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Summary
The
Constitution protects the citizen against "double jeopardy", that
is, the judicial arm of the government cannot inflict harm on the citizen
twice for one and the same reason. Apparently, the principle of double
jeopardy does not apply to the monetary arm of the government. The Federal
Reserve System can punish the citizen twice whenever it manipulates the rate
of interest to his prejudice. In particular, savers are put in double
jeopardy when the rate of interest is manipulated upwards. They are hit
twice. First, when the purchasing power of the currency is decimated as
prices rise; second, when the capital value of savings is decimated, both
caused by rising interest rate structure. Producers are also hit twice when
the rate of interest is manipulated downwards. First, when prices fall (or
pricing power is lost, or market share is ckipprd).
They are hit again for the second time as their burden of debt is increased,
both caused by falling interest rate structure.
"Shabby secret" of the regime of
irredeemable currency
In this series
"Dismal Monetary Science" I have argued that the regime of
irredeemable currency has brought the Nemesis of flowing and ebbing interest
rates upon the savers and the producers. Paradoxically, savings accounts are
pilfered when the rate of interest is manipulated upwards, and capital accounts
are plundered when it is manipulated downwards. A lot of people have
difficulty in understanding this. They are victims of propaganda by
mainstream economists who mendaciously hail rising interest rates as godsend
for the savers; while hailing falling interest rates as godsend for the
producers. But the truth, as opposed to propaganda, is that savers are
creditors who suffer capital losses as the rate of interest is driven up, and
producers are debtors who suffer capital losses as the rate of interest is
driven down. In other words, savers are in the same boat with the
bondholders; producers, with the sellers of bonds. As bond prices vary
inversely with the rate of interest, those in the first boat suffer losses
when the rate of interest is rising; those in the second, when it is falling.
Bondholders are locked in at the wrong rate as bond prices fall; sellers of
bonds are locked in at the wrong rate as they rise.
This is the
'shabby little secret' of the immorality, nay, the
criminality of the regime of irredeemable currency. It is a scheme enabling
bond speculators, the multinational banks and the hedge funds, to drive down
bond prices in order to tap into savings accounts, only to drive them up
again in order to tap into capital accounts. It is: "heads: I win;
tails: you lose."
The producer is
plundered even if he is technically out of debt. To the extent he needs
capital goods in order to produce, a falling interest-rate environment means
that he has financed his production at rates far too high. This fact should
be registered as a loss in the profit/loss statement of the enterprise, and
should be compensated for by the injection of new capital, the same way as
losses caused by damage to plant and equipment due to fire, for example, are.
Instead, businesses are merrily paying out phantom profits as dividends,
further weakening capital structure. They plunge into bankruptcy not knowing
what has hit them. They don't realize that they are victims of a hidden
deflationary process, a huge illicit wealth-transfer from producers to the
financial sector. The obscene profits of bond speculators, the multinational
banks and the hedge funds, do not come out of nowhere. Bond speculation is
not a zero-sum game. Speculative profits are siphoned off clandestinely from
the capital accounts of the producers. Like computer hacking, this is a crime
that leaves no physical traces of break and entry. Producers are the silent,
captive, and passive participants on the short side of the bond market, with
their capital at stake whether they like it or not. They are like lambs to be
slaughtered. Bond speculation aided and abetted by the government is
responsible for denuding producers of their capital. What happened to the
American industry during the past thirty-five years? Don't say that
high-paying industrial jobs were "exported" to low-wage countries.
Say that capital accounts have been plundered through falling interest rates
and as a result a large part of American industry was bankrupted.
When
governments inflicted global irredeemable currency on the world, they
"forgot" to investigate the more far-reaching effects of their
move. They looked at the problem of rising prices, and they were satisfied
that central bankers can control it through "fine-tuning" the
increase in the money supply. But they never looked at the problem of rising
interest rates as it affects savings accounts. Worse still, they never looked
at the more remote consequences, of the tide turning, and falling interest
rates devastating capital accounts. This was criminal negligence, and the
world still suffers from the consequences of it.
A low interest-rate structure must not be confused
with a falling one. While the former is beneficial to producers, the
latter is lethal. We may conclude that the best economic climate for all
non-parasitical elements of society is the one with a stable
interest-rate structure. It has been charged that the gold standard has
failed to stabilize prices. However, in a dynamic economy the stabilization
of prices is neither possible nor desirable. The great merit of the gold
standard must be seen in the feat that it can stabilize the interest-rate
structure so as to prevent the financial sector from becoming a vampire
sucking the life-blood of the producing sector. This is an unstable world and
the best one can do is to stabilize interest rates by adhering to a gold
standard. Prices will then take care of themselves.
Pilfering and
plundering has been going on since 1973 when stable interest rates were
thrown to the wind in exchange for "floating". Now, 35 years later,
we have to be prepared for something much worse: the disintegration of the
world's payments system, which would devastate not just the savers and the
producers, but everyone outside of the clique of multinational bankers and
their lap dogs, the corrupt politicians. As the world reaches the saturation
point of the dollar glut, the international monetary system will seize up. Of
course, central banks will issue statements to the effect that they are
standing by with all their resources to support the dollar. However, this is
just whistling in the dark.
………Paradox inside of a
paradox…….Debt at the trough
Antal E. Fekete
San Francisco School
of Economics
aefekete@hotmail.com
Read
all the other articles written by Antal E. Fekete
DISCLAIMER
AND CONFLICTS
THE PUBLICATION OF THIS LETTER IS FOR YOUR INFORMATION AND AMUSEMENT ONLY.
THE AUTHOR IS NOT SOLICITING ANY ACTION BASED UPON IT, NOR IS HE SUGGESTING
THAT IT REPRESENTS, UNDER ANY CIRCUMSTANCES, A RECOMMENDATION TO BUY OR SELL
ANY SECURITY. THE CONTENT OF THIS LETTER IS DERIVED FROM INFORMATION AND
SOURCES BELIEVED TO BE RELIABLE, BUT THE AUTHOR MAKES NO REPRESENTATION THAT
IT IS COMPLETE OR ERROR-FREE, AND IT SHOULD NOT BE RELIED UPON AS SUCH. IT IS
TO BE TAKEN AS THE AUTHORS OPINION AS SHAPED BY HIS EXPERIENCE, RATHER THAN A
STATEMENT OF FACTS. THE AUTHOR MAY HAVE INVESTMENT POSITIONS, LONG OR SHORT,
IN ANY SECURITIES MENTIONED, WHICH MAY BE CHANGED AT ANY TIME FOR ANY REASON.
Copyright
© 2002-2008 by Antal E. Fekete
- All rights reserved
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