - better than investing in wet index paper!)


The only way, thinking it was anway, to reduce debt burden is pay it down - unless embedded in this article is some magical way to rehypotocate cash out for payables.

Fri, 04/13/2012 - 14:51 | 2342457 taniquetil
taniquetil's picture

Paper money is like the government putting a gun to your head and telling you how much your stuff is worth.

Fri, 04/13/2012 - 14:58 | 2342475 twh99
twh99's picture

They have it easier than that.  At least when someone is putting a gun to your head you know you are being robbed.  

In this case most people don't even understand the amount or level of theft that is being perpetrated by the government.

Fri, 04/13/2012 - 15:16 | 2342515 CURWAR2012
CURWAR2012's picture

Very true, stealth theft we do have.

Fri, 04/13/2012 - 15:11 | 2342504 Max Fischer
Max Fischer's picture



The gold standard is like having something utterly arbitrary (in this case, the supply of gold) dictate to a country how fast it can grow and whether or not it will have the funds necessary to defend itself in war.  If the gold standard worked, why did this country go off it so many times?

Max Fischer, Civis Mundi

Fri, 04/13/2012 - 15:25 | 2342518 mayhem_korner
mayhem_korner's picture

The gold standard is like having something utterly arbitrary


That gold is of finite physical supply is exactly what makes it NOT arbitrary as a currency anchor. 

And instead of asking the "if the gold standard worked" question, why don't you ask how well things have been working since 1971? 

Uber-moronic today, Max.

Fri, 04/13/2012 - 15:34 | 2342557 Max Fischer
Max Fischer's picture



The reason this country has gone to shit is because we have a very dumb population that continues to elect politicians who serve the owners instead of the laborers. It is not accidental that over the last 40 years the rich have gotten richer and the workers have been gutted.  What's truly amazing though, is that many of those gutted continue to be brainwashed into electing politicians who craft legislation that's directly against their interests. Just think about this for a moment:  Sarah Palin nearly became the second most powerful person in this country.  

I fully acknowledge that this country seems to go further and further into the ditch as each decade goes by. But that's not a comment about the gold-standard, that's a comment about the idiocy of our population and the leaders they elect.  Going back to the gold standard is NOT the answer, just like it wasn't throughout our history. 

Max Fischer, Civis Mundi 

Fri, 04/13/2012 - 15:58 | 2342629 Zero Debt
Zero Debt's picture

Word of advice, speak for yourself only about who is dumb or not. Besides, if your idea of fractional government paper is so great, why would you not like to prove it by allowing competing currencies? Instead of lecturing others on which standard ought to be used, let's have the market decide, and not impose legal tender laws, taxation or other mandated disadvantages on commodity money. Surely the paper system must become the winners, right? That is what history tells us, right?


Fri, 04/13/2012 - 18:08 | 2342824 Max Fischer
Max Fischer's picture



We have competing currencies... it's called the fx market.  If you think the US dollar is worthless, just keep a small amount of US dollars in your wallet for everyday transactions, and keep the remainder of your wealth in gold, silver, corporate equity or other currencies.  Pretty simple, actually. 

Secondly, we had an era of competing currencies which gained momentum around 1836. It was known as the "free banking era" and it was a DISASTER. It began when the charter of the Second Bank of the United States (a primitive attempt at a central bank) expired which then led to the creation of thousands of unregulated local and regional banks.  In this wild, wild West of competing financial Darwinism, the banks began issuing their own unique currencies (which led to rampant counterfeiting) and practiced very risky and unsound speculation and lending - all of it devoid of any federal regulation. Bank panics (often for no reason) were the norm and the life savings of farmers and workers would vanish overnight. It was an unorganized, unregulated NIGHTMARE. Do you actually think that if banking was relegated to regional and local entrepreneurs, the Lloyds and Jaimes would disappear and there wouldn't be manipulation, fraud and corruption?  

By the time the Federal Reserve was created in 1913, it was estimated that there had been 10,000 different currencies issued by thousands of different state-chartered banks and only redeemable at those particular banks. This was a nightmare scenario for trying to conduct interstate commerce, and/or trying to figure out exchange rates, let alone if the bills were fake or not.  While the National Banking Act of 1863 was created to make an attempt at unifying a national currency. the regional banks still created their own currencies and it only created more chaos in the system.  

You need uniformity, and you need uncorrupt, true representatives of the People to govern it.  Competing currencies within a country is no different than "End the Fed"....  just more empty Libertarian rhetoric that sounds great if you don't understand history or don't really think it through.  

Max Fischer, Civis Mundi 

Fri, 04/13/2012 - 20:09 | 2342997 Zero Debt
Zero Debt's picture

The FX market is an quasi-government institution where different monopoly tokens can be bartered, but not a genuine market of producer and consumers of those tokens. Their value in barter emanates from the lack of alternatives. Competing currencies means to allow competing issuers. In addition to FX you would then have domestic exchanges. There are thousands of stocks listed, obviously you believe in having a stock market and you are not having endless nightmares about all those thousands of complicated stocks inhibiting all interstate commerce, stifling your prosperity and eating your proverbial lunch. And so it just appears odd to have only one currency. We have thousands of bond issuers, no nightmares so far. Every freaking municipality seems to be issuing one. If they can issue a zero coupon bond, then they can issue a currency. The complexity of valuating currencies is not just a national one but a regional one too. Economies have both local and international flows.

The point about bank runs is unrelated, if a bank is unsound it has to fail. Why give a depositor more protection? If there is a need to insure deposits, let private insurers do it and charge a fee competitively. Depositors are looking for interest returns, and should be treated as risk takers. A true saving of physical metal in a warehouse does not just "fail", hence prudent depositors do not need to bail out ignorant ones. "Risk free rates" is an oxymoron on par with "flying saucer". The risk free rate is fixed at 0% in a free money market. All >0% rates are risky. Besides, monopoly currencies did not help farmers and commodity producers from losing segregated monies in MF Global.

Your perception of chaos is your own. Do you perceive different styles of clothing, software and cars as equally chaotic? The desire to unify and control is not in the best interest of the many.

Fri, 04/13/2012 - 21:51 | 2343143 MayIMommaDogFac...
MayIMommaDogFace2theBananaPatch's picture

you need uncorrupt, true representatives of the People to govern it

Thanks, PollyAnna -- I feel a lot better now.

Sat, 04/14/2012 - 09:58 | 2345226 DaveyJones
DaveyJones's picture

"You need uniformity, and you need uncorrupt, true representatives of the People to govern it."

you do realize the oxymoron?

Fri, 04/13/2012 - 16:00 | 2342634 Ness.
Ness.'s picture

"Just think about this for a moment:  Sarah Palin nearly became the second most powerful person in this country."


Instead we have a community organizer who's former comunity is a warzone and the second most powerful person in this country Joe "Stand up, Chuck, let 'em see ya." Biden who thinks Jon Corzine is a financial genius, but you choose to bust on Palin?  Grow up Maxie.  



Fri, 04/13/2012 - 16:01 | 2342640 Carl Spackler
Carl Spackler's picture

Again, über-moronic statements today, Fischer. 

The elitism you portray in your class warfare mentality is the hobgoblin, whichmakes your world view appear to be small townish.

Politicians are not to serve the owners or the laborers. They are to serve every legal citizen.

Whether or not they do that well has been the essence of politics since the dawn of man.

Moreover, the most profound period of economic growth in this nation's history (i.e., the 1950s and 1960s) occurred while the US Dollar was on the gold standard.



Fri, 04/13/2012 - 16:08 | 2342653 Schmuck Raker
Schmuck Raker's picture

If you're such a genius try to at least develop a more compelling argument than, " If the gold standard worked, why did this country go off it so many times?".

It should be obvious to anyone with half a brain the inherent counter-argument - "If the gold standard doesn't work, why did this country go back on it so many times?" - holds as well.

Fri, 04/13/2012 - 16:57 | 2342731 TWSceptic
TWSceptic's picture

" Just think about this for a moment:  Sarah Palin nearly became the second most powerful person in this country.  "


Just think about this for a moment: Obama, who doesn't understand economics and is a radical socialist with fascist tendencies, became president. Do you really think that it would matter if it would be the GOP with some other numbnuts at the steering wheel? If you do, you need to wake up asap.


It is NOT "going back". Going back means going to paper money. We used to have the gold standard because paper money failed many times. Both in Europe and in the US. Gold was going forward. As the founders knew when they put the US on the gold standard.


You should learn some history, because those that fail to look at it tend to repeat the same errors.

Fri, 04/13/2012 - 17:50 | 2342815 NotApplicable
NotApplicable's picture

Wow, kid. You sure know how to come off as a complete dumbass.

First, anybody who thinks that the VP is the 2nd most powerful... well, I won't even go there.

Finally, go pick up a damn book and learn what the gold standard WAS and WASN"T. Rothbard wrote many of them. "What has government done to our money?" is a good place to start.


Sat, 04/14/2012 - 11:19 | 2345305 geoffb
geoffb's picture

At this point, the, "you get the government you deserve", argument is baffling to me. Do you really think the powers that be (Banks/Oil/Military/Gov) will ever let someone on the ticket whose ideas run contrary to their own??? Really? Its heads I win, tails you lose. Even if Ron Paul managed to get in somehow, would he even have the capacity to change a powerstructure that is dug into the taxpayer like an Alabama tic? Think about what it would actually take to undo budgets, laws, appropriations, contracts, personal and business redistribution and subsidy schemes and protections that this country has built up over 100 years. The event horizon for real change was passed a long time ago. We will simply have no other option than to make some popcorn and watch the crash.

Fri, 04/13/2012 - 15:33 | 2342561 skepticCarl
skepticCarl's picture

The amount of gold in the world is constantly increasing, from direct mining and as a by-product of industrial metals mining, and at levels disproportionate to the world's economies.  It's ridiculous to doom a hardworking, productive society to poverty, simply because they were not lucky enough to have mineral wealth under their feet.  Lack of gold certainly did not keep Japan from leaping into one of the world's more wealthy nations in the last century.

Fri, 04/13/2012 - 16:09 | 2342658 Stuck on Zero
Stuck on Zero's picture

You ever hear of trade?  Labor for gold.

Fri, 04/13/2012 - 16:57 | 2342739 Zero Debt
Zero Debt's picture

If a population claims itself to be so hardworking and productive, then it will easily be able to barter that labor for some gold. This begs the question on how you reliably measure the size of an economy when the currencies are being debased.

Fri, 04/13/2012 - 17:53 | 2342817 NotApplicable
NotApplicable's picture

Somebody please doom me with honest money! PLEASE! PLEASE! PLEASE! PLEASE!

Fri, 04/13/2012 - 18:34 | 2342902 IAmNotMark
IAmNotMark's picture

Okay...since you asked.

I DOOM you with honest money!  Go forth and sin no more.

Sat, 04/14/2012 - 16:05 | 2345609 MeelionDollerBogus
MeelionDollerBogus's picture

Gold supply around the world is increasing around 2% a year from mining. That's nothing to worry about.

Look at the rate at which goods increase in the world relative to the actual need of people to use those goods, vs the increase in energy supplies coming online matching the need of people to use that energy. Gold fits in there nicely as you need some of the manufactured tools to get the gold and 25% of gold mining is energy cost.

Dooming people to poverty is removal of gold, not using gold.

Fri, 04/13/2012 - 15:21 | 2342527 Ahmeexnal
Ahmeexnal's picture

You just earned yourself the not so coveted "idiot of the year" award.  Now go back into the closet you should have never come out of.

Fri, 04/13/2012 - 15:29 | 2342551 piceridu
piceridu's picture

You must be a complete moron...that question has to be the... ding, ding, ding - winner in moron of the week contest.

Fri, 04/13/2012 - 15:41 | 2342586 Zero Debt
Zero Debt's picture

It is because people who seek power, supported by those who crave for being led, do not like the idea of living within their means.

Without a gold standard, there can be no physically meaningful budget, because there is no unit of account anchored in physical reality.


Fri, 04/13/2012 - 17:53 | 2342819 NotApplicable
NotApplicable's picture

It's just like building a house with an elastic ruler.

Sat, 04/14/2012 - 01:23 | 2343320 Cadavre
Cadavre's picture

The gold standard is like having something utterly arbitrary

"utterly"? ... in the movie Beetlejuice, a suicide note with that exact word was wadded up and tossed in the can ... but if it still gets the rhetorical effect you think it does ... run with it,

Just thinking outloud, but the quoted statement from your post could easily be construed as "something utterly arbitray".

Wealth is only created by non financial (or tangible?) production and product innovation.

The less innovative or stagnant ideas do not get, or have to sacrifice, whatever piece of the gold reserves they had to the more innovative dynamic and efficient product ideas.

The central bank reserve standard only supports so called financial ideas, or rehypothocation / ponzi crony capitalism schemes to the detriment of real, useful  and meaningful innovation.

Growth of M2 is not prosperity. It is, and will always be: counterfeiting.

Natural organic capitalism, by definition, means older, less efficient or less innovative ideas fail and sacrifice their piece of the 'gold' pie to new better more innovative ideas. The original intent of the corporate charter was for the sell of bonds to finance big projects. Once project was completed and the note holders were paid off, the corporation was dissolved. Corporations, and favorable tax benefits to them, were never intended to be the "enduring" structure they are now. If corporations are people, then people should slso be corporations.

Are you writing this down - again: "increasing the money supply is not wealth creation or innovation" - it is counterfeiting - it is a ponzi by it's very nature that favors failure over success. Basic law of physics should also be used with economics: Wealth can neither be created or destroyed - it can only be transferred.

This insider's game of "Japanese Baseball" the FED's and her bevy of wall street white shoes are playing is a game for dumb as nail failures with pockets full of other peoples money.

Sat, 04/14/2012 - 16:02 | 2345605 MeelionDollerBogus
MeelionDollerBogus's picture

No, a standard of gold & silver coin exchange directly for fuel, food & land is balanced as the availability of new food, gold, land, silver, fuel is roughly equal at any given time for trade, and all have intrinsic value.

Gold isn't arbitrary, it's a time-tested search for a useful rare item that is highly durable. Gold was only gradually accepted as money like anything else but it has withstood the test of time as various other kinds of money fall out of favor - especially paper.

The gold standard worked so the thieves took it off as money in America - that's how thieves work when you let them be in charge. THEY still use gold as money, they just stopped YOU from using it as money.

Sun, 04/15/2012 - 11:04 | 2346494 PivotalTrades
PivotalTrades's picture


Fri, 04/13/2012 - 14:53 | 2342461 fbrothers
fbrothers's picture

This should be understood by every person that is prepareing to make a loan of any type. It is common sense. It is not a theory. 


Fri, 04/13/2012 - 14:56 | 2342470 cossack55
cossack55's picture

You state the phrase "common sense" as if sense is still in existence.  Please offer some proof.

Fri, 04/13/2012 - 15:08 | 2342498 Bluntly Put
Bluntly Put's picture

The proof is in the article, there are still some individuals who are using common sense. Unfortunately the number of said individuals is rapidly declining in proporation to the increase in debt burden due to serial halving of the interest rates by the central banks. Or, said another way the number of morons is exponentially increasing in direct proportion to the serial reducing of the interbank lending rates.

The question is, what happens when said morons propose negative interbank lending rates?

Fri, 04/13/2012 - 18:32 | 2342896 NotApplicable
NotApplicable's picture

Some FX trader buys the most expensive bubbly in the house?

Fri, 04/13/2012 - 14:58 | 2342473 Withdrawn Sanction
Withdrawn Sanction's picture

That's why Bernanke's focus is always on "price stability."  It's called misdirection.  Interest rate volatility is far more damaging than price volatility because changing interest rates affect many more cash flow values than plain price changes do.  Volatile interest rates make it harder to plan, act and think long range and thus they impede investment.

Look at long rate volatility from the Civil War to 1913 and then compare that period to the post-1913 period.  The difference will positively leap off the page.  The post 1913 period looks like a seismograph reading from the ring of fire region.  It's truly amazing the amount of damage one institution has managed to do in just under a hundred years.  Remarkable.

Fri, 04/13/2012 - 15:00 | 2342484 Seize Mars
Seize Mars's picture

Withdrawn: Can you link to a source for some data? Thanks

Fri, 04/13/2012 - 15:37 | 2342569 blu
blu's picture

I had a look myself:


"Technology and the Wealth of Nations"  By Nathan Rosenberg, Ralph Landau, David C. Mowery

There is no chart as such, see table on page 291. The change in interest rate volatility after the classical "Gold Standard" period ending in 1913 is quite clear (3x), after 1973 is eye-popping (nearly 15x)

Google books link to relevant commentary:

Fri, 04/13/2012 - 16:12 | 2342664 Seize Mars
Seize Mars's picture

Cool. Nice work, thanks

Fri, 04/13/2012 - 15:57 | 2342627 Schmuck Raker
Schmuck Raker's picture

Thank you for the insight WS.

Fri, 04/13/2012 - 16:02 | 2342641 Zero Debt
Zero Debt's picture

Volatility that emanates from the marketplace is not axiomatically damaging. If the free market would set rates, and those rates would then rise or fall quickly in response to supply and demand for debt instruments, that should be considered a correcting mechanism, not a damaging one. Volatility emanting from doctrine of force is, but on the flipside, even stability emanating from doctrine of force, no matter how appealing its stability on the surface is, is ultimately far more damaging.

Fri, 04/13/2012 - 17:57 | 2342825 NotApplicable
NotApplicable's picture

Wordy, but chock-full of truth.

In summary: Don't fuck with Mother Nature (not even when it's human nature), because you're not that smart. (or anyone else)

Fri, 04/13/2012 - 16:43 | 2342719 valkyrie99
valkyrie99's picture


ummm.....please research the following:


Panic of 1857, a U.S. recession with bank failures

Long Depression (1873-1896) including:

          o Panic of 1873, a US recession with bank failures, followed by a 4-year depression

          o Panic of 1884

          o Panic of 1890

          o Panic of 1893, a US recession with bank failures

          o Australian banking crisis of 1893

Panic of 1907, a U.S. economic recession with bank failures


Fri, 04/13/2012 - 18:05 | 2342840 NotApplicable
NotApplicable's picture

I'd note that with the exception of the Long Depression, I believe those were all short-lived episodes, making the point of the self-correcting nature of fully reedemable currency.

The Long Depression? Greenbacks to pay for Reconstruction (not fully redeemable)

Oh, and 1907? Engineered by JP Morgan/Rothschilds to create the mandate for a European style central bank. 

Sat, 04/14/2012 - 15:41 | 2345554 valkyrie99
valkyrie99's picture

My point is that it's inaccurate to claim everything was just fine before 1913 as is commonly asserted.  The posters point to compare post-1913 to the civil war-1913 may have been a particularly bad example of his point. We didn't just trade in gold or gold-backed currency through most of our history; bank notes were created backing few gold reserves; banks created the currency - in 1863 the national bank act codified this practice and further disguised counterparty risk in bank notes by creating a nationally exchangeable currency still created by fractional reserve banking; in 1864 this system was taken from the states and put in federal control - it's absurd to claim everything was perfect with a pure commodity currency before 1913.  

Sat, 04/14/2012 - 11:34 | 2345317 potatomafia
potatomafia's picture

Maybe you should be the one doing a little research...


Sat, 04/14/2012 - 18:46 | 2345785 valkyrie99
valkyrie99's picture

I agree with much tht is stated in this Wiki, but not everything...I certainly think that the increase in bank notes and sanctioning and allowing further dilution of reserve assets through the bank acts played a huge part in 1873's turmoil.  I also agree of some of the benefits of deflation in this period, all though I do believe it's a temptation of any economist trying to explain how history supports their theories instead of creating new theories based on conflicting data to overlook some aspects of situations...I do think at some times Austrian theorists are guilty of overlooking the negative effects of deflation, especially on indebted farmers during this period.

My point was that I wouldn't highlight the civil-war - 1913 period as an example of low volatility and economic stability. It wasn't.  Through most of that period banks created the majority of circulating currency, as they do today; they just didn't have the Fed backstopping the system. Fact is throughout history commodity based currencies have been stable for long periods but also have period of instability; currency created by governments has been very stable at times and very in stable at times, usually after the empire grew to a point of power maintained by never-ending wars that needed never-ending funding. Bank created currency has very rarely been stable and the role it played increasing volatility has been ignored by historians and usually at the time of occurance, but to understand the economic history of the US or the world you need an accurate grasp on who was really creating the money.  

Fri, 04/13/2012 - 15:02 | 2342481 Sudden Debt
Sudden Debt's picture

As the local loan sharks would say:

Fri, 04/13/2012 - 15:15 | 2342513 Ignatius
Ignatius's picture

Good time to be a bankster.  Get your ass bailed out while your debtors are stuck paying back their loans at full value and on money that was conjured into existence.

How unbelievably offensive.

Fri, 04/13/2012 - 15:01 | 2342483 rufusbird
rufusbird's picture

Present value tables are in most beginning college level Accounting textbooks...

Fri, 04/13/2012 - 15:01 | 2342485 Hangfire
Hangfire's picture

What would happen if my gold coins fell in between the blue interest rate gear and the red pinion gear?  Would that stand up to my boating accident story?     

Fri, 04/13/2012 - 15:08 | 2342496 LawsofPhysics
LawsofPhysics's picture

Yes.  You don't don't solve a paper problem (i.e. problem with faith, trust, and promises) with more paper.

Sat, 04/14/2012 - 15:03 | 2345490 MeelionDollerBogus
MeelionDollerBogus's picture

I read a story about a man who was sent to the dumps - to sift through all he could to find the gold he threw out. His wife sent him as she was pissed that he could throw it all out because it was in a garbage bag just like other stuff.

I must admit my total naivete that since it made a news story it totally missed that this is the best big public cover story ever (e.g. my poor boat) for losing "all that gold" (75k worth).

Fri, 04/13/2012 - 15:01 | 2342486 Jason T
Jason T's picture

..ok, back to building my garden.. i mean my retirement plan. 

Fri, 04/13/2012 - 15:10 | 2342500 slewie the pi-rat
slewie the pi-rat's picture

i read this earlier on another site and almost put up a link here, myself, b/c of this line, especially:

(feature #450 of irredeemable money is that total debt cannot go down)

irredeemable!  how fuking satanic is that?  i hope people haven't forgotten the meaning of the word   L0L!!!

Fri, 04/13/2012 - 15:14 | 2342509 SimpleandConfused
SimpleandConfused's picture

Over under on a green finish today?  Seems like they are going to push the averages green in honor of good old fashioned paper money.

Fri, 04/13/2012 - 15:15 | 2342512 youngman
youngman's picture

He is right if the amount of paper is static...our problem is the amount of paper is growing at 2 trillion a year here in the USA alone....and they are keeping interest rates costs even more...and who makes the money......the bankers of course....they keep the excess

Fri, 04/13/2012 - 15:16 | 2342517 BliptoP3
BliptoP3's picture

so what the FED is doing then, is analogous to imploding a plutonium sphere?  Weaponized interest rates of mass destruction?  I'm no fan of death and mayhem, but I've gotta admit - it's pretty cool what we can accomplish these days.

Fri, 04/13/2012 - 15:19 | 2342524 carbonmutant
carbonmutant's picture

Can we get some labels for the other gears?

Fri, 04/13/2012 - 15:34 | 2342544 thursday0451
thursday0451's picture

If this is too dense for you to understand, allow me to attempt to explain it less technically.

Planning any extremely large scale project is going to take a lot of time, and a lot of money. Specifically, its going to take lots of money at lots of different points in time, so you have to find a way to ensure you have a reliable inflow of money for the duration of the entire project, as costs are spread out in time.

In order to construct a reliable plan, you would likely have to fund the project by issuing bonds, meaning you will rely on debt payments, meaning you rely on the interest rate for a steady payment structure.

If the interest rate and thus payments are relatively easy to predict, you can order the costs of the project to occur in a manner spread out evenly over time, so that you always are spending money you actually have.

The interest rate is only easy to predict if it is stable, if it doesn't change much over time.

Fiat currency is a system with wildly fluctuating interest rates.

This makes long-term planning and large-scale projects essentially impossible to reliably plan. That means things like regional/continental infrastructure, global energy production and distribution, the exploration and population of space, etc, cannot be done if we keep screwing with interest rates.

The article then proposes the solution of the gold standard, as under a gold standard, interest rates seem to have been much, much more stable.

This is interesting, because if this is true (and it may be, as this explanation has no immeadiately obvious logical flaws), it means that America's laughable infrastructure state is in fact DUE to profligate government spending. It means that unsustainable urban sprawl is a result of government policy. It means that the government has caused a situation where it must fight for oil resources, because it has made the alternative (a large-scale long-time investment in renewable energies and new technologies) impossible. It means pretty much every large scale, seemingly intractable problem in the world that could only be solved if we had enough money to fix it ... would be fixed. But first we have to fix fiat currency, and government abuse of it.

Fri, 04/13/2012 - 15:39 | 2342581 LowProfile
LowProfile's picture

You were doing great until:

This makes long-term planning and large-scale projects essentially impossible to reliably plan. That means things like regional/continental infrastructure, global energy production and distribution, the exploration and population of space, etc, cannot be done if we keep screwing with interest rates.

None of those things are necessary, or even DESIRABLE.

Decentralized power production is more robust, there is no such thing as "continental infrastructure" (interstate roads can be planned out by various states by conferring with their neighbor states), and PRIVATE EXPLORATION OF SPACE IS PROVING THOUSANDS OF TIMES MORE COST EFFECTIVE THAN GOVERNMENT PROGRAMS.

Other than that, four stars ****

Fri, 04/13/2012 - 15:53 | 2342618 thursday0451
thursday0451's picture

Eh, you're disagreeing with nomenclature.

Even if a system of roads and gas pipelines is built by coordinated private means, in its totality it is still an infrastructure. 

There most certainly is continental infrastructure. There are gas and oil pipelines and roads that stretch huge distances over Eurasia, North America, South America and parts of Africa. There are privately run sea and air lanes that function as vital global infrastructure. There are telecommunication lines that encircle the globe. There are satellite systems that these other systems require to function as they currently do. Some of these things have been built by government, some by private hands, and some both.

Private exploration of space is of course many times more cost effective than government programs, but that doesn't mean that a large scale effort to say population another celestial body, or create an orbiting city in space, or an asteroid mining operation, or run a deep space research station, etc, might not run into a huge cost point somewhere down the line. Some things are extraordinarily expensive no matter how efficient of a system you have trying to create/provide them.

Ultimately, mankind will grow to fully and safely utilize the planet and expand outward into space, but this is impossible with our current social/economic structure. It is simply not efficient enough (it introduces too much cost per additional layer of complexity) to be able to fund these things given our limited resources. We must adopt a new monetary order (meaning socio-political system) if we want to fully realize our potential. That's what I'm trying to say.

Fri, 04/13/2012 - 16:04 | 2342650 LowProfile
LowProfile's picture

Actually, I'm disagreeing on principle.

If the cost of those things you propose (various infrastructure, space exploration, etc..) cannot be met PRIVATELY (or at least locally), then they are not worth doing.

The "bigness" of the projects you are speaking of requires central control, which ultimately never works.

Fri, 04/13/2012 - 16:59 | 2342741 thursday0451
thursday0451's picture

I agree that if cost cannot be met privately, an activity is not worth funding. Of course. To say otherwise would be to promote blatant theft/misallocation of resources.

However, distorting the interest rate structure is what causes these projects to be un-doable by private actors, because the government is simply stealthily directing resources toward itself, and pushing risk onto everyone else. This means many of these mega-systems or other cool ideas SHOULD be privately possible, but aren't because government fucks it up.

It is entirely possible to build a HUGE network of immense size and complexity via private means. For example, imagine if we had widespread use of cheap, effective solar panels. Most households would be mostly, if not entirely self-sufficient. Any remaining energy produced by a house would then be able to be sold onto an energy market and redirected to say, smashing particles together in particle colliders, or building a space elevator. To move energy from houses to these energy sinks would require a network. This network could be privately built and maintained.

Central control is not really required if you have a comprehensive network of mutual exchanges. This is the beauty of the market, the invisible hand. Goods and resources are capable of aligning themselves with wants and needs automatically so long as no one is gameing the system. Having stable interest rates would allow this spontaneous order to emerge on grander scales.

Fri, 04/13/2012 - 18:14 | 2342859 NotApplicable
NotApplicable's picture

You're arguing with yourself.

Read his post again, he never said the infrastructure was public, you added that yourself.

You're also completely incorrect on your concept of scale. Scale is achievable in a sustainable fashion only in an environment of decentralized control. Otherwise there'd be no need to label some entities as TBTF.

Long story short, it's all about chaos theory, and self-organizing order arising from complexity. Even though you and I have brains, we are still not in complete control of our bodies. If we had to be, we'd be extinct by now.

Ultimately, centralized control can only produce disorder. Or calculated chaos as Butler Shafer calls it.

Fri, 04/13/2012 - 16:13 | 2342669 geekgrrl
geekgrrl's picture

Totally agree. There is an article today from the Guardian that discusses corporate welfare of the nuclear industry, an industry that would never have existed without the support of the State:

"Nuclear welfare started with research and development. According to the non-partisan Congressional Research Service, since 1948 the federal government has spent more than $95bn (in 2011 dollars) on nuclear energy research and development (R&D). That is more than four times the amount spent on solar, wind, geothermal, biomass, biofuels, and hydropower combined. But federal R&D was not enough; the industry also wanted federal liability insurance too, which it got back in 1957 with the Price-Anderson Act. This federal liability insurance programme for nuclear plants was meant to be temporary, but Congress repeatedly extended it, most recently through 2025. Price-Anderson puts taxpayers on the hook for losses that exceed $12. 6bn if there is a nuclear plant disaster. When government estimates show the cost for such a disaster could reach $720bn in property damage alone, that's one sweetheart deal for the nuclear industry!"

Fri, 04/13/2012 - 17:01 | 2342744 thursday0451
thursday0451's picture

I agree completely with you. It is totally possible that entire industries (banking anyone?) should not exist, but are propped up by interest rate distortion. But that doesn't mean that large scale networks and systems by themselves are inherently bad. They can occur voluntarily and spontaneously. Those are the things that are awesome, that inspire. Those are why we should fix this fiat money, volatile interest rate system.

Sat, 04/14/2012 - 00:19 | 2343273 geekgrrl
geekgrrl's picture

I'm going to have to disagree with you here. Large scale systems are not sustainable, and that will become patently clear in the next few years.

Fri, 04/13/2012 - 15:31 | 2342555 Dre4dwolf
Dre4dwolf's picture

But Austrian Economics does not apply in our Eutopia where digging a hole and filling it back up creates wealth out of thin air.





Fri, 04/13/2012 - 15:55 | 2342622 blu
blu's picture

If you got paid for both digging and filling, it would.

Fri, 04/13/2012 - 15:34 | 2342562 Koffieshop
Koffieshop's picture

One of the most important ideas proposed by Professor Fekete is that a rise in the rate of interest reduces the burden of debt that has been accumulated previously.


I must be stupid or something but I don't get this....

If I have a 100,000 loan and the interest rate is 1% I can pay it off if I pay more then 1000 a year.

If I have a 100,000 loan and the interest rate is 50% I will need to declare bankrupcy as I can't pay 50,000 a year.

It's the other way around!


Fri, 04/13/2012 - 15:54 | 2342613 KnowIDontKnow
KnowIDontKnow's picture

You're not stupid. 

Fri, 04/13/2012 - 16:01 | 2342638 blu
blu's picture

debt that has been accumulated previously.

Without actually looking up the reference, I suspect this arguement applies to past debt at fixed interest. That is, a debt of $100,000 at 3% might seem like a problem on pay day, but your neighbor getting the same $100,000 loan at 9% thinks you have it good.

Just my $.02 worth.

Fri, 04/13/2012 - 16:56 | 2342740 Escapeclaws
Escapeclaws's picture

Here's the paper that lays out the idea of the "liquidation value of debt", which I guess is Fekete's "big idea". It uses simple mathematics to explain how lowering interest rates actually increases the burden of debt. Bear in mind that he is talking about perpetual debt.

Fri, 04/13/2012 - 18:24 | 2342879 Koffieshop
Koffieshop's picture

I read it and I think understand what he is saying.

He is indeed talking about perpetual debt contracts that have a fixed interest rate. Government bonds are not perpetual however, so the theory doesn't apply to the real world of today.


If broke governments somehow managed to roll over all their debt into the perpetual debt contracts that Fekete is talking about and THEN crank up the interest rate, it would reduce the debt load like Fekete says.


If the broke governments would want to continue expanding the debt they would have to CONTINUE TO INCREASE THE INTEREST RATE. This would get really crazy, really fast......

Fri, 04/13/2012 - 16:31 | 2342698 Zero Debt
Zero Debt's picture

If the payment is $1000 per year, and the interest rate is 10%, then the payment at the end of the first year is worth 1000 / 1.1 = $909 today

Seems Professor Fekete is a bit too focused on the net present value of the repayments, whereas he does not mention the net present value of the principal.

It is true that one could discount NPV of repayments. But the principal itself is also on the balance sheet and cannot be left out of the consideration. Hence one should also discount NPVs of additional interest that is added to the principal. If the interest rate is 10%, the principal will be worth 10% more for the lender, and it would also be a 10% larger debt on the lender's balance sheet. Assuming no repayments, the "NPV" (Net present debt) of the principal grows exponentially negative as the interest rate rises. So there are two terms in the equation. This makes it impossible to know the NPV (or effective net present debt burden while discounting both repayments and interest added to the principal) without knowing how quickly the debt is repayed.

Fri, 04/13/2012 - 16:39 | 2342710 Banjo
Banjo's picture

The rate of interest. Example I buy a house for 250,000 and finance this amount at 6.8%

If over ten years interest rates go as follows
1. 6.3%
2. 5.8%
3. 5.3%
4. 4.8%
10. 1.3%

Then myself having a 6.8% loan is an increased burden. This is why falling bond prices are great for bond holders someone is still paying top dollar for debt as the rate of new debt is falling.

Fri, 04/13/2012 - 15:37 | 2342570 SumGuy
SumGuy's picture

For all this talk of the worthlessness of paper money, if I threw a bag full of greenbacks in the air - you'd all still fall over and beat each other to run away with it.


Fri, 04/13/2012 - 15:55 | 2342621 LowProfile
LowProfile's picture

Get back to us in five years.

Fri, 04/13/2012 - 16:03 | 2342643 blu
blu's picture

Prove it.


Fri, 04/13/2012 - 16:08 | 2342655 viahj
viahj's picture the coin shop

Fri, 04/13/2012 - 15:51 | 2342606 KnowIDontKnow
KnowIDontKnow's picture

Does this article have a point beyond providing a very convoluted introduction to the trivial concept of compound interest?

The fact that compound interest reduces the present value of future payments says nothing in itself about what interest rate policy, or any other policy, ought to be.

Fri, 04/13/2012 - 18:19 | 2342867 NotApplicable
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What is this alien concept of "interest rate policy" of which you speak?

Do you really believe that some bureaucrat knows what the rate should be?

His article doesn't talk about what I should eat for dinner either, but rather, sticks to the subject at hand, which is the wealth transfer device of a continually falling rate environment.

Fri, 04/13/2012 - 15:53 | 2342612 skepticCarl
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Totally unconnected babble.

Fri, 04/13/2012 - 15:53 | 2342615 geewhiz190
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If Europe is doomed, and Biederman is right about Canada and Australia being in the soup because China is in for a hard landing and add to that the decline in US oil imports because of domestic weakness. shouldn't all this lay the ground work for a rally in the US dollar and across the board weakness in the big-cap export names in the dow?  Oil is the biggest cost item on the import side, with all those dollars being sent out into the world. what if that slows?The US will probably be the first country with rising interest rates(which will hurt all the late stage buyers in the bond market) but with a real stimulus no politician could ever create-falling commodity prices. can't see the argument for gold other than a 10% position at most as a hedge. rather   be in cash until coming sell off in stocks is over. then look to buy non- export related domestic companies.

Fri, 04/13/2012 - 16:30 | 2342697 Carl Spackler
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I'll take a swing at your thought.

If Canada and Australia are "in the soup" due to a hard landing by China, oil will drop in price because pressure on demand will drop (see China) but supply will still be up.  Canada will still have this new supply coming on line (e.g., tar sands), which has to be sold, somewhere and somehow, to service all the new debt employed to build the new Albertan infrastructure. Easiest way to do that is to lower the price and sell it to Americans.

Historically, every drop of $10 in WTI = 0.5% of U.S. economic growth. 

So, large-cap U.S. manufacturers may actually see new highs as U.S. industrial production ramps up again, because they will see cheaper energy input costs hitting the Cost of Goods Sold (COGS) number. 

Plus, they will be bringing manufacturing back to the USA (natural gas is now the real driver whose price offsets Chinese labor and cost of transport and brings down COGS). 

Interest rates will have to rise, anyway, due to Quantitative Easing, which is always a bad time to hold fixed-rate investments.

Aside from all that, if China goes in the soup (Europe is stuck there until the Euro blows up), then America becomes a safe haven for global investors (more capital flows to the US), and they drive up the price of the US Dollar.


Fri, 04/13/2012 - 16:52 | 2342732 cymro33
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- Article is just another way of looking at inflation. To make your debt less valuable create inflation.(e.g print more money). The FED is doing this and then lying that there is no inflation therby justifying low interest rates.

- The sheeple are getting screwed especially the SS recipients.

- What dumb ass believes in reporting inflation without including food and energy.

- In addition they use hedonics to fool you in calculating inflation.

- This low rate policy is eventuall going to f%*k the FED.

Fri, 04/13/2012 - 17:02 | 2342747 valkyrie99
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"Unlike under a gold standard, in paper money the rate of interest is subject to massive volatility. "


Do you have reserch supporting this statement?  Frractional reserve banking became the predominate method of deposit-banking several centuries before paper-currency became prevelant and most paper currencies have been backed by gold until the last century, or less....the availability of credit has been highly volotile since fractional reserve banking started.  There have been some pretty huge discrepencies in interest rates through these times...some other factors seem to have made a much larger impact, for instance whether the Catholic church would sentance you to death for usury or not....please display data.



Fri, 04/13/2012 - 17:31 | 2342788 jimmyjames
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"Unlike under a gold standard, in paper money the rate of interest is subject to massive volatility. " ***********
Sat, 04/14/2012 - 16:02 | 2345604 valkyrie99
valkyrie99's picture

That is some good data - but a bond yeild doesn't speak to the interest rates the polulation could access, just the government. Also, even the bond yeilds don't show much volitality in years that the greenback was issued and a trend torwards normilization in rates starts surprisingly quickly after the last vestiges of the gold-standard were abandoned. Of course that doesn't speak to the sustainability of this system as it has been around a pretty short time still, but bond yeilds so far aren't exactly bulletproof evidence of its failure.  

I'd love to see more data supporting the statement that a gold-backed currency encourages more stability in interest rates then a fiat currency; I just don't think a theory based around this concept is is convincing without including persuasive evidence of this base claim. 

Fri, 04/13/2012 - 17:21 | 2342775 ebworthen
ebworthen's picture

I'm being ground up in those gears I'm sure.

Thanks Ben!

Fri, 04/13/2012 - 18:20 | 2342870 NotApplicable
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I thought I was getting goose-bumps.

Turns out it was dimples, all along.

Fri, 04/13/2012 - 17:48 | 2342795 Escapeclaws
Escapeclaws's picture

I wish I had read this in 2003!

The idea is, find gold producers who look toward increasing mine life rather than making a quick buck. They don't tend to be glamourous and are hard to find. I don't know of any such companies.  As the gold price increases, they mine their marginal ores with fewer grams per ton, thus preserving as long as possible their high grade mines. Fekete suggests investing in these companies. As the price of gold increases, you sell your stock in these companies and convert the proceeds to bullion. They thus amount to an option of the gold price. Fascinating stuff, but granted, Fekete is hard to understand. It is clear that he is way out ahead of the pack in his thinking. He has a level 8 mind whose workings cannot really be understood by lower level minds. He himself seems unaware of this difference in minds, which is why he is hard to understand. He can't grasp that something that makes perfect sense to him is incomprehensible to others, especially given the pains he takes to make his ideas clear. (I got the level 8 stuff from a mathematician William Dunbar who wrote a nice book on number theory. Seems to make sense. By the way, it has nothing to do with IQ--some of those people with high IQs are probably as low as level 4. Marylin vos Savant, for example showed a complete lack of understanding of Wile's proof of Fermat's last theorem--what she wrote on it was laughable.)

Fri, 04/13/2012 - 18:23 | 2342874 NotApplicable
NotApplicable's picture

Those companies have been (or will be) consumed by the likes of Barrick, likely under the threat of nationalization. There will be no responsible miners allowed.

BTW, Fekete has a soft spot for Barrick. (Of course that spot is a bruise, but hey, he learned!)

Sat, 04/14/2012 - 00:27 | 2343285 slewie the pi-rat
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if he was a stockholder, he learned...  Hahaha!

the dilution solution!

Sat, 04/14/2012 - 01:51 | 2343342 Dorky
Dorky's picture

It depends on whether the payment is based on fixed rate or floating rate.

If the payment is floating rate, as is usually the case, then higher interest rate with increase the debt burden because the increase in salary would not be able to catch up fast enough with the increase of interest rate.

Even if the rate of increase in salary matches the rate of increase in the rate of interest, the best outcome is that the debt burden remain the same, neither better nor worse, because your additional salary increase will be used to pay for that additional increase in payment, under floating rate - you're neither worse off or better off.

As salary is sticky, so the outcome is usually always worse, with the increase of rate of interest.

The only way to solve all these is getting in debt in fixed rate, not floating.

Professor Fekete's idea is faulthy.


Note: My entire explanation above already took into consideration those PV calculation.

Sat, 04/14/2012 - 01:56 | 2343346 Dorky
Dorky's picture

In addition to my explanation above, I suspect Professor Fekete is pro- higher interest rates, probably because he is more of a saver where he finds his savings getting eroded away in a ZIRP environment, thus he proposed such ludicrous idea that higher interest rate is better.

Throughout history of commerce, people, corporations, and governments always go bankrupt because of higher interest rate, not lower.

Sun, 04/15/2012 - 09:20 | 2346387 Grand Supercycle
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The Big Picture Wile E. Coyote Equity Top.

Prepare for a substantial USD rally.

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