The aims of the Act are fairly simple to (1) repeal federal law which currently decrees unconstitutional forms of currency legal tender, (2) prohibit federal taxes on gold, silver, platinum, palladium or rhodium bullion, (3) prohibit States from assessing tax or fees on any currency or monetary instrument used in interstate or foreign commerce that has legal tender status under the United States Constitution, (4) repeal federal criminal code pertaining to gold, silver or other metal coins and nullify any previous convictions under those codes.

Like he has often been when attempting to restore the checks and balances of the Constitution on this issue with H.R. 4248 Dr. Ron Paul is the lone voice in the wilderness and has no co-sponsors.  To my knowledge the only legislation Dr. Ron Paul has introduced that has been approved and enacted is Public Law 99-185 and Public Law 99-61 which require under 31 United States Code 5,112 that ‘the Secretary shall mint and issue, in quantities sufficient to meet public demand, coins which’ contain .999 fine silver or fine gold.  When the public wants to buy gold or silver, lawful money, there should be enough!

H.R. 1207 – FEDERAL RESERVE TRANSPARENCY ACT OF 2009

On 26 February 2009 Representative Ron Paul of Texas introduced H.R. 1207 the Federal Reserve Transparency Act of 2009.  Most in the financial establishment chuckled, politicians ignored it and the general public was clueless as to its effect.  But because of rapid education of the public and the political pain they exerted on the politicians the bill now has 317 co-sponsors.

To fully understand the impact of the H.R. 4248 legislation it is important to take a short journey through American legal history.

CONSTITUTIONAL LEGAL TENDER

Under Article 1 Section 8 Clause 5 Congress is given the power to ‘Coin Money, regulate the Value thereof’.  Notice the Constitution does not say what money is only that it is something that is coined rather than printed.  The Tenth Amendment states, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”  The Constitution operates on the principle that if a power is not specifically delegated then it is prohibited.

In this case, the Federal Government is given no authority to make anything legal tender.  The Federal Reserve Act of 1913 was enacted by Congress creating the Federal Reserve and it would not be the first unconstitutional legislation.  They habitually violate their own laws.

Because Congress does not have the power to declare anything legal tender and because the Federal Reserve was created by Congress therefore it follows that the Federal Reserve cannot declare anything legal tender.  The individual States do retain the power to declare things legal tender but are restricted under Article 1 Section 10 Clause 1 from making any ‘Thing but gold and silver Coin a Tender in Payment of Debts’.   The creature cannot exceed the creator.

The Founding Fathers strongly supported the hard money system.  After all, they had just fought a Revolution after living through the tyranny of King George with the Stamp Act, Writs of Assistance, destruction from the the Continental hyperinflation and implosion of the economy.

Despite the constraints of the Constitution the monetary system of the United States has been perpetually in violation.  For example, the United States Dollar or Federal Reserve Note Dollar went poof multiple times last century including on 5 April 1933 when FDR decreed gold to be a dangerous weapon of mass financial destruction, deemed it a controlled substance and threatened any United States citizen with jail time for owning it,  on 4 June, 1963 and 24 June 1968 when silver certificate redemption was completely ceased and 15 August 1971 during the Nixon shock.

WHAT IS A DOLLAR?

Dr. Edwin Vieira, J.D., is the author of the preeminent legal treatise on monetary jurisprudence in American law Pieces Of Eight, holds four degrees from Harvard and practices law before the United States Supreme Court.  I highly recommend reading Dr. Vieira’s entire essay, What Is A Dollar?, which is quoted only in small part here:

2. Do the present monetary statutes intelligibly define the “dollar’”?

Unfortunately, the present monetary statutes do not define the “dollar” in an intelligible fashion.

a. Federal Reserve Notes. Most people associate the noun “dollar” with the Federal Reserve Note (“FRN”) “dollar bill,” engraved with the portrait of President George Washington. This association is mistaken.

No statute defines – or ever has defined – the “one dollar” FRN as the ”dollar,” or even as a species of “dollar.” Moreover, the United States Code provides that FRNs “shall be redeemed in lawful money on demand at the Treasury Department of the United States * * * or at any Federal Reserve bank.”⁴ Thus, FRNs are not themselves “lawful money” – otherwise, they would not be “redeemable in lawful money.” And if FRNs are not even “lawful money,” it is inconceivable that they are somehow “dollars,” the very units in which all “United States money is expressed.”⁵

b. United States coins. The situation with coinage is more complex, but equally (if not more) confusing. The United States Code provides for three different types of coinage denominated in “dollars”: namely, base-metallic coinage, gold coinage, and silver coinage.

c. Currency of “equal purchasing power”. The UnitedStates Code provides no answer to this perplexing question. Indeed, it mandates that the question should not even be capable of being asked. For the Code commands that “the Secretary [of the Treasury] shall redeem gold certificates owned by the Federal reserve banks at times and in amounts the Secretary decides are necessary to maintain the equal purchasing power of each kind of United States currency.¹⁴

The term dollar is used in Article 1 Section 9 Clause 1 and the Seventh Amendment.  Neither the slave-trade faction nor the right to trial by jury would have accepted these provisions without a clear definition of what the dollar is.

Therefore, their support of these provisions inferentially establishes what a literal reading of them straightforwardly suggests: to wit, that the noun “dollar” refers, not to a mere name applicable to whatever Congress whimsically might decide thereafter to call a “dollar,” but instead to a particular coin so familiar in American experience as to be beyond political transmogrification. … Obviously, Jefferson’s free-market, scientific approach is a world apart from the arbitrary way in which Congress has set up the mutually incompatible and internally irrational sets of silver, gold, and base- metallic coins that exist today.

2) The Coinage Act of 1792. Little more than a year after Hamilton’s Report, Congress enacted its principles into law.

Section 9 of the Coinage Act of 1792 contained the monetary definitions for the United States monetary system and defined

DOLLARS or UNITS – each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver.

THE COINAGE ACT OF 1792

It is interesting to see the difference between how the Founding Fathers and the current politicians deal with those who engage in quantitative easing.  For example, on 21 November 2002 at the National Economists Club in Washington DC Federal Reserve Chairman Ben Bernanke said,

A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject’s oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.

Section 19 of the 1792 Coinage Act provided:

SEC. 19. And be it further enacted, That if any of the gold or silver coins which shall be struck or coined at the said mint shall be debased or made worse as to the proportion of fine gold or fine silver therein contained, or shall be of less weight or value than the same ought to be pursuant to the directions of this act, through the default or with the connivance of any of the officers or persons who shall be employed at the said mint, for the purpose of profit or gain, or otherwise with a fraudulent intent, and if any of the said officers or persons shall embezzle any of the metals which shall at any time be committed to their charge for the purpose of being coined, or any of the coins which shall be struck or coined at the said mint, every such officer or person who shall commit any or either of the said offences, shall be deemed guilty of felony, and shall suffer death.

As David Reilly of Bloomberg reported on 29 January 2010 in Secret Banking Cabal Emerges From AIG Shadows:

Later, when it became clear information would be disclosed, New York Fed legal group staffer James Bergin e-mailed colleagues saying: “I have to think this train is probably going to leave the station soon and we need to focus our efforts on explaining the story as best we can. There were too many people involved in the deals — too many counterparties, too many lawyers and advisors, too many people from AIG — to keep a determined Congress from the information.”

Think of the enormity of that statement. A staffer at a body with little public accountability and that exists to serve bankers is lamenting the inability to keep Congress in the dark. …

Now, I’m not saying Congress should be meddling in interest-rate decisions, or micro-managing bank regulation. Nor do I think we should all don tin-foil hats and start ranting about the Trilateral Commission.

Yet when unelected and unaccountable agencies pick banking winners while trying to end-run Congress, even as taxpayers are forced to lend, spend and guarantee about $8 trillion to prop up the financial system, our collective blood should boil.

Reuters reported on 8 December 2009 that the Chinese do not put up with this type of financial terrorism:

Yang Yanming was sentenced to death in late 2005 and took the secret of the whereabouts of 65 million yuan ($9.52 million) of the misappropriated funds to his grave, the Beijing Evening News said.

The report added that Yang was the first person working in China’s securities sector to be executed. …

Conscious that the growing gap between rich and poor could generate resentment, China is battling corruption and stock trading abuses. It has used the death penalty as a deterrent in serious cases.

It will be interesting to see if there is swing in the political attitude of the people towards the Federal Reserve engaging in quantitative easing.  As Dr. Ron Paul was the lone voice in the wilderness with calling for an audit of the Federal Reserve, is currently a lone voice about competing currencies and while he is joined by an increasingly shrill chorus condemning the bailouts he may yet become a lone voice in championing in introducing stiff legislation as a deterrent instead of rewarding the nefarious behavior with bailouts.  If legislation like the 1792 Coinage Act were to be passed then there would likely be a lot of rounding up to do.  Financial criminals, whether engaged in something large like unconstitutional legal tender or something small like a potential Monex fraud, should take heed.

CURRENCY CONTROLS

Many currency controls are in place which support the FRN$ by hindering its competitors such as gold, silver, platinum, palladium or rhodium.  H.R. 4248 intends to remove these barriers.  More may be implemented and holders of FRN$ may their usefulness and velocity frozen.

For example, there are ‘qualified intermediary’ rules the Infernal Revenue Service require foreign banks to follow even where legislation protects bank privacy.  The PATRIOT Act allows for ’sneak and peak’ warrants along with the ability to confiscate cash at will and in secret.

A particularly insidious but scarcely mentioned currency control was implemented by the United States Mint on 14 December 2006 which provided:

The United States Mint has implemented regulations to limit the exportation, melting, or treatment of one-cent (penny) and 5-cent (nickel) United States coins, to safeguard against a potential shortage of these coins in circulation. … Prevailing prices of copper, nickel and zinc have caused the production costs of pennies and nickels to significantly exceed their respective face values.

“We are taking this action because the Nation needs its coinage for commerce,” said Director Ed Moy. “We don’t want to see our pennies and nickels melted down so a few individuals can take advantage of the American taxpayer. Replacing these coins would be an enormous cost to taxpayers.”

Specifically, the new regulations prohibit, with certain exceptions, the melting or treatment of all one-cent and 5-cent coins. The regulations also prohibit the unlicensed exportation of these coins, except that travelers may take up to $5 in these coins out of the country, and individuals may ship up to $100 in these coins out of the country in any one shipment for legitimate coinage and numismatic purposes. In all essential respects, these regulations are patterned after the Department of the Treasury’s regulations prohibiting the exportation, melting, or treatment of silver coins between 1967 and 1969, and the regulations prohibiting the exportation, melting, or treatment of one-cent coins between 1974 and 1978.

The new regulations authorize a fine of not more than $10,000, or imprisonment of not more than five years, or both, against a person who knowingly violates the regulations. In addition, by law, any coins exported, melted, or treated in violation of the regulation shall be forfeited to the United States Government.

Better be careful with the amount of pocket change you take across the border into Mexico to buy gum.  You may find yourself unjustly criminally liable and headed to jail!

ECONOMIC IMPLICATIONS

The Federal Reserve Note is a bill of credit, a debt instrument.  As Murray Rothbard observed on page 18 of his 1963 America’s Great Depression, “It is true that credit contraction may overcompensate, and, while contraction proceeds, it may cause interest rates to be higher than free-market levels, and investment lower than in the free market.  But since contraction causes no positive malinvestments, it will not lead to any painful period of depression and adjustment.”

Mr. Rothbard continues the observation that government policy can hobble the adjustment process by: “(1) Prevent or delay liquidation, (2) Inflate further, (3) Keep wage rates up, (4) Keep prices up, (5) Stimulate consumption and discourage saving and (6) Subsidize unemployment.”

H.R. 4248 would hasten the liquidation of the FRN$ credit instruments and hobble the government and central bank’s ability to inflate further.  Because the monetary metals are safe stores of value it would encourage savings.  The cascading effect this would have on wage rates, prices and the inability to subsidize unemployment would allow the country to recover from this greater depression much quicker.

UNAVOIDABLE COLLAPSE

The current unconstitutional monetary system will collapse.  It is not a matter of if but when.  Tremendous resources are being mashelled in an attempt to stop the collapse but it is about as effectual as a lone man putting forth his arm to stop the might Amazon from flowing or some costumed King named Cnut decreeing that the tide should not rise.  Economic law will takes it course.

As Ludwig von Mises predicted decades ago in chapter 20 of Human Action, ‘The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. … But then finally the masses wake up. … A breakdown occurs. The crack-up boom appears.’

The fiat currency system with the Federal Reserve Note dollar as the world reserve currency is in the process of and will eventually completely breakdown and fail.  There is no easy solution.  The more capital is misallocated through bailouts the more painful the liquidation and correction will be.

Dr. Ron Paul’s legislative prescription to the monetary ailments is like taking a drug addict off drugs; the simplest, most ethical and most likely solution to put America back in a position to generate freedom, peace and prosperity.  To ignore H.R. 4248 and continue with the current monetary system is like giving an alcoholic a stolen bottle of whisky to cure his headache; while it may mask the pain in the short term it causes more damage, is immoral to steal the whisky and will lead to a worse headache later.

CONCLUSION

With unlimited greed, insatiable and imprudent desires in Wall Street and Washington it must be that the whole operation must combine and climax in an unsustainable debt bubble that either implodes in a depression or erupts in hyperinflation.  But in the grand design, gold and silver’s primary role are not as economic tools, insurance against depression or hyperinflation, but guarantors of liberty when actually used in ordinary daily transactions.

Gold, silver and the other precious metals protect against confiscation through inflation which is a form of taxation without representation or due process of law.  These shiny metals are not mere barbaric commodities but essential checks and balances in the American political machinery.

Thus, the fight over of competing currencies is about more than just wealth.  It is a fight with only two destinies:  freedom of choice or coercion.  To realize the first and vanish the second will not have too high a price because without it you will have paid the ultimate anyway without a return.

Dr. Ron Paul’s H.R. 4248 the Free Competition in Currency Act of 2009 would return America to a Constitutional monetary system, lay the foundation for freedom, peace and prosperity and clear up the unintelligible federal law in these regards.  For these reasons I endorse this legislation.

Disclosures: Long physical gold and silver with no interest in the problematic SLV or GLD ETFs or the platinum ETFs.

Related posts:

1. Current Dollar Currency Controls
2. Is the “Free Market” to Blame for the Recession?
3. Gold Rising As A Currency

LAWS OF MOTION

Stated in layman’s terms the three great Newtonian laws of motion are:

1.  A body persists in a state of uniform motion or of rest unless acted upon by an external force.

2.  Force equals mass times acceleration” or “F = ma.

3.  To every action there is an equal and opposite reaction.

In regards to human action a body seems to stay at rest rather than work unless acted upon by some type of force.  The force can be either internal such as hunger, the desire for self-actualization or anywhere in between on the Maslow hierarchy of needs or external such as a saber-tooth tiger, boss or customer.  To sustain life the human body must consume fuel.

Capital is the means of production and the difference between production and consumption flows into or out of the store of capital.  Out of this dynamic human society has attempted to efficiently allocate capital to produce more and this has resulted in institutions, large and small, where individuals work in the attempt to produce in order to meet their needs and wants.  Of course, the great fiction of government is that everyone can live off someone else’s production.

MASSIVE FAILING INSTITUTIONS

The chains of habit are too weak to be felt until they are too strong to be broken.  The mass of the economy times its speed in the Information Age has resulted in a tremendous force.  But this mass has largely been built from the atomic level upon something which is inherently unstable and undefinable leading to chronic fingers of instability.  What Is A Dollar?

The problem is debt and because psychology is changing, The Great Credit Contraction has begun and the rate at which the mass of the economy is evaporating is truly scary.  While many attribute the ongoing financial crisis to the subprime mortgage mess, which is surely a contributing factor, the problem is much more systemic than a few defaulted mortgages.

UNEMPLOYMENT

But now the second wave of Option ARMs are getting ready to reset at the same time the Federal Housing Administration is requiring higher down payments.  But where are these renters going to find a job when over 6.1M people have been unemployed for 27 weeks or more?

And what about all the discouraged workers who are not included in the labor force because they have ceased looking for non-existant jobs?  The Detroit News reported:

Despite an official unemployment rate of 27 percent, the real jobs problem in Detroit may be affecting half of the working-age population, thousands of whom either can’t find a job or are working fewer hours than they want …

Mayor Dave Bing recently raised eyebrows when he said what many already suspected:  that the city’s official unemployment rate was as believable as Santa Claus.  In Washington for a jobs forum earlier this month, he estimated it was “closer to 50 percent.”

With so many unemployed almost all of the States, with California being the poster child, are under severe financial pressure.  For example, 40 state unemployment insurance funds are either broke or moving in that direction.  While there are people starving in the chaos of Haiti about 37M Americans are now on welfare state food stamp programs, the rate of acceleration is expanding at about 20,000 per day and 1.4M Americans filed for personal bankruptcy in 2009.  And this is a rosy situation considering the FRN$ is still the world’s reserve currency!

RETIREMENT CHAOS

The Baby Boomer generation has driven trends their entire lives because of their mass and acceleration.  From Gerber baby food to the housing booms and busts caused by costumed government officials gallivanting in genocide which caused serious aberrations in demographics and are now getting increasingly explosive politically as the 2016 election will see 78M Baby Boomers pitted against 112M Millennials.

Social Security and Medicare are out of control kudzu that are strangling the economy.  Additionally, virtually all pension funds in the United States are massively underfunded with epic games being played with the discount rate.  As Forbes reported:

The GAO study found that states’ cumulative unfunded liabilities were $405 billion, while Novy-Marx and Rauh figure $3.2 trillion is a more accurate number.

All those tax eating costumed government officials are going to be extremely happy when they realize their retirements evaporated.  But with unemployment benefits draining the capital of the economy like vampires while the productive members of society are punished via increased taxation and regulation the entrepreneur has either learned how to vanish or been turned to stone by the local Gorgons.

The result has been massive declines in State and local tax revenues.  Even Federal corporate income tax receipts were down 55% for the fiscal year ended 30 September 2009.

KICK THE CAN

So like a classic Ponzi scam the answer has been to attempt to bailout the State and local governments via Federal resources.

For example, a chief bailout recipient Citigroup is accepting California IOUs indefinitely at face value; a surreptitious Federal bailout of California in a preemptive attempt to keep them from seceding monetarily by taking the next step of unconstitutionally decreeing the IOUs legal tender for all debts public and private.  The Euro faces the same type of structural issues.

But if the States unconstitutionally decree FRN$ legal tender then why not their own little colored coupons? With 13% of US GDP a $30B deficit California should have nothing to worry about with a mere $30B+ cash-flow issue.  After all, the California Dollar could have a bear on it; the Florida Dollar an alligator, the Texas Dollar a long-horned bull and the New York Dollar a vampire squid.  They would be such fitting symbols!

And so the adjusted monetary base has exploded.

The FRN$ is destined to evaporate and the increase in debt is only hastening the rate.

CONCLUSION

Despite propagandist cheerleaders on television the economy is in horrible condition.  The Obama administration’s attempt to alter the speed and direction of the economy is textbook action for intentionally exacerbating the greater depression.  Like in the recently released movie Daybreakers soon the starving vampire squids of Wall Street, Washington DC, State and local governments will run out of their productive human livestock and only a few understand their true predicament.  They think they can ’save or create 3M jobs’.  Seriously?

No one knows how this ginormous mess will play out.  But the massive momentum of 2009 has largely shaped the direction for 2010.  While the FRN$ may rise in the short term it is an extremely risky play because of how fast hyperinflation could strike the FRN$.

Of course, among the chief uses of silver and reasons to buy gold, platinum and lead are to keep you and your property safe from the costumed vampire tax eaters who will likely spring Obama’s retirement trap by nationalizing retirement accounts and forcing purchases of US debt to bolster Treasuries.

Using force or intimidation against innocent people or their legitimately acquired property is unfair, immoral and unsustainable.  The current state of the economy and where it is headed is merely the result of cause and effect from economic law.  George Mason, the father of the Bill of Rights, observed this principle hundreds of years ago in his writings contained on page 966 of The Papers Of George Mason:

As nations cannot be rewarded or punished in the next world, so they must be in this. By an inevitable chain of causes and effects, Providence punishes national sins by national calamities.

Please, leave your thoughts on how you think 2010 will play out.

DISCLOSURE:  Long physical gold, silver and platinum with no interest the problematic SLV or GLD ETFs, the platinum ETFs or Treasuries.

Related posts:

1. M0 Money, M0 Problems: Expect Massive Inflation in 2009 and Beyond
2. Intel Posts Explosive Earnings Up 875%: Continues Massive Momentum
3. A Simple Plan to Save California

As such, it makes no sense that governments should create money through “quasi-private” central banks.  If there is consumer demand for facilitating the exchange of goods and services, then there will arise through the spontaneous order of the free market a system of competing providers of currencies.  Presumably, those who produce money that will retain its value will drive out of the market those incompetent or unscrupulous competitors producing depreciating money.  This is because money that retains its value over time will make the exchange of products easier because businesses will be able to make better calculations in exchange, and because as with any product, a premium will be placed on maintenance of value over depreciation.

One could speak to a host of problems with government currency: that inflation of the money supply unfairly benefits debtors at the expense of creditors and serves as an outright tax on all; that a constantly debased currency allows the government to fund unjustifiable wars in addition to all sorts of social programs and other means of unjust and unconstitutional wealth redistribution; that government naturally will mismanage the money supply just as they do all programs from a purely economic standpoint; that it is absurd that the government should have the power to outlaw monopolies yet grant itself a monopoly on a commodity like money that serves a specific special interest of the banking sector; and finally that government’s record in management of the money supply has been horrendous, with central banks creating a perpetual boom-bust cycle and constantly devaluing the people’s money.  Concentrating the monopoly power over the money supply in the hands of a select group of bureaucrats is an asinine, irrational and furthermore dangerous policy.

But without going into these sometimes arcane economic phenomena, the most important thing to understand is that at its core, money supply is just like the supply of any other good or service except to the extent that its value is derived from its use as a commodity in exchange, rather than from the utility we gain in consuming a traditional good or service.  If the market can provide other goods and services in the proper quantities and qualities to meet the demands of society, then surely it too can provide the proper quantity and quality of money.  To believe that somehow, government provision of money is any more sacred or preferable to government provision of any other good or service is pure folly.

Related posts:

1. Hyperinflation: The Inevitable Result of Government-Manged Money
2. What Has Government Done To Our Money?
3. Sound Money for a Sound State

EVAPORATED CURRENCIES

The speed with which currencies can lose their purchasing power is astonishing.  For example, on Tuesday 3 February 2009 it took 109,759 tenge, the Kazakhstan currency, to purchase one ounce of gold.  On Thursday 5 February 2009 it took 123,346.  And that was small compared to the bolivar’s evaporation.

On 4 March 2009 the Armenian Dram went poof losing 30% of its value, shortly later on 15 April 2009 the Fiji dollar lost 20% in a devaluation event and in November it was Vietnam dong.  In October 2008 the Iceland Krona went poof which has harmed the infrastructure and led to civil unrest in Iceland.   During 2008 the British Pound went poof and hundreds of years ago the Continental Dollar went poof prompting the Founding Fathers to craft particular monetary powers and disabilities in the United States Constitution.

GOLD AND SILVER CANNOT EVAPORATE

Water’s boiling point is 99.974 °C or 211.95 °F.  The average temperature on the surface of the earth is 15 °C or 59 °F.

Gold’s boiling point is 2,856 °C or  5,173 °F.  Silver’s boiling point is 2,162 °C or 3,924 °F.  The temperature on the surface of the sun is 5,400 ºC or 9,800 ºF.  Additionally, gold is extremely resistant to corrosion and can sit at the bottom of the salty ocean for centuries and still retain its luster.

I suppose gold could go poof on the surface of the sun but on earth physical gold cannot evaporate when used as a currency in ordinary daily transactions or when hoarded safely in vaults.  At all times and in all circumstances gold remains money.  When the Zimbabwe dollar evaporated the people quickly found out you can always trade gold for bread; assuming there is bread available which is an excellent reason to follow provident living principles and prepare for survivalism in the suburbs.

On 20 May 1999, Alan Greenspan testified before Congress, “Gold is always accepted and is the ultimate means of payment and is perceived to be an element of stability in the currency and in the ultimate value of the currency and that historically has always been the reason why governments hold gold.”

GOLD’S 2009 PERFORMANCE

I always get a chuckle out of the paper bugs who cling with so much tenacity to their little colored coupons.  So to the paper bugs, do you like numbers?  How do you like them numbers? (from the Academy Award Winning Goodwill Hunting)  I am waiting for gold to be devalued to $0 so that I can buy all of it.

The results become even more stark when using gold as the numeraire, or presentation currency under International Accounting Standard 1.  I shudder to think of the change in a Venezuelans financial statements in a single day from this devaluation if most of their wealth was located in Venezuela.  But the income statement and balance sheet destruction is not limited to Venezuelans but taking place in all major currencies.

VENEZUELA’S ERODING INFRASTRUCTURE

One unfortunate consequence of fiat currency and the attendant inflation is the result of misallocation of capital that leads to malinvestment and in many cases neglect of important infrastructure.  Venezuela is no different.

Venezuela’s electrical infrastructure, heavily reliant on hydroelectric with 73% coming from the Guri Dam which has been seriously enervated by a drought and has already been neglected, underdeveloped and overused for years.  Venezuela’s mushrooming demand coupled with shrinking supply is resulting in a slide towards darkness with several major electricity failures in 2008 and 2009 with unplanned blackouts and brownouts reminiscent of California’s.

With the Guri Dam’s water levels at extremely depressed levels Columbia has cut natural gas exports about 70% from 7 million cubic meters per day to a paltry 2.3 million.  At the same time Chavez has implement subsidies which have resulted in increased demand.  Coupled with theft the electrical usage per capita is among the highest in all of Latin America with national demand around 17 gigawatts.

Because of neglect of the infrastructure it has become increasingly inefficient with tremendous amounts of electricity being lost or stolen by the typical Latin creativity where they just tap into the power lines with makeshift wiring systems.  Because the low utility prices artificially stimulate demand and leads to less resources for the electricity producers therefore their ability to police the lines is greatly hampered.  With consumption barely below production the system is extremely vulnerable to spikes which can cripple the system in a similar way to what happened in the gigantic 2003 blackout in the US Northeast that affected about 55 million people from Toronto to New York City.

Price controls lead to shortages and shortages lead to rationing. Venezuela is no different and announced in December 2009  electricity rationing requirements.  Due to the power being cut off there have been tremendous production complications; particularly among the metals industry with some aluminum producers cutting as much as 40% of their production.  Gold production will likely  continue trending lower also.  What is next for Venezuela? A typical response from a vampire squid criminal costumed in government regalia would be to implement aluminum rationing.

There is no feasible substantive solution to the electrical crisis in Venezuela.  Like almost all crisis this one is created by governmental intervention in the market and after initial negative unintended consequences the government interferes more causing even more negative effects.  This is a prime example of how government is a weapon of mass wealth destruction.

And because America is implementing similar policies therefore it would be irrational to think America will have different consequences.  Just wait until your 104k, IRA or other type of retirement account gets nationalized to support United States Treasuries.  There is comfort in the thought that at least you will not be able to boot up your computer to check your balance!

CONCLUSION

The fiat currencies represent the common stock of governments and all are evaporating which is predictably leading to civil unrest.  In response, governments which are weapons of mass wealth destruction, respond with draconian measures like Venezuela has done with price subsidies, rationing and currency devaluation and these measure further exacerbate the situations.  Such customer service is to be expected when your enemy is your customer.

Of course, Venezuelans could have protected themselves by casting the ultimate vote of no confidence in Chavez and buying gold.  At least then their capital would not have evaporated.  This is just the prelude to 2010 which will be an interesting and exciting year!

DISCLOSURES:  Long physical gold, silver and platinum with no position the problematic SLV or GLD ETFs.

Related posts:

1. Armenian Currency Goes Poof
2. Gold Already Trading At $1,300 Per Ounce
3. Gold isn’t in Backwardation, the USD is in Contango

Last week was a good lesson in terms of what might, or what might not, happen when policy makers attempt to steer currency markets. Notwithstanding the obvious question of much how clout policy makers de-facto holds with respect to moving currency markets (not a lot I think), the outgoing finance minister in Japan Hirohisa Fujii has on several occasions made it clear that he, for one, is not worried about a stronger Yen only to revert slightly as markets responded with a; “well then, lets go …” In general however, it does seem as if Fujii’s general position has been that a strong Yen perhaps would not be so bad since it would only serve to boost purchasing power. This is of course true, but it also highlights a rather alarming disconnect between the fundamentals of the Japanese economy stuck in export depedency and deflation and policy makers economic analysis (or spin) of the situation.

Now, Fujii has stepped down due to health reasons and perhaps in an attempt to enter the office with a bang instead of a whimper, his replacement Naoto Kan kicked off his first public appearance by noting that he, for one, would like the Yen to be a little bit weaker and that he believed the MOF and the BOJ should cooperate to make it so. Having not forgot the last time in 2002 that Japan intervened by selling Yen, markets reacted swiftly by giving the Yen a nice jolt downwards (against the USD).

Yet, that position lasted only one day;

(quote Bloomberg)

Japan’s Finance Minister Naoto Kan said markets should set currencies, while underscoring the ability to intervene in extreme circumstances and taking account of the yen’s impact on the economy. “Currencies of course should be determined by markets, but I must be aware that I have the right and the responsibility to take action in emergency situations,” Kan told reporters in Tokyo on his second day in office. “I must take into consideration businesses’ expectations.”

It appears then that Mr. Kan has received comment from above as the statement noted above was followed by comments by prime minister Yukio Hatoyama and finance minister delegates that members of governmetn should not really comment much, if at all, on currency markets.

So, will this be the last we hear from Kan on the Yen. Not very likely in my opinion. Japan needs a weaker Yen and slowly Japanese policy makers will wake up to this. In this sense we are likely to see policy makers and delegates tip-toeing in and out on this refrain as the data comes in. Whether this means that we will see actual intervention is another question. I have called for intervention once to many times before. However, I can say with the strongest possible conviction that prime minister Hatoyama’s growth target for Japan in the 2010-2020 stint of 2% annually is dubious at the offset and completely bogus if Japan is not able to maintain a stable and growing external surplus towards the rest of the world. In a post-crisis context where many economies look set to follow the same road of export reliance this would definitely need a weakening Yen.

In his annual 10 non-predictions Macro Man revealed the non-intervention by part of the MOF/BOJ as number 8. I have no reason to disagree with him, so for now; plus ca change indeed!

Related posts:

1. Japan: The Land of Deflation
2. Japan – In the Eye of the Beholder
3. Corporate Capex in Japan (Q2-2009) – So, is This What a Recovery Looks Like?

“We cannot stop terrorism or defeat the ideologies of violent extremism when hundreds of millions of young people see a future with no jobs, no hope, and no way ever to catch up to the developed world” Hillary Clinton, Remarks to the Center for Global Development at the Peterson Institute for International Economics

For a moment there I thought she was talking about the US – “when millions of young Americans see a future with no jobs, no hope, and no way ever to catch up to the Baby Boomers”. Generational class warfare anyone?

“could seriously disrupt bond markets if it triggered concerns about creditworthiness or inflation because of concerns with government incentives to inflate debt away” Bank for International Settlements in invitation to top central bankers and financiers for a meeting in Basel

This doesn’t need any further comment for readers of this blog, suffice to say I find it interesting that the BIS acknowledges that inflating debt away is an option.

PS – unfortunately Andy Smith’s stuff is not publically released, because I rank him as the top precious metals analyst.

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3. Against Government Money

In the Great Depression, we saw the harmful effects of the exchange rate mercantalism that is feasible with fiat money. This was a key motivation for Keynes and others in their design of the post-war order. The IMF was supposed to be a multilateral body that would help bring pressure on countries to move towards good sense through `ruthless truth-telling’. This didn’t work out too well. The IMF got itself into a box where it would not say anything about exchange rate regimes. To some extent, by standing ready to help countries that got into a currency crisis, it has helped perpetuate exchange rate pegging.

For the present discussion, I want to emphasise the distinction between small countries who can pretty much do as they like as opposed to systemically important countries where actions have a significant impact upon the world economy at large. In this approach, the four interesting questions are:

1. In the selfish maximisation of one country at a time, what is the optimal choice of monetary policy regime / exchange rate regime?
2. What the mechanisms and empirical magnitudes through which the exchange rate regime choice of one country imposes externalities on others? I.e. what is the consequence of the Nash equilibrium?
3. What is an ideal solution for the world, which combines optimality for the local economy with good system outcomes?
4. What international institutional arrangements can help push the system towards the right solution?

On the first question, some people believe that exchange rate mercantalism is good for the country. You don’t find much of this amongst professional economists.. As Merton Miller said: If devaluations could make a country rich, Argentina would be the richest country in the world. For a careful rebuttal of this loose thinking, done by one of the world’s top economists, see these discussant comments by Michael Woodford about a paper with this view by Dani Rodrik. As Andrew Rose said in a discussant comments at the Neemrana conference about a similar paper by Surjit Bhalla: This is either a home run or it’s totally wrong.

I feel that exporting is great for growth, but only when this exporting involves genuinely facing the market test of the global market. If a country exports based on subsidies of some sort – which I term `fake exports’ -  then the gains in productivity and capability do not come about (link, link). My sense is that in China also, intellectuals no longer buy the `distort everything for exports’ idea.

As with every other export-subsidy or protectionist scheme, this has more takers amongst non-economists than amongst economists. It’s slow hard work, banging these down over and over.

On the second question, see Paul Krugman: link, link.

On the third question, I have a comment on `global imbalances’. Some people see big numbers for current account surpluses/deficits as being intrinsically flawed. I look upon them as being the success of globalisation, as a repudiation of the Feldstein/Horioka problem. It is in an autarkic world that you see Feldstein/Horioka problems, where capital flows are not large. If we are to get beyond the Lucas paradox, and get back to the massive `development’ capital flows of the First Globalisation, it’s going to require large sustained BOP surpluses in some countries and deficits in others.

As an example, the best deal for ageing OECD is to buy securities in young countries like India today, thus spurring their growth today. Over the next 50 years, these securities would yield a flow of widgets back and thus support consumption of their elderly.

Hence, I would say the question is: How can the world be made safe for large BOP surpluses/deficits? This is a more interesting and important problem, instead of saying to ourselves: How can the world eliminate large BOP surpluses/deficits.

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Q1: Should central banks target asset prices?

Davies points out that the consensus view is that central banks should remain focused on inflation targeting and not target asset prices.

However, pretty much everyone would agree that information from the world around us, about asset prices, is useful for forecasting inflation and output, and should be used in figuring out what values for output and inflation we put into our Taylor rules (whatever they might be).

So it seems that on this question, there is consensus: Asset prices are (and have always been) useful inputs in monetary policy formulation, but monetary policy should continue to do inflation targeting and not asset price targeting.

Q2: Should the measure of inflation targeted include an element of asset price, and particularly house price inflation?

Any reasonable CPI must have house rent in it, and through this, a boom in house prices and thus rents will get reflected in the CPI. This would give one more channel through which asset prices would directly influence a traditional inflation-targeting central bank.

Q3: Is it possible to identify serious asset price misalignments, and are they of legitimate concern to monetary policy-makers?

This is controversial territory. Some economists believe it is possible to ask central banks to make a call on when asset prices are misaligned.

I am personally skeptical about the extent to which this is possible. It is always easy to look back, ex-post, and say that it was obvious that US house prices were way off in 2006. But how many of the people who say this today were shorting US housing then?

Making a call about asset price fluctuations is hard even for a well motivated hedge fund manager. It is doubly hard in the public sector given the peculiar combination of skills and incentives that are found within central banks. The people with real skill in these things are unlikely to choose to work in a central bank; years spent in a central bank do not hone skills at market timing; the public will be very irritated if a central bank calls wrong.

So overall, I’m skeptical about the extent to which central banks (past or future) can usefully make calls about when asset prices are out of whack.

Q4: Even if we can identify misalignments, and believe that some price adjustment is bound to occur, is it right to use interest rates to try to moderate the expansion?

Even if you knew that asset prices were grossly wrong, interest rates seem to be a very blunt tool, which inflict collateral damage all around the economy. Davies quotes Mervyn King who said two months ago: Diverting monetary policy from its goal of price stability risks making the economy less stable and the financial system no more so.

Q5: Should we try to find and use mechanisms other than interest rates to moderate extravagant credit expansion and associated asset price bubbles?

I think there is a good case for building some kinds of counter-cyclicality into financial regulation. But operationalising this is hard.

It should be feasible for financial regulators to have three manuals which govern boom times, normal times, and recessions. Full public disclosure of these three manuals is, of course essential, to avoid the usual issues of transparency and consistency. The question is: When would you flip from one manual to another?

Doing this based on asset prices runs into the difficulties articulated above. How is a civil servant to know when asset prices are in a boom or a bust?

Doing it based on business cycle conditions is more objective and feasible. It should be possible to setup indicators like Eurocoin which give low latency information about a coincident indicator. This could be used to drive rules about when we go into each of the three manuals. I personally think this would be useful.

Such efforts can be rationalised on the narrow ground that we seek to reduce the extent to which finance is a source of pro-cyclicality in the economy. If this is done right, it would reduce the amount of heavy lifting that monetary and fiscal policy have to do by way of stabilisation.

You don’t have to have a `financial markets are irrational’ view to support this. All you have to believe is that the existing structures of financial regulation are a source of pro-cyclicality. If that much is agreed, then there is a case for changing the framework of financial regulation so as to reduce the extent to which this is the case.

Join the forum discussion on this post - (1) Posts

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This is one of the reasons the FRN$ is near the bottom of the liquidity pyramid and rises in value with each round of the credit contraction. But as continuing pressure keeps being added to the FRN$ through bailouts, inflation, swaps, etc. it will hasten towards the fiat currency graveyard as commodity currency alternatives gain prominence.

The secular gold bull market has entered stage two and continues pulling in capital.  This has led to a large multiple of the gains inverse to the FRN$ decline.  But more importantly and more often gold and the FRN$ are strengthening together.  This is because of their respective positions in the liquidity pyramid.

So as the FRN$ continues its evaporation the Ancient Metal of Kings will do what it has always done; preserve capital.  As it has performed this function over the last eight years it has also increased in purchasing power.  As gold enters the third stage of the bull market, which is still likely several years away, it will strengthen even more often while the FRN$ both advances and declines.

HOW TO PREDICT THE PRICE OF GOLD

Jeff Clark, Editor, Casey’s Gold & Resource Report

Long-term readers know that gold moves inversely to the dollar, meaning if the dollar drops, gold tends to rise (and vice versa). This happens with about 80% regularity. But what many gold writers haven’t acknowledged is the leveraged movement our favorite metal has demonstrated this year to the world’s reserve currency.

The U.S. dollar index, a six-currency gauge of the greenback’s value, has dropped 7.8% so far this year (as of December 3). Meanwhile, gold is up 38.7% year-to-date. In other words, for every 1% drop in the dollar index, gold has risen 4.9%. If that approximate percentage holds over time, one can begin to estimate what the gold price might be if you know what the dollar might do.

While the dollar is likely to bounce at some point, making gold correct, the long-term fate of the dollar has already dried in cement. If the dollar were simply to return to its March 2008 low of 71.30 next year – a 4.6% drop from current levels – this would imply a rise in gold of 22.5% and a price of about $1,478 an ounce.

The long-term scenario is more dramatic. If you believe the dollar will lose half its value from current levels, this would imply a gold price around $4,164. If you believe it will lose 75% of its value, gold would reach about $5,642. Doug Casey has called for a $5,000 gold price; if he’s right, guess what that implies for the dollar?

And think about this: these calculations ignore what else might “show up,” such as when price inflation shows up in the economy, the greater public shows up to buy gold, or the Chinese don’t show up at an auction. Could $5,000 gold be too low?

Unless you think the dollar’s problems are solved, its eventual demise is gold’s eventual glory. Prepare, and invest, accordingly.

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You cannot make this stuff up.  So, in the culture of Goldman Sachs (GS), if their employees start getting exterminated then how will it affect the stock and how can the situation be played for profit?

TENSENESS IN THE OFFICE

The Goldman Sachs (GS) gangbanger’s public pillaging is being increasingly revealed and the hundreds of millions, even billions, of people they have stolen from and wronged are getting rightfully upset.  This is bound to create some tenseness and nervousness around the gangbanger’s hideout.  Bloomberg’s Alice Schroeder, author of The Snowball:  Warren Buffett and the Business of Life, reports:

The banker had told this friend of mine that senior Goldman people have loaded up on firearms and are now equipped to defend themselves if there is a populist uprising against the bank. … Has it really come to this? Imagine what emotions must be billowing through the halls of Goldman Sachs …

The bailout was meant to keep the curtain drawn on the way the rich make money, not from the free market, but from the lack of one. Goldman Sachs blew its cover when the firm’s revenue from trading reached a record $27 billion in the first nine months of this year, and a public that was writhing in financial agony caught on that the profits earned on taxpayer capital were going to pay employee bonuses.

My the tangled web that Goldman Sachs (GS) gangbangers weave.

WARNINGS

Lloyd Blankfein, Chief Gangbanger for Goldman Sachs (GS) and whose wife does not like to wait in line at charity events, proclaimed that Goldman Sachs (GS) was ‘doing God’s work’.  Interestingly, CNBC reported, Lloyd Blankfein “added that he understood, however, that people were angry with bankers’ actions: “I know I could slit my wrists and people would cheer.”

As the Huffington Post reported:

L’Osservatore Romano is reporting that Goldman Sachs is indeed Doing God’s work, and His Former Holiness Joseph Ratzinger has confirmed the unsolicited hostile takeover. Writing under his pen name Benedict XVI, Ratzinger verified that total control of the popular religion has been transferred to Goldman Sachs and His New Holiness Lloyd Blankfein.

But seriously, the Bible has many examples from Elijah with the chariots of fire to Daniel in the lion’s den of those who did God’s work being protected.  And what type of work did Jesus do?  Mark records:

And they come to Jerusalem: and Jesus went into the temple, and began to cast out them that sold and bought in the temple, and overthrew the tables of the moneychangers

But instead of relying on God’s protection the Business Insider has reported, “all Goldman Sachs employees received earlier this month. They were told not to organize small [12 maximum] parties even if no firm money goes to pay for them.”

So during the holidays remember to keep that Christmas spirit.

WAGING OF WAR

During the Panic of 1873 many investment houses went bankrupt.  Tensions got so heated the United States Army was deployed to New York City to protect the bankers.

When the rich wage war its the poor who die in Afghanistan but when the cake eating poor wage war its the rich who died in France.  This time around the Goldman Sachs (GS) gangbangers are going to want security provided by highly trained troops, or former troops, whose parent’s pensions have been stolen and whose best friends have died in their arms in foreign lands.

A few days ago I was talking with a friend who had just returned from an overseas war deployment with the United States Navy.  I jokingly recounted how the armed forces protected the bankers in 1873 and asked him ‘What would you do if ordered to protect the bankers?’  He jokingly replied to the effect, ‘I would go, stand between the angry crowd and the banker and when the time was right I would grab the bankers and throw them to the crowd.’

EXTERMINATED VAMPIRE SQUIDS

I can understand why the leading gangbangers at Goldman Sachs (GS) are getting nervous as the number of parasitic vampire squids that have been exterminated keeps growing.  Andrei Kozlov, Russian central banker, was riddled with bullets.  Dead hedge fund managers include Seth Tobias, Oleg Zhukovsky, Rene-Thierry Magon de la Villehuchet, Michael Klein, Peter Wuffli and Kirk Wright.

The list goes on.  It includes David Kellerman, Freddie Mac CFO and even James MacDonald the CEO of the Rockefeller family offices.  I suppose we should wish their famlies the best; except for New York tax attorney William Parente.  Whoever he angered worked corruption of blood and his wife and two children were also murdered.  There are many more examples.

SERVICE BUSINESS

Goldman Sachs (GS) is primarily a service business and dependent upon the individuals who receive an average bonus of about $700,000 from a total pot of $16.7B.  When a company’s workforce is so universally hated and have wronged so many millions, even billions, of people there is a possibility that retribution will be taken.  If retribution is taken then how could that affect earnings and how could the company benefit from the unfortunate circumstances?

Wall Street is full of sociopaths and you cannot grow a conscience if you do not have one.  Unfortunately, for this exercise we will have to analyze like the Goldman Sachs (GS) gangbangers; with the lack of a moral compass.

Key-man insurance can be described as an insurance policy taken out by a business to compensate that business for financial losses that would arise from the death or extended incapacity of the individual specified on the policy. The policy’s term usually does not extend beyond the period of the key person’s usefulness to the business. The aim is to compensate the business for losses and facilitate business continuity.

Not only is there a very real threat to Goldman Sachs (GS) gangbangers from the outside, evidenced by the weapons permits and limitations on sizes of gatherings, but there is a potential conflict of interest from the inside.  Sure, if Goldman Sachs (GS) gangbangers were to start targeting their own employees to benefit from key-man insurance it would be illegal and they should be prevented from receiving proceeds because of killer and slayer statutes.

But perhaps the gangbangers will get their vassal politicians to create ex-post facto legislation to provide immunity.  As CNET reported:

A federal judge in San Francisco has tossed out a slew of lawsuits filed against AT&T and other telecommunications companies alleged to have illegally opened their networks to the National Security Agency.

U.S. District Judge Vaughn Walker on Wednesday ruled that, thanks to a 2008 federal law retroactively immunizing those companies, approximately 46 lawsuits brought by civil liberties groups and class action lawyers will be dismissed.

Which employees should the upper brass target?  If you have spent the last 5-15 years putting in 80-100 hour weeks then how much would you sell your health for?  An even better question may be how much would your boss sell your health for?  Why should they share profits with you?

CONCLUSION

The Goldman Sachs gangbangers are among the largest hordes of parasitic vampire squids on the planet.  The absence of their aggressive theft would increase the standard of living for millions even billions of humans.  As a peacemaker who believes that force should never be used aggressively against innocent people or their legitimately acquired property I would prefer to starve the vampire squids I am opposed to and not be an instrument of extermination.  It is unfortunate that the parasitic Goldman Sachs Gang has been and is so aggressive that their host victims may feel they have no other choice than to act in self defense by gunning for Goldman Sachs gangbangers.

Through the use of key-man insurance and ex post facto legislation to provide immunity for illegal behavior the Goldman Sachs Gang can tremendously increase the gang’s profitability and the bonus share for the senior partners.  If the gang’s leaders do happen to find themselves in an uncomfortable situation then they will likely be bailed out, if possible.  Nevertheless, I would not tamper with such a filthy instrument either way.

DISCLOSURES:  Long physical gold but neither long nor short with GS and neither long nor short (except for being a US citizen) on any GS employees.

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