Citizen Economists » deficit

California IOUs – One Step Closer To The Brink And About To Break

Trace Mayer — Thu, 02 Sep 2010 18:21:15 +0000

California IOUs are beginning to infringe on the Federal Reserve’s exclusive monopoly regarding legal tender fiat currency. On 23 August 2010 California bill A.B 1506 passed 9-0 and contains a provision that “a state agency shall accept from a person or entity a registered warrant issued by the Controller that is endorsed by that payee , at full face value”. This failing State is now one step closer to the financial abyss event horizon and the gravitational pull of economic law continues exerting tremendous pressure.

California’s budget deficit is 1.267% of the United States’ while its GDP is about 13%.

UNITED STATES CONSTITUTIONAL MONETARY SYSTEM

The language of the Constitution is both exceedingly simple yet extremely profound in its consequences. In Article I, Section 8, Clause 5 and Article I, Section 10, Clause 1, silver and gold coin are adopted as the exclusive money and currency of the United States. The term ‘dollar’ is written twice in the Constitution in Article I, Section 9 and in the Seventh Amendment. But what is a dollar?

Constitutionally, a dollar is a silver coin containing 371-1/4 grains of silver. Thus, the legal value of silver coinage must be proportional to the weight of silver contained and any gold coinage must be proportional to the exchange value between silver and gold based on the exchange rate in the free market.

Despite these clear Constitutional prescriptions the commonly accepted instrument in the United States is the Federal Reserve Note. The market share for Federal Reserve Note coupons, emblazoned with images of sacrosanct sociopaths like Abraham Lincoln or Alexander Hamilton, is increased because they are given preferential yet unconstitutional treatment under 31 USC 5,101-5,118. Now California appears to be attempting to infringe on this hallowed monopoly.

LEGAL TENDER FIAT CURRENCY

Fiat currency is a currency issued by a State which is neither legally convertible to any other thing nor fixed in value in terms of any objective standard such as gold or silver. Thus, fiat currency is without intrinsic value.

Because fiat currency is usually just some form of little colored coupon with no intrinsic value the State often has to resort to violence to increase liquidity. These immoral market interferences to enhance the little colored coupon’s market share generally consist of four prongs: (1) making the currency the unit for payment of taxes and fees for public expenditures, (2) by declaring the little colored coupons ‘legal tender for all debts, public and private’, (3) imposing taxes on competing currencies and (4) by outlawing contracts payable in any other form of money or currency, especially currency that does not require force to be accepted such as commodity money like gold or silver.

CALIFORNIA IOUs – A THREAT TO FEDERAL RESERVE NOTE COUPONS

By issuing IOUs and passing a bill requiring state agencies to accept them at full face value, California will be infringing on the Federal Reserve’s Congressionally granted monopoly. Like the Kelantan State in Malaysia that is encouraging the use of gold and silver coins in ordinary daily transactions this seemingly small action actually poses a significant threat to the Federal Reserve Note’s status as the world reserve currency.

Why? Because the next few steps California could easily take is to either declare the IOUs legal tender for all debts public and private or impose taxes for using FRN$s in California or completely outlaw the use of FRN$s in California.

Given that California GDP is the largest of any US State and the eighth largest economy in the world, between Italy with $1.76T in debt and Russia, it seems fairly perplexing that they are worried about a measly $19B budget deficit when the United States budget deficit is about $1,500B. In other words, California’s budget deficit is 1.267% of the United States’ while its GDP is about 13%.

How could California access its ‘credit worthiness’ when compared with other sovereigns like Italy with its nearly $2T in debt? Slap a bear on its IOUs, call it a California dollar while making it redeemable in silver, pass a bill to make California dollars legal tender and then impose taxes or prohibit the use of Federal Reserve Notes in California. Indeed, in conjunction with H.R. 4248 The Free Competition In Currency Act every State should begin issuing their own currency.

IRS PROTECTION OF FEDERAL RESERVE’S MONOPOLY

The Federal Reserve does not want any competition to its little colored coupons in the currency market. Want to know why gold rises at most only about 30% per year? Its the gold price suppression scheme as uncovered by GATA in conjunction with IRS Topic 409 where the net capital gain of collectibles, such as American Eagle gold coins which are legal tender under 31 USC 5,103, are taxed at a maximum rate of 28%.

But either way California is being pulled into a situation it cannot recover from. How will California fund its chronic budget deficit and debt when can neither be surreptitiously bailed out by the federal government via Citigroup nor print its own California dollars?

CONCLUSION

The Federal Reserve’s monopoly over the currency market is increasingly facing overt and covert threats. The more credible the threats the less demand for its little colored coupons. But the Federal Reserve Note is merely the King Ghost of currency illusions and has no substance compared to the Ancient Metal of Kings, gold, or Tears of the Moon, silver. Countless fiat currencies have come and gone through the ages while these elements have always been worth something. The Great Credit Contraction continues and even if there is a California dollar created the smart holders of capital will bypass it and move directly into the monetary metals.

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Quantitative Easing By Fed Is Predictably Failing

Trace Mayer — Wed, 01 Jul 2009 11:34:06 +0000

The Federal Reserve has embarked on a perilous journey of quantitative easing. On 18 March 2009 I predicted the Federal Reserve Will Fail With Quantitative Easing.

In the June 2009 Special Issue from Sprott Asset Management the billionaire Eric Sprott declared, “The Federal Reserve’s policy of Quantitative Easing is failing. The US budget is ludicrous, spending is out of control, spending promises are out of control, the world knows it – and we know it.” The policy of Global Quantitative Easing is going to result in significant additional turmoil and destruction of wealth.

BUDGET DEFICIT

The Obama administration is robbing other people’s wealth and spending it like a starving laughing hyena scavenging the rotting pelt of an almost deceased diseased wildebeest. As Mr. Sprott observes the projected deficit is $1.845T and must come from foreign and international holders, mutual funds, state and local governments, the Federal Reserve or other investors.

There have been plenty of public comments by various officials about avoiding the FRN$ as Resurgent Russia Is Discharging Dollars and Brazil Is Bucking The Buck. China would rather have physical gold bullion such as the entire International Monetary Fund hoard.

Mr. Sprott concludes his analysis with “We have concluded that the majority of traditional buyers of US debt will be unable to increase their purchases this year”.

As I wrote about 9 June 2009 in Current Dollar Currency Controls “There is not enough real capital, private liquidity, to sponge up all the bonds the incontinent government is selling; 10-20x per month more than a few years ago.”

So who or what holds all these government liabilities that are spewing into the cesspool that constitutes the modern financial markets?

Well, 42% of US debt is with ‘Intergovernmental Holdings’. As Mr. Sprott teases out, “The debt holdings are held in accounts for the various trust funds the US manages for its future obligations – the largest of which are set aside for Social Security and Medicare.”

MASSIVE INFLATION

Inflation, under the traditional definition in the Austrian school, is an increase in the currency supply. The adjusted monetary base has exploded.

Some economists, either ignorantly or worse the deliberate psycho-sociopathic court economists like Paul Krugman and Greg Mankiw, assert that inflation is increased prices. But just as wet streets are not rain so likewise rising prices are a consequence of inflation but not inflation.

Argentina, a country fraught with political risk, is politically manic depressive like California. The Argentine economy continues evaporating like the dusty farmland of Salta and crime is escalating. In the recent June elections Argentine President Cristina Fernandez de Kirchner lost significant political capital. Her party’s legislative advantage disappeared and they retain only 36 of 72 Senate seats and her husband, former Argentine President Nestor Kirchner, lost his parliamentary seat. This vexed country is a likely template for America’s future.

Like a snake striking a clueless mouse so likewise a currency crisis crumbles the businesses and fortunes of the unprepared with blistering speed. Not only has there been massive inflation but political risk in the United States, such as the new policy of preventative detention, is increasing and evaporating Treasuries.

There are few safe havens to consider and many begin to wonder how to buy gold or how to buy silver. But perhaps the best investment is a 72 hour kit and three month supply of food; eat what you store and store what you eat. Food is a great investment, not subject to counter-party risk, a natural hedge against inflation or hyperinflation and in most cases not subject to capital gains taxes or exchange controls.

PROMISE BREAKING

The United States has made too many promises and will be unable to perform. Like a lame geriatric ward hosting a sprint race the United States is delusion about its own abilities and capacity to produce wealth. The Federal government is a giant wealth vaporizing machine and for the safety of its citizens and the world its destructive force needs to be capped by the Constitution and its pieces traded off by the 10th Amendment.

This can be started by asking what is a dollar? Another step would be to begin using digital commodity currencies, like GoldMoney, as an alternative to the current financial system with their destiny as an eventual substitute. There can still be regeneration instead of repression.

But like a beautiful tapestry of freedom, peace and prosperity that hides a cement wall; the derivative illusion that has fooled the American people for four decades with their current standard of living is being viciously ripped away revealing the dark, dank cell of tyrannous government. The irony is the politicians are taking actions not to live themselves but to ensure their human livestock dies. The livestock is rapidly realizing this is not the hope and change they were looking for.

This massive real estate and stock market crash was foreseen and written about in 2004 by Robert Kiyosaki in Prophecy. While his book made startling predictions on a massive scale I think they were still too small.

CONCLUSION

The massive budget deficit is causing the United States’ balance sheet to hemorrage cash. To fill the gap they must issue an immense amount of debt. The private market cannot sop it all up so inflation has exploded along with the policy of global quantitative easing. America’s wealth generating capacity is being rapidly destroyed as millions of Americans lose their jobs and civil liberties. The self-feeding cycle of budget deficit, declining dollar, job losses, budget deficit, etc. is accelerating.

This is neither an ordinary recession nor a generational depression. This is The Great Credit Contraction and it has only begun.

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