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Have you ever wondered what money really is? You'll
notice that everyone you read has a strong opinion about what money actually
is, but who's right? Is money really just one single thing and then
everything else has varying levels of moneyness
relative to real money?
Is gold real money? Or is money whatever the government says it is? Or is it
whatever the market says it is? Is silver money in any way today? Are US
Treasury bonds money? Is real money just the monetary base? Or is it all the
credit that refers back to that base for value? Is money supposed to be
something tangible, or is it simply a common unit we use to express the
relative value of things?
Is money really the actual medium of exchange we use in trade? Or is it the
unit of account the various media of exchange (checks, credit cards, PayPal)
reference for value? Should the reference point unit itself ever be the
medium of exchange? Some of the time? All of the time? Never? Is money a
store of value? And if so, for how long? Is money supposed to be the fixed
reference point (the benchmark) for changes in the value of everything else?
Or is it simply a shared language for expressing those changes?
So many questions, right? And how often have you seen these questions even
asked, let alone answered? Is money something that changes over time? Or is
money's true essence the same concept that first emerged thousands of years
ago? And probably the most important question: Does the correct view of money
produce answers that are vastly superior to the blind conjecture prescribed
by all other views?
Answers
I wonder if it's even possible to answer all these questions in one post.
It's a neat challenge in any case, isn't it? As I said at the top, everyone
has a strong opinion about what money actually is. So "everyone"
will probably disagree with what I write. But that doesn't mean they are
right and I am wrong. I want to challenge you to use your own mind and see
for yourself. Take what I say and then take what they say, compare, contrast,
analyze and then decide for yourself. The
prescription produced by my view is quite simple. And only you can decide if
it is vastly superior to their blind conjecture.
The Pure Concept of Money
According to Webster's the word 'money' emerged in the English language
sometime during the Medieval period in Europe, maybe around the late 1200s. Wikipedia
suggests a possible etymology originating with the Greek word for 'unique' or
'unit'. The Western term for physical coins that emerged sometime around the
late 1500s was 'specie' from the Latin phrase for "in kind" or
"payment in kind," meaning "payment in the actual or real
form." The word 'currency' came a little later from the Latin word for
current or flow, and was married to the money concept in 1699 by the
philosopher John Locke who described the "circulation of money" as
a flow or current of monetary payments made in specie.
Etymology is important, because with money or "the moneyness
of things" we are talking about a vital concept that predates the word
by thousands of years. And it's only by understanding
the pure concept that we can see the ways the word has been bastardized by
the two camps over centuries. The meaning we commonly assign to words may change
over time, but that never changes the original concept underlying the
emergence of the word in the first place.
Case in point: Is 'money' equal to 'wealth'? Is "gathering wealth"
the same as "gathering money?" In the 1950s a Seattle engineer
named Howard Long was deeply distressed that his beloved King James Version
of the Bible just didn't seem to connect with people when sharing the Word of
God. Long felt he needed a new translation that captured the truths he loved
in the language that his contemporaries spoke.
It took a couple of decades, but Long's passion became the New International
Version (NIV), a completely original translation from Hebrew, Aramaic, and
Greek texts that was finally released in 1978. The King James Version had
been translated into English and released 367 years earlier, in 1611. Here is
one verse as it appears in each version:
Proverbs 13:11 (KJV) Wealth gotten by vanity
shall be diminished: but he that gathereth by labour shall increase.
Proverbs 13:11 (NIV) Dishonest money dwindles away, but whoever
gathers money little by little makes it grow.
I use this only as an example of how we sometimes change words to fit our
modern understanding, not as any kind of a criticism of the NIV. To be fair,
there are many more verses where the NIV does not remove or replace
the word 'wealth'. Here are a few other translations of the same verse, which
I think will help to illustrate my point about words and concepts:
Proverbs 13:11 (English Standard Version 2001)
Wealth gained hastily [or by fraud] will dwindle, but whoever gathers
little by little will increase it.
Proverbs 13:11 (Wycliffe Bible 1395) Hasted chattel, that is, gotten hastily,
shall be made less; but that which is gathered little and little with hand,
shall be multiplied.
Proverbs 13:11 (Young's Literal Translation 1862) Wealth from vanity becometh little, And whoso is gathering by the hand becometh great.
And, just for fun:
"Think now, if you are
a person of "great worth" is it not better to acquire gold over
years, at better prices? If you are one of "small worth", can you
not follow in the footsteps of giants? I tell you, it is an easy path to
follow!" --ANOTHER (THOUGHTS!) 1/10/98
The point is, your modern understanding of 'money', and the pure concept of
money that emerged long before the word, may be substantially different
things. I'll go even further to say that the modern understanding of money is
so confused and disputed by the two opposing money camps that the only way we can hope to have a clear view of what is
actually happening today is by reverting our understanding to the
original concept, before it was corrupted by the two camps.
So now let's go back to the etymology at the top of this section because,
while it does not set the pure concept, it does reflect it from a time more
proximate and a meaning less corrupted than now. And I should note that
etymology is a somewhat subjective and inexact science, kind of like
interpreting what you find at an archeological site. So I'm using it only as
a tool that helps me share with you a concept, not as proof of the
correctness of my concept. There is no proof at this time. There is only the
use of your own discerning mind.
If we look at the specific etymology I highlighted, we are pretty close to
the pure concept which I will confirm from a couple different angles. 'Money'
is a "unique unit" that we use as a kind of language for expressing
the relative value of things other than money. The modern example would be
"dollar". Not "a dollar," not a physical dollar,
but the word "dollar" as it is used to say a can of peas costs a
dollar, or my house is worth 100,000 dollars, or you owe me a hundred
dollars. If you give me two grams of gold you won't owe me a hundred dollars
anymore. You don't have to give me actual dollars. That's just the unit I
used to express the amount of value you owed me. That's the pure concept of
money.
This is where it gets a little tricky and mind-bending. The actual physical
dollar, that physical item we call "a dollar," is not money in and
of itself. In other words, it is not intrinsically "money". It is
only money because we reference it when expressing the relative value of
goods, services and credit. If we stopped referring to it, it would cease to
be money even though it would still be a dollar. Can you see the difference?
Like I said, it's tricky.
A dollar is just a thing, a tradable item. And it will continue being that
same thing even if we stop referring to it when expressing relative values.
It will still be a dollar, it just won't be money
anymore. Therefore it is not money in and of itself. It is just a thing.
Take the old German Reichsbank marks from 1923.
Some of them still exist. They are still marks with lots of zeros. But they
are no longer money. We can still trade them. I might trade you a few
Zimbabwe notes for an original mark, but that obviously doesn't make them
money. The same goes for gold. Gold is just a tradable item.
We could be using seashells as money. If we were, then all the seashells
available for trade would be the monetary base. That's the base to which I
would be referring when I said you owed me one hundred seashells. A single
seashell would be the reference point, the unique unit, but the whole of all
available seashells would be the base around which money flowed. You could
pay your debt to me with either an item that I desired with a value expressed
as 100 seashells, or with 100 actual seashells. So if the total amount of
seashells available (the monetary base) suddenly doubled making them easier
for you to come by, I'd be kinda screwed. Of course
I'd only be screwed if the doubling happened unexpectedly between the time I
lent you the value of 100 seashells and the time you paid me back.
Getting back to our etymology, the concept behind the term 'specie' meant
actual units of the monetary base. In the 1500s, that was the total of all
metal coins-of-the-realm available for trade. That was the monetary base of
the day and the term 'specie' arose as a way to express payment in the
monetary unit itself rather than payment in bulls, or hats, or anything else.
But original concept aside, the meaning of the word became married to coins
and stuck to this day:
Specie: 1610s, "coin, money in the form of
coins" (as opposed to paper money or bullion), from phrase in specie
"in the real or actual form" (1550s), from L. in specie "in
kind," ablative of species "kind, form, sort"
Notice it says "coins… as opposed to… bullion." That's
because while gold coins were referenced in the use of money at the
time the word 'specie' emerged, gold bullion was not. "Gold" was
not money in and of itself. It was just a thing; a tradable, barterable item. Notice also that it says "money in
the form of coins." The coins themselves were also not money in
and of themselves. They were only called money because, in that coin
form, they were the monetary base that was referenced when expressing the
relative value of everything else at that time. Some of those gold
coins from the 1500s and 1600s still exist today. Today they are not money,
but they are still gold coins. Can you see the difference yet?
Now remember, there's no right or wrong at this point. There's only the
usefulness of a perspective in delivering the correct analysis of what's
actually happening today and the best prescription for your personal action.
But you can't use a perspective until you get it. Then, and only then, you
can use your own mind to decide if it is the correct perspective and then act
upon it. Later it will be proved correct or incorrect, just as Another said:
"time will prove all things."
But in support of this particular view of the money concept, I'd like to
direct your attention to Gold Trail Three where FOA went to great length explaining the historical
precedents for this view found in the archeological record. Some of this
history has been rewritten in hard money text books to fit the modern meaning
of words, while the actual historical record—and FOA—tell a
different story about the underlying concepts.
_________________________________________________________
Sidebar Post-within-a-post
FOA on the Concepts of Money and Wealth
Beginning on the third page of The Gold Trail, FOA presents a number of cases
in which the hard money camp has corrupted the interpretation of money-related
archeological finds in order to make them fit a modern agenda. By projecting
modern biases on antiquity, this camp leaves us with estimates of the volume,
value and role of ancient gold that may be entirely wrong.
FOA explains "his group's" contentions along with the archeology
and sound logic that backs them. And in so doing, he leaves us with an
alternative interpretation of the historical record that I think can only be
properly viewed by letting go of some of our modern hard money dogma.
For example, the amount of gold that existed in, and made it out of antiquity
is probably overestimated. So, if anything, there’s
likely less than the current estimates of all gold available today.
And gold probably carried a much greater value in antiquity than Hard
Money typically assumes. Less gold, circulating as a tradable good (not
hoarded, not money) at a really high value relative to everything else.
Gold’s primary utility was that you could travel to far-away markets
with a great amount of tradable wealth in a small package. It was essentially
the trade good that was preferred "on the road," not at home in
common everyday trade. It was too valuable for that.
The way gold was used, the way it was valued, the reason why we find more
silver, copper, and bronze coins buried at the ancient sites, all this and
more has been misinterpreted by our hard money teachers because they project
modern thoughts onto the ancients in support of their modern policy
prescriptions. FOA said "to understand the value of gold, we must remove
ourselves from present time thought and think of gold as the Ancients
did." Gaining FOA's ancient perspective is helpful in understanding the
ultimate moneyness of gold in Freegold.
I went through GT3 again (for probably the fourth time) just to pull a few
tastes and give you the flavor of this masterful piece of conceptual
dissemination by FOA:
Gold, that wonderful metal that has all the unique
qualities to function as our one and only wealth medium, and we just can't
use it without altering its purpose. You know, the Lydians
had it right, back around 430 BC. They didn't struggle with the concepts of
money, like we do today. They just stamped whatever pieces of gold they found
laying around and kept it for trade. There was no
need to clarify for certain that their gold money needed properties of
"utility", store of value, medium of exchange, etc. etc.. They didn't need to identify these qualities were in
gold before they stopped questioning if it was safe to use gold as savings.
Gold was owned and the knowledge that people owned it and carried it for
trade was alone enough to make it "worth its weight as wealth".
You see, back in antiquity there existed another
property that could override our need for modern definitions of tradable
wealth. That property was found in the one identifying mark of wealth that
transcended all ages; real possession!(smile) This factor and this one factor
alone had the ability to activate all the other modern attributes of money
properties, even when the knowledge of these attributes was unknown in the
ancient era. Come now, Alexander the Great didn't know about
"utility" did he? (grin)
--------------
Wealth.
As a means of example; think about art work for a moment? That fine painting
that graces your main prominent wall. It's tradable for something, isn't it?
Perhaps that Renoir for the acreage down the street. That use would cover
some of the medium angle, right? A little bulky, but the large value makes it
no more or less cumbersome than five gold bricks.(smile)
Utility? Just watch your friends stare at it for hours. Store of value? A
Renoir? We don't even need to discuss this.
But, one more thing, is it wealth? Of course it is. You see, it is wealth
because you possess it, and the very knowledge that you possess it is held by
others.
These paintings command a value, a price, a demand, precisely because every
one of them is possessed by an owner. In the world of wealth, worth is
enhanced because the supply is lessened by this "possession
attribute". And possession is how most people in antiquity understood
wealth.
++++++++++++++
Many hard money philosophers have pointed their finger at others for the fiat
situation we use today. It was the bankers and governments, the kings and
cohorts, big business and robber barons or some communist manifesto that
forced us to use this type of money. Well, you may not like the process and
consider yourself above or apart from it all. You may even declare all of
them evil. But, in the end, one fact remains; society may govern itself in
many ways over thousands of years, but it has never stopped the evolution
that corrupts the use of real money as official money.
Over time and life spans gold has been brought into official use countless
times. Only to be bastardized by forces, we as peoples can never control.
After every failure and ruination of much wealth, the cries always return to
bring gold back as money. Once again to begin the long hard road that leads
to the same conclusion. Gold coins, then bank storage, then gold lending,
then gold certificate use, then lending of certificates, then certificates
are declared paper money, then overprinted, then gold backing removed, then
price inflation, then,,,,,, we begin again. But this
time it's different the hard money crowd say. Yes, it is. Only the time has
changed.
For the better part of human existence, gold alone has served all of the best
functions of tradable wealth. But as soon as we call it our money, human
nature takes over. Yes, we can call it a stock or a bond, a piece of land or
a painting, a car, boat or antique, but just don't label it as money.
++++++++++++++
Going back over #56 "The Gold of Troy":
You noticed that I structured that discussion in a way that makes the
independent mind wander about. Let's pull those thoughts together and move
along.
We found that history had left us with some conclusions that were, it seems,
never concluded. Archaeology had never been approached by someone like us,
with a different hard money perspective. Yes, all the records were there, but
most every paper written on the subject appeared carbon copy. They all
projected our modern sense of money into the economic structures as they
existed back then. "Of course, we are today more complicated", our
history papers said,,,, so,,,,,, allowing for that
difference "the ancients still operated back then the same as us
now". How neat!
Yes, our teachers "called our perception of money, their money and our
perception of goods, their goods" in the same context we can use now.
They said "hey, they were using hard money to buy and sell from each
other, just like we once did" Again,,,,, how
neat"!
++++++++++++++
For us, as hard money "Physical Gold Advocates", to understand the
value of gold, we must remove ourselves from present time thought and think
of gold as the Ancients did. Not as money but as little tradable hunks of
metal. Gold for goods, straight up, as the citizens of Troy did!
It's the Physical Gold Advocate's "advantage", because while he is
waiting for the real value to emerge, the real value that we know existed in
antiquity has never gone away! It just doesn't have a marketplace to show it.
It will.
I use the phrase; "our advantage of owning the metal", because
buying physical gold for today's currency,,,,,,, is
like buying a lifetime wealth option that never expires. The commission one
pays for this gold coin position, in the form of what we call today's price,,,,,,, may one day go to almost zero as our paper market
structure fails from the discovery of real price.
++++++++++++++
So, with the Athens, Macedon, Tarentum and Antiochus to name a few, began the
world's first coins. Gold coins? Yes they were, but money as we know it? Our
view of how these people viewed and used this gold money is, we believe, far
different from what gold scholars teach. And its impact on estimates of
existing modern gold supply and use is enormous.
All throughout these early times, prior to BC and into some AD, people didn't
see these gold coins as we think of money today. These various gold coins had
tremendous value, but they were just gold pieces. They were wealth for trade
like everything else was. That's simple logic, I know, but the vessel of oil,
for instance was just as tradable as a gold coin. In fact, within most of the
medium sized city states of that era, barter of like goods was just as good or better than gold coin. One's life was better if he
owned wealth he used.
++++++++++++++
More to the point, this logic made these guys spenders of gold, rather than
savers! If you had gained gold in trade, for your services or goods supplied,
you had no reason to save it. There was no other money that needed to be
hedged against value loss.
It's becoming more and more apparent that average people
of that time quickly traded (spent) their gold for something useful of value,
for both them and their family. They didn't have the excess we know today. In
modern nomenclature; this logic dictates that a much smaller amount of gold
money circulated and circulated faster than many supposed.
For longer savings, even for those of above average means that had all they
wanted, people tended to spend their most valuable gold coins first, while
saving the least valuable (bronze, silver, iron) for
emergencies and later use. To us, today this sounds strange, but place yourself in that time. It was better to build your most
useful and needed store of things while times were good.
Therefore, you traded the gold, which brought the most equal trade, first. If
things got so bad that one had to dig up the stash, you were trading for last
ditch things anyway. Kind of like wrapping up and burying beef jerky to get
you thru a pinch. This use of lower metal is supported. Remember, lots of
things served as money objects then. Even much later, AD, it was common in Rome
to trade big iron bricks that were forged as a bull. Its use was in trade for
"one bull" or something of that animal's value.
++++++++++++++
When evaluating lifestyle wealth, back then, many often find themselves
comparing things in a relative mode with today's perspective. In this
position we think the mark has been far missed for gold worth. It's possible
that gold payment, in these early times amounted to a huge premium compared
to today. The various goods and lifestyle conditions in existence indicate a
much higher relative worth for their goods of daily life. Thereby giving gold
a much greater relative worth within one's life also. If a one stater Darius of gold, from Cyrus of Persia was worth a
very valuable vessel of oil, why utilize the effort to find gold just to
trade for some oil. Better to skip the gold production and make the oil. This
was the norm for thinking by people not trading on the road, living
"within local" city states. Indeed, outside the need to pay armies,
a much smaller amount of gold did the job much better than us modern thinkers
thought was necessary. Further, the use of oversea warfare and trade perhaps
lost more gold into the ocean than we will ever know.
Consider these possibilities well. In that gold today is in a much lesser
existence, compared to modern goods supply and lifestyle enhancements, when
comparing it to its value in life in the past. It's true worth as a wealth
medium could be a 1,000 times higher! For it to return to its ancient
position of true asset wealth, for trade outside the modern currency realm,
we can see where its European benefactors have once again placed it "On
The Road" to much higher fiat currency prices.
++++++++++++++
Back then, there was no other currency. No paper moneys or banks. One had no
need to save gold as a hedge or savings account. Your wealth was in the
useful things contained in the world around you. Those little hunks of metal
were just that, little hunks of gold that everyone knew had trading value.
They were not money, not the way we think of money today. They were just a
beautiful metal, gold.
++++++++++++++
The Lydians, Greeks and Romans all held gold. From
Parthia through Rome and on to the Visgoths, Lombards, Normans and Franks, they all held gold as
wealth. It was wealth first and traded as what we call money second.
Possession identified that gold as real wealth, even if that ownership was
for but the moment of a trade.
From the earliest times right into the Old World periods of Europe, gold
served as the most valued wealth asset one could use in trade. It was by far
the largest unit of tradable wealth in circulation that could be counted on
to bring a premium in trade while shopping between cities. It moved, it
flowed and it traveled. It was indeed, always "on the road"! Lesser
metals and other tradable wealth assets always competed with gold for its
trading function, but only gold made the best "on sight" trade.
When given the choice of other "almost moneys", gold would always
bring an extra slice of meat or fuller basket of cloth.
The irony of gold use over most of its earlier periods was that few average
people kept it for long. Hence the seldom discovery of gold coinage where
average people lived (see my earlier posts). To be sure, it represented
wealth to these commoners, in good form and to the highest degree. Yet, their
possession of this wealth usually constituted only a short time period. This
short ownership occurred because gold did, would and could trade so much
better for the needed things in life. For the worker, service wages paid in
gold meant you just got a bonus or raise and the time had come to finally buy
what you couldn't afford if paid in other means. If these people saved at
all, it was usually in the form of the lesser metals (see my other posts).
---------------
If gold was so valuable back then, there must have been a bunch of it saved
and transported into our modern time?
No, not really! We used to try and extrapolate all the gold that was mined
and turned into jewelry, bullion or coin. If it was so good for coin and
trade, civilizations must have saved every ounce, we thought! But something
kept nagging at our conclusions. Something that kept turning up over and over
at our digs.
Some of you have seen the Gold of Troy pieces or other fine examples of old
gold craftsmanship at other museums. Ever notice how good they were at making
gold so long ago? From intricate bracelets to rings, head dress items to fine
cups, even the most thin of leaf. Some of it was so small we had to use
magnifying glasses to see the work clearly.
This gold in jewelry and art work form was the other major form of traveling
wealth. In many of our recent findings we now think that jewelry and coin traded
places as easily as getting your check cashed today. Throughout the ancient
land, gold centers occupied the trade routes. Any gold that rested for too
long was quickly recruited into a form that worked for the next traveler. In
fact, evidence now points to all forms of gold ownership, not just coins,
being a short term proposition for the average man. Indeed, contrary to what
we thought, the fingers of all mankind did, through the ages, touch gold!
Now place yourself in that time. You work for Rome in the army, a fighting
man. Not all of you were paid in lesser metals, many of you were relatively
better off. You did carry some of your wealth with you in the form of gold
coin or jewelry. In the case of a Roman soldier, a gold ring was very
probable. When you went into battle, did you leave your few gold items laying in the tent? Or did you wire them back to a Swiss
bank for safekeeping until after the battle? (big grin)
What we are finding, in the form of molecular fragments at battle sites,
leads us to believe that most wars were fought with most wealth possessions
worn or in pockets. Gold included. To make a long story short, we now believe
that a great deal of early gold was scattered on trails, in the sea and
during every war. In fact, rubbed, scraped and powdered to the four winds.
Because gold was so valuable in long trade, extremely small creations were
carried as jewelry. Much smaller and much more able to be lost than other
larger units of the lesser metals. The nature of so much of this gold was
that it was easy to be lost and dispersed. Especially considering the modes
of travel back then. We as museum visitors see all the magnificent pieces
displayed. What we don't see are the countless broken, partial and fragmented
items that are never offered for viewing.
Knowing what we know now, we believe that a very large portion of gold was
lost and scattered on a yearly basis. Add to this the fact that most gold
mining brought almost the same return as making many of the goods it
purchased and we can see how gold was and is over counted. Where it was once
taken as fact that all gold was looted and remelted,
we now think that gold stocks were lucky if replaced.
By the time of the great gold coinages in Europe, the gold that flowed into
these major commerce centers was all there was left in the world!
++++++++++++++
The real issue is our misunderstanding and misuse of the term "sound
money". That thought has been bantered around for hundreds of years.
Truly it does not exist except in the minds of men.
Money, the term, the idea, perhaps the ideal,,,,,,,
is something we dreamed up to apply to one of our chosen units of tradable
wealth. Usually gold. We could take almost every item in the world and use it
in this same "money fashion". Still, this form of trading real for
real is just exchanging wealth. It isn't exchanging money as we understand
money.
Gold is no different than anything else you possess as your wealth, it just
so happened to be the most perfect type of tradable wealth in the world. So
it evolved to be used the most and eventually labeled in the same function of
what we consider to be "sound money".
Now, consider that all wealth is represented in and of itself. You cannot
reproduce wealth through substitution, like giving someone five pieces of
copper for one piece of gold and then have them think they now have five
pieces of gold! This is the process we try to perform within the realm of
man's money ideals. We have always debased trading wealth by duplicating it
into other forms and calling all of it, collectively, "our money".
This duplicating, this replicating, this debasement is the result of taking
the concept of a credit / contract function (paying in the future) and
combining it with the concept of completing a trade at the moment. Think
about that for a moment?
As an example, I'll give you a paper contract to pay you later for some
oranges and you give me the basket of oranges. Better said, I just gave you
modern man's actual concept of money.
Or I trade you a basket of apples "or gold" for those same oranges
and the deal is finished, done! We have been taught to think that this is
also the concept of money trade.
The first uses what our currency system has evolved into, what is really
money in our mind. Where the second uses no credit form at all and is more
comparable to trading real wealth as the ancients
traded using gold.
Contemporary thought has always blurred these two notions; saying that these
two methods of trading are one in the same and both forms use the same idea
of what we think money is.
++++++++++++++
This is the road ahead. A fiat no different from the dollar in function, yet
a universe away in management. A wealth asset that also stands beside this money, yet has no modern label or official connection as
money. In this way modern society can circle the earth, to once again begin
where we started. Having learned that the concepts of wealth-money and
man's money were never the same.
++++++++++++++
They are not trying to Un-money gold! They are going to un-Westernize gold so
it performs its historic function of acting as a tradable wealth holding. No
longer following the Gold Bugs' view that governments need to control gold so
it acts like real money in the fiat sense. Truly, the BIS and ECB are today "Walking
In The Footsteps Of Giants"!
++++++++++++++
Gold will no longer be able to successfully carry the Western name of Money
so as to allow for its political price fixing. A process that, it seems, has
been with us for generations. Enslaving millions of hard workers by always
officially classifying the terms and value of both their paper currency and
their metal savings. Always inflating both items for the good of society's
never ending political agenda.
Allowing FreeGold to circulate as a wealth asset
would denominate its true worth through the much larger real demand of
"Wealth Possession" instead of paper possession. Such a gold scale
would measure our world reserve currencies against each other instead of
against our Western concept of gold as official money. But, in addition, on a
higher level, prevent any one country from subjugating other nation states
through fiat dominance. To more fully grasp the impact of
"Possession" and why ancient gold was worth so much more as FreeGold; hike again that part of our trail (FOA
(04/18/01; 20:20:06MT - usagold.com msg#64) Lombards,
Normans and Franks.)
++++++++++++++
We were first alerted to the "gold is money" flaw years ago. When
considering the many references to gold being money, in ancient texts,
several things stood out. We began to suspect that those translations were
somewhat slanted. I saw many areas, in old text, where gold was actually more
in a context of; his money was in account of gold or; the money account was
gold or; traded his money in gold. The more one searches the more one finds
that in ancient times gold was simply one item that could account for your
money values. To expand the reality of the thought; everything we trade is
in account of associated money values; nothing we trade is money!
The original actual term of money was often in a different concept. In those
times barter, and their crude accounts of the same, were marked down or
remembered as so many pots, furs, corn, tools traded. Gold became the best
accepted tradable wealth of the lot and soon many accountings used gold more
than other items to denominate those trades. Still, money was the account,
the rating system for value, the worth association in your head. Gold,
itself, became the main wealth object used in that bookkeeping.
This all worked well for hundreds and perhaps thousands of years as fiat was
never so well used or considered. Over time, society became accustomed to
speaking of gold in the context of money accounting. Translations became all
the more relaxed as gold and money accounting terms were mingled as one in
the same. It was a subtle difference, then, but has become a major conflict
in the money affairs of modern mankind; as gold receipts became fiat gold and
bankers combined fiat money accounting with gold backing.
++++++++++++++
To understand gold we must understand money in its purest form; apart
from its manmade convoluted function of being something you save. Money in
its purest form is a mental association of values in trade; a concept in
memory not a real item. In proper vernacular; a 1930s style US gold coin
was stamped in the act of applying the money concept to a real piece of
tradable wealth. Not the best way to use gold, considering our human nature.
++++++++++++++
By accepting and using dollars today, that have no inherent form of value, we
are reverting to simple barter by value association. Assigning value to
dollar units that can only have a worth in what we can complete a trade
for. In effect, refining modern man's
sophisticated money thoughts back into the plain money concept as it first
began; a value stored in your head! Sound like something that's way over
your head of understanding? I'll let you teach yourself.
++++++++++++++
You use the currency as a unit to value associate
the worth of everything. Not far from rating everything between a value of one to ten; only our currency numbers are
infinite. Now, those numbers between one and ten have no value, do they?
That's right, the value is in your
association abilities. This is the money concept, my friends.
++++++++++++++
A fiat trading unit works today because we make it take on the associated
value of what we trade it for; it becomes the very money concept that always
resided in our brains from the beginnings of time. In this, a controlled fiat
unit works as a trading medium; even as it fails miserably as a retainer of
wealth the bankers and lenders so want it to be.
++++++++++++++
For thirty years fiat use evolved on its own to embrace the non-wealth
trading aspects of "the money concept". Leaving in its wake a world
of worthless dollar debt as people bought wealth outside the "money
concept" anyway. We are, today, in a transition away from that dollar
mess and much of our wealth illusion will be passing from our grasp in the
process.
In every way, society is trading its way back to where it started. In the
process, gold will find a new value from its history in the past:
"A wealth of ages savings for your future of
today."
End Sidebar
_________________________________________________________
Well, there you have it! The pure concept of money is our shared use
of some thing as a reference point for
expressing the relative value of all other things. Money is the referencing
of the thing, not the thing itself. As FOA said, money is "a value
stored in your head!" Money is not something you save. "Money in
its purest form is a mental association of values in trade; a concept in
memory not a real item… the value is in your association abilities.
This is the money concept, my friends."
But what does this have to do with me in 2011? I can almost hear you thinking
this question now. Well, I'm going to share a secret with you. The big secret
is that the people's money is simply credit. And by "the people's
money," I mean our money, the real producing economy's money. The
monetary base is only the banks' and governments' money, except for that
little bit of cash you keep in your wallet for
emergencies. Let me explain.
Today's monetary base is a clearly defined thing. It is all physical currency
plus reserves held at the Fed. We the people cannot have electronic base
money. We cannot open an account at the Fed. Only banks and the government
can. We use commercial bank credit and private credit to keep the economy
churning. The reference point of our credit is the base. We reference that
base when we transact in "dollars".
Private and commercial bank credit appears and disappears spontaneously all
the time, all throughout the real economy. This is what actually lubricates
the economic engine; having a base of stable value to which we refer in
monetary transactions. Private credit is generally cleared using bank credit.
And bank credit is cleared using the monetary base. But all credit
denominated in dollars refers to that base and relies on a stable unit value
or price stability.
It is the banks' job (both commercial and central banks) to make sure that
bank credit (the people's money) and base money (the banks' money) are fungible. That is, they are always freely and equally
exchangeable. But of course they are two separate things, credit and base
money, with two very different volumes. Under normal conditions, there's a
lot more credit money floating around than there is base money. So keeping
them fungible can be a juggling act on occasion. But for the most part, we
the people choose to hold bank credit as our money rather than cash.
And, in fact, it is the limited availability of cash in the system (its
relative "hardness") that keeps our money stable in unit
value.
Think about it this way: We are free to choose cash at any time. And when we
go to the bank to exchange our credits for cash, we put that bank under
pressure to come up with cash that is relatively "harder" to come
up with (more limited in volume) than credit. Let's say, for example, that
"demand deposits" (those that can demand cash on the spot)
are ten times larger than the total volume of cash in the system. Is this
good for our money? Yes, because it means that the reference point unit we
use is in limited supply, which keeps a vital tension on the overall
system. The operations the bank must do to come up with our cash (sell off
some value) maintain value in our credits.
Say the base volume is one trillion dollars, which is about what it was in
October of 2008. That means the base unit reference point for all
dollar credit in the world is one one-trillionth of the base volume, all the
available above-ground dollars ever mined throughout all of history. Then
imagine you doubled that base to two trillion dollars. The unit reference
point will have been cut in half, from one one-trillionth to one-half
of one one-trillionth of the base volume.
Like this: Remember the "reference kilo" in Reference Point Revolution?
Say you've got a contract or a credit for a kilo of gold. Now obviously the
total volume of gold can't be doubled overnight like the dollar base was, so
what would be the equivalent effect? Well, it would be like someone cutting
that reference kilo in half. Your one kilo contract, since it is denominated
in kilos, refers to this unit reference point that has just been cut in half.
It has suddenly become twice as easy for your creditor to deliver on his
obligation. And, by the way, the volume of the dollar base has more than
doubled since Oct. 2008. It's now at 2.7 trillion, which means the unit
reference point was actually given a 63% "haircut" in three years,
from one one-trillionth to little more than one-third of one-trillionth of
the total volume.
Now, before you start arguing your own favorite economic pet theory, let me
remind you that there is no right or wrong at this point. There's only the
usefulness of a perspective in delivering the correct analysis of what's
actually happening today and the best prescription for your personal action.
But you can't use a perspective until you get it. Then, and only then, you
can use your own mind to decide if it is the correct perspective and then act
upon it. Later it will be proved correct or incorrect, just as Another said:
"time will prove all things."
Clearly the 63% destruction of the dollar unit reference point over the last
three years did not immediately translate into a 170% rise in prices at the
grocery store. And I wouldn't expect it to. It never works like that. Henry Hazlitt explained it like
this: "The value of the monetary unit, at the beginning of an inflation, commonly does not fall by as much as the
increase in the quantity of money, whereas, in the late stage of inflation,
the value of the monetary unit falls much faster than the increase in the
quantity of money."
If you have a large 401K, IRA or pension fund full of credits for dollars,
you may be taking comfort in the fact that the 63% haircut in the very unit
your retirement nest egg references has not yet shown up at the stores where
you shop. But the fact remains that the dollar has been debased. That's why
they call it debasement. The base is diluted by expanding its volume which
reduces the value of the unit used for reference relative to the volume of
available units.
There are, of course, plenty of economic theories out there that are wholly
designed to distract your attention away from this plain and obvious
debasement and to tell you why it doesn't matter, and how the presently slow
price inflation is proof that it doesn't matter if they debase your money and
your life's savings. Some will tell you that the apparent fungibility
of credit and cash means they are the same thing. And some will even try to
tell you that the base unit reference point derives its value from the volume
of credit rather than its own volume, and that the base volume is
essentially meaningless. But I think that if you are keeping your wealth in
the form of money, sheep being periodically sheared is an image worth keeping
in mind.
The Pure Concept of Wealth
Another concept of concern today is that of 'wealth'. As FOA emphasized in
the sidebar, the fundamental property of wealth is that of
"possession." It is by this property that wealth is identified, and
thereby it becomes 'wealth'. "In the world of wealth, worth is enhanced
because the supply is lessened by this 'possession attribute'. And possession
is how most people in antiquity understood wealth."
Have you ever noticed how the super-rich seem to stay super-rich no matter
how much money they spend? Not only that, but they seem to get wealthier the more
they spend! They buy amazing super-homes, expensive antique furniture to fill
the homes, and priceless artwork to hang on every inch of their fancy walls,
yet somehow they retain their wealth.
That's not to say that they don't also participate in the Western tradition
of "the something for nothing game" we call the paper markets. They
do, but that participation does not constitute their 'wealth'. Yet we, the
commoners, are told constantly, by state-approved financial advisors, to put
our entire nest egg at risk in this "something for nothing game."
We can't afford that nice furniture and art that the super-wealthy buy, so we
buy low-priced crap from China that is worth half what we paid for it the
minute we walk out of the store. What is going on? Is it possible to imagine
a new monetary system that would put common people on equal footing with the
super-rich when it comes to possessing our wealth?
FOA (05/06/01;
20:30:52MT - usagold.com msg#69)
A Tree in the Making
In this world we all need much; blessings from above,,,,, family,,,, home,,,
friends and good health. But after all that, one must have currency and
an enduring, tradable wealth asset that places our footing in life on equal
ground with the giants around us,,,,,, gold! Understanding the events that
got us here and how they will unfold before us is what this GoldTrail is all about.
I know I keep repeating myself, but this post is specifically designed to
encourage independent thought; to let your mind wander about, freed from the
confines of modern dogma. If you were able to wrap your mind around the pure concept of money,
you may be starting to sense the danger, at least conceptually, in holding
your lifetime's-worth of accumulated wealth as money. Because when they
double the base, they are diluting all of “our” money by half,
even if “our money” outnumbers the base by 10:1 (bank credit),
100:1 (all credit), 1,000:1 (credit derivatives) or whatever. It is credit's
reference point they are abusing to ease their own discomfort, and our money
they are debasing. And the more money you are holding when they do this, the
greater your share of the loss.
To contrast these two important concepts, money and wealth, notice that,
conceptually, money is not the item that is referenced,
and the item (e.g., a dollar bill) is not money in and of itself. It only
obtains moneyness by the fact that it is referenced
in valuing other items. True wealth, on the other hand, is, in fact, the item
itself. A wealth item is wealth, in and of itself, by the mere fact
that it is possessed.
The easy money camp always wants the savers to store their wealth in money,
so they can loot those savings by debasing the referenced unit which eases
their discomfort. Meanwhile the hard money camp always wants the debtors'
deficit spending to be denominated in real wealth. The problems with this
approach are myriad.
So here’s an interesting question: What do you call a monetary system
where physical gold wealth (not credits denominated in ounces issued by a
commercial bank, but the actual physical stuff) sits on Line 1 of the Eurosystem’s monetary assets? There’s no
silver there on line 2, no copper, no oil, no GLD or PHYS, no mining shares,
no antique furniture or Renoirs, just 400-ounce bars of physical gold bullion
and a few minted gold coins. Official purchases and sales of gold (changes in
the volume) are publicly reported every week, and its value is updated every
quarter.
What do you call that system? And what do you call the gold in that system?
How would you describe gold's moneyness in such a
system? And why hasn’t Greece sold its gold yet to end the discomfort?
Why do we mainly hear politicians proclaiming "the euro will survive." Why do we rarely if ever see the central
bankers sweating "the survival of the euro"? Aren’t they
worried about the survival of their reference unit? Or do they simply
understand moneyness better than the rest of us?
MMT
If you read my whole sidebar like I hope you did, you saw where FOA described
in the broadest terms how we arrived at our latest iteration of easy money.
Here it is again:
Gold coins, then bank storage, then gold lending,
then gold certificate use, then lending of certificates, then certificates
are declared paper money, then overprinted, then gold backing removed…
How's that for covering a lot of years in one sentence?
Depending on which camp you're in, as long as you haven't grasped the pure
concepts of 'money' and 'wealth', there's a whole spectrum of descriptions of
how "modern money" works with varying degrees of uselessness in
practical applicability, both macro and micro. On the hard money side, you'll
find lots of criticism of "fractional reserve banking," "thin
air money," "borrowed into existence," "credit money is a
pyramid scheme" (it's not, the concept of money has always been a credit
reference to a base unit), etc., etc… Hard money descriptions of modern
money are overwhelmingly critical because, of course, the easy money camp has
been in charge for a long time now.
Obviously I think the hard money camp misses the mark in its policy
prescriptions, but you've got to understand that they can only address
today's issues in the counterfactual subjunctive. In other words, "if A
had been true, then B wouldn't have happened or the outcome would have been
better." But A isn't true. A being "if only we had hard money
today."
But it's over there in the far corners of the easy money camp where you'll
find some truly repulsive arrogance by those who unfortunately have the
luxury of using true antecedents in their modal logic. Like this:
"If it is true today that USG deficit spending is not technically
constrained by taxes and borrowing because it issues its own currency, then
structural trade deficits are not only sustainable, good and loved by our
trading partners, but necessary. 'Austerity', or producing more than we
consume at times like these, on the other hand, is a total disaster."
That's the logic. Here's the arrogance:
"As a current account deficit nation, the US
government can appropriately be thought of as a net currency exporter. This
means that we send pieces of paper over to the foreign nations in exchange
for goods and services." (Cullen Roche)
"We don’t need China to buy our bonds in order to spend. China
gets pieces of paper with old dead white men on them in exchange for real
goods and services." (Cullen Roche)
And why doesn’t China just buy other American stuff?
"They have attempted to use their dollars to
purchase other USD denominated assets, but the US government has squashed
those efforts. So, instead of leaving these pieces of paper to collect dust
in vaults, they open what is the equivalent of a savings account with the US
government." (Cullen Roche)
"Anyone who uses the term [monetization] in the context of the
Fed’s contribution of government spending does not understand how the
modern monetary system works." (Cullen Roche)
"This is basic macroeconomics and the debt-deficit-hyperinflation hyperventilating
neo-liberal terrorists seem unable to grasp it." (Bill Mitchell)
"The Fed is not printing money. They are merely swapping treasuries
for deposits." (Cullen Roche)
Someone should explain to these guys the meaning of the phrase, "never look a gift horse in the mouth." It means that when
someone gives you a free horse, you shouldn't inspect it too closely in front
of the giver.
Of course this is MMT, or Modern Monetary Theory I'm talking about. Even Paul
Krugman noted the arrogance of these theorists in
his latest blog post about MMT (my emphasis):
"First of all, yes, I have read various MMT
manifestos — this one is fairly clear as they go. I do dislike the style — the claims
that fundamental principles of logic lead to a worldview that only fools
would fail to understand…"
I bring up MMT not because it is entertaining to make fun of their misguided
(and often repulsive) arrogance, but because of the inauspicious rise of
their extreme easy money theories right at the tail end of history's grandest
easy money experiment. I find it to be a handy platform from which to explain
how the ancient concepts of money and wealth are still more relevant to the
near-term outcome than a few accounting identities that thrive solely in the
monetary plane, and do so with reckless disregard for the real power of the
physical plane.
One of the main tenets of MMT is the accounting identity that roughly states
the amount the USG deficit spends (government spending in excess of the taxes
it takes in) is always equal to private sector net savings plus the trade
deficit (exports minus imports, or stated another way, our trading partners'
net dollar savings).
This is generally explained with the analogy that the USG spends money into
existence and taxes money out of existence. So if the USG (God forbid)
taxed as much as it spent (or spent as little as it taxed), there wouldn't be
any extra USG money for us mere mortals to save. So by spending more than it
takes in, the USG is graciously giving us money for savings. And then, the
USG issues Treasuries in an amount equal to that deficit spending (extra
money for us to save Woo hoo!) to give us an
interest-bearing exchange for our net-production.
To be fair, MMT consistently reminds us it is only describing
and not prescribing a monetary system. Fair enough. But the presence of
the trade deficit and our trading partners' presumed need for dollar savings
should probably set off your alarm bells. If so, MMT wants to calm your worry
with these soothing words:
"In a world with global trade we are certain to
have trade deficit and trade surplus nations." (Cullen Roche)
In other words, we are simply a trade deficit nation. That's just who we are.
Get used to it, and then embrace it! After all, it's pretty cool to get free
stuff:
"…the US government can appropriately be
thought of as a net currency exporter. This means that we send pieces of
paper over to the foreign nations in exchange for goods and services." (Cullen Roche)
It's pretty neat the way accounting identities work. They are always true
because, by definition, they must be true. They are like saying, "the
amount of widgets sold equals the amount of widgets bought." You can't
really dispute them as they are framed. But it is in the static assumptions that
go into the careful monetary plane framing that flaws
can be found. The physical plane can be much more dynamic than they assume.
For example, what if all the private sector net-producers decided to save in
gold instead of USG debt? Since the accounting identity we're talking about
includes our foreign trading partners like China, I'm essentially asking what
happens if they (and we) stop buying Treasuries. Remember that Cullen says it
doesn't matter:
"We don’t need China to buy our bonds in
order to spend. China gets pieces of paper with old dead white men on them in
exchange for real goods and services."
(Cullen Roche)
In other words, if they don't buy our Treasuries (run a capital account
deficit), then they'll just stack the Benjamins. In
other words, that's just the way it is. See? It's an accounting identity.
But then a reasonable person might point out that the USG still issues
Treasuries equal in amount to all its deficit spending. And if we and the
Chinese aren't buying them, then the Fed has to, so it makes up a cool name
like QE2 to disguise the real purpose of the purchases. Not so fast, MMT
says. The Treasury does not need to issue debt in order fund its spending.
When it spends, it simply credits private sector accounts with new credit money
and the banks with new base money. There is no direct connection between
sales of Treasuries and money spent other than a myth in our confused minds.
In fact, during the debt ceiling debate in late 2009, MMT actually advised
them to stop issuing Treasuries and just keep spending:
"The anti-deficit mania in Washington is
getting crazier by the day. So here is what I propose: let’s support
Senator Bayh’s proposal to 'just say no' to raising the debt ceiling.
Once the federal debt reaches $12.1 trillion, the Treasury would be
prohibited from selling any more bonds. Treasury would continue to spend by
crediting bank accounts of recipients, and reserve accounts of their banks.
Banks would offer excess reserves in overnight markets, but would find no takers—hence
would have to be content holding reserves and earning whatever rate the Fed
wants to pay. But as Chairman Bernanke told Congress, this is no problem
because the Fed spends simply by crediting bank accounts.
This would allow Senator Bayh and other deficit warriors to stop worrying
about Treasury debt and move on to something important like the loss of
millions of jobs." (L. Randall Wray)
I want you to notice a small detail in the above quote that probably slips by
most people. Wray writes (my emphasis): "Treasury would continue to
spend by crediting bank accounts of recipients, and reserve
accounts of their banks."
Out here in the real world of the productive economy, when we spend, only the
account of the recipient gets credited. Not the reserve account of their
bank. The "reserve account of their bank" is that commercial bank's
account at the Federal Reserve Bank. Remember? You and I can't have accounts
there. Only the banks and the government can. Our spending is netted out in
the system each night and the imbalances between banks are cleared with those
substantially smaller reserve accounts.
I imagine there's a good reason Randall Wray was careful to include this
small technicality in his piece. That's because raw government-created money
through deficit spending is fundamentally different than "our
money." Government spending adds one unit of credit money (our money) to
the system as well as one unit of base money (their money). The bank
receiving the deposit gets a reference point unit asset to match the
liability it takes on.
So the volume of the base is expanded when the government spends, and it is
likewise contracted when the government taxes and/or sells Treasuries to the
private sector (including our trade partners like China). But when the
government spends in excess of those two operations (taxing and debt
selling), the base volume is simply expanded. And MMT apparently sees no difference
between the true concept of money (all that 100s of trillions of credit
denominated in a single reference point unit) and the base which it
references. Take QE2 for example.
Super easy money camper and activist Ellen Brown writes in IS QE2 THE ROAD TO ZIMBABWE-STYLE
HYPERINFLATION? NOT LIKELY:
"Unlike Zimbabwe, which had to have U.S.
dollars to pay its debt to the IMF, the U.S. can easily get the currency it
needs without being beholden to anyone. It can print the dollars, or borrow
from the Fed which prints them.
But wouldn’t that dilute the value of the currency?
No, says Cullen Roche, because swapping dollars for bonds does not change the size of the
money supply. A dollar bill and a dollar bond are essentially the same
thing."
This is part of the flaw in MMT’s view. Bonds are credit (the
economy’s money) denominated in (referencing) the base unit (the
dollar). Swapping credit for base units dilutes and debases every single
credit dollar in the world, all quadrillion of them if you included
derivatives.
When the private sector (plus our foreign free stuff
suppliers) buy bonds, the USG is essentially spending credit money
rather than expanding the base because "the credit to the reserve
account of their banks" that Randall Wray mentioned above is deleted
when the private/foreign sector buys a Treasury bond. Spending credit money
does not dilute the base and debase the reference unit. But when the people
(or banks) that bought those bonds swap them with the Fed for cash, the base
is diluted and the reference unit is debased. So Cullen is wrong. A dollar
bill and a dollar bond are not essentially the same thing.
Back in June, talking about QE2, I wrote something very similar to what
Cullen says. See if you can spot the subtle difference.
Cullen:
"There is not 'more firepower' in the market following QE. All that
the Fed altered was the duration of the U.S. government’s liabilities.
The Fed took on an asset (treasurys) and also
accounted for a new liability (the reserves). But this transaction did not
change the net financial assets in the system. The point here is that from an
operational perspective the Fed is not really altering the money
supply."
Me: "The Fed has not created more money,
it has simply changed the nature of existing money. Remember, FOA said
that '...hyperinflation is the process of saving debt at all costs, even
buying it outright for cash.'"
So, just to recap, MMT says that neither selling debt to the Chinese nor QE
(selling it to the Fed) is actually necessary to fund government deficit
spending. The government spending actually happens first,
therefore it is independent of, and not reliant on, either of those financial
operations. And to this point, I think we can all agree with MMT's
description of the process as it exists in the monetary plane, although it is
clearly not the only correct description, and certainly not the whole
story.
Here's the thing, the act of government deficit spending without
either counterbalancing taxes or Treasury sales to the private/foreign
sector, and the act of Fed quantitative easing, both change the nature of the
money supply in a way that all other "normal" activities do not.
They debase "our money" by expanding "their money" in
volume to ease their discomfort. And this kinda
gets us to the driving thrust of MMT; that MMT sees little to no danger of
this monetary plane debasement spilling out into the physical plane with
deadly consequences for the dollar.
There is, however, one area in which the danger is at its all-time peak
today. And that is the US trade deficit as viewed from the physical plane.
But before we get into that, let's take a look at a couple neat charts that
Cullen Roche uses to visualize the monetary plane accounting identity that
underlies his theory. Cullen calls them "sectoral
balances," meaning the monetary plane balance sheet of three different
sectors: the government sector (USG), the domestic private sector, and the
foreign sector.
What I'm going to try to do is to help you see the physical plane reality of
these charts. They are so neat and balanced in the monetary plane, yet they
represent an immense imbalance in the physical plane that,
because of the credibility inflation of the last 40 years, leaves the dollar vulnerable to spontaneous
hyperinflation. More on that in a moment.
In this first chart, I want you to pay special attention to the dashed blue
line. In the monetary plane, that line represents the amount of US paper our
foreign trading partners are taking in each year. When they take in dollars,
those show up as a current account surplus on their sheet and a current
account deficit on ours. Then when they trade them in for Treasuries they
show up as a capital account deficit on their sheet and a capital account
surplus on ours. But the easiest way to understand this blue line is in the
physical plane. It represents the trade deficit; the amount of free stuff we
got each year in exchange for nothing but paper. As Cullen says, "the US
government can appropriately be thought of as a net currency exporter." So the blue line is our "currency
exports."
Here's a link to our Balance of Payments (BOP) from 1960 through 2010:
www.census.gov/foreign-trade/statistics/historical/gands.txt
The first column is our trade balance. A negative number means a trade
deficit. I'm sure the MMT folks reading this are getting tired of me calling
it "free stuff," but that's what it is, which I'll explain in more
detail later. Foreign central banks were literally supporting our trade
deficit for their own reasons for the last 30 years. You'll notice we went
into deficit in 1971, with the only blips up into surplus since then
occurring in '73 and '75.
You've probably heard it said that the US has become a "service
economy" as opposed to producing all the real stuff we used to produce.
Well, if you look at the second and third columns, the goods column and the
services column, you'll see the inflection point of that transition was also
in 1971. So all those negative numbers in the first column really do
represent real goods, the kind of stuff that gets packed into containers and
physically shipped to the US.
In 2010 you'll see that our trade deficit was $500 billion. That number comes
from a $645B deficit in goods, and a $145B surplus in services. In 2011 we
are on track for a trade deficit of about $565B (monthly data). For the last decade, our trade deficit range has been $400B - $750B
per year. The average for the decade is $581B per year, or $48.5B per month.
Now this second chart really shows the monetary plane symmetry that MMT
loves. The whole point of the accounting identity is that the balances of the
three sectors (government sector, domestic private sector and foreign sector)
must net out to zero. One person's savings is another person's debt, or so
the story goes. Remember what I said about widgets? "The amount of
widgets sold equals the amount of widgets bought." Well the accounting
identity behind this chart is essentially just as simple: "the amount of
debt sold equals the amount of debt bought." If you're going to save,
then I have to deficit spend (create debt notes) for you to hold as your
savings. Neat, huh?
On this chart, the bottom is the amount of debt sold and the top is the
amount of debt bought. All that red on the bottom is the government sector
selling debt. The green on the top is the foreign sector buying that debt.
The blue, which seems to jump around, is the domestic US private sector
either buying (top) or selling (bottom) debt (think: MBS). What I want to
draw your attention to is this last bit of blue at the end:
What this section, roughly encompassing the last three years, apparently
shows is that 1. The debt sold by the USG jumped dramatically, 2. The debt
purchased by the foreign sector decreased, and 3. The domestic US private
sector apparently picked up the slack dropped by the foreign sector. I
propose to you that "the domestic US private sector" in this case
was mostly Ben Bernanke and the Federal Reserve. I do understand that MMT
interprets QE as something other than money printing, but I would like you to
read this paragraph from Wikipedia on the specific amounts of quantitative easing:
"The US Federal Reserve held between $700 billion
and $800 billion of Treasury notes on its balance sheet before the recession.
In late November 2008, the Fed started buying $600 billion in Mortgage-backed
securities (MBS). By March 2009, it held $1.75 trillion of bank debt, MBS,
and Treasury notes, and reached a peak of $2.1 trillion in June 2010. Further
purchases were halted as the economy had started to improve, but resumed in
August 2010 when the Fed decided the economy wasn't growing robustly. After
the halt in June holdings started falling naturally as debt matured and were
projected to fall to $1.7 trillion by 2012. The Fed's revised goal became to
keep holdings at the $2.054 trillion level. To maintain that level, the Fed
bought $30 billion in 2–10 year Treasury notes a month. In November 2010,
the Fed announced a second round of quantitative easing, or "QE2",
buying $600 billion of Treasury securities by the end of the second quarter
of 2011." (Wikipedia)
Now, before we move on, I want to draw your attention to three curiosities to
which I will be referring:
1. Using the latest data for the last three years, the dollar monetary base expanded by $1.7T and the US trade deficit (free stuff inflow) was $1.5T over the same time period.
2. For fiscal year 2011, the trade deficit was $540B and
"QE2" was $600B over the same time period.
3. For the last year, Chinese Treasury holdings are perfectly flat (same amount held in Aug. 2011 as in Aug. 2010)
and Hong Kong holdings are down by $26B.
The Debtor and the Junkie
The USG may be a dealer in the monetary plane, but it is most definitely a
sketchy junkie in the physical plane. The USG thinks (and truly believes)
that the key to rejuvenating the US economy is trashing the dollar as a short
cut to increasing exports (reducing the trade deficit). But what it can't see
(nor anyone that focuses solely on the monetary plane for adjustment) is that
the huge trade deficit the USG wants to quit is actually its own heroin fix.
This is a deadly combo for the US dollar.
MMTers don't think very highly of "hyperinflationists". They call us "hyperventilators" and such, although I shouldn't
really bunch myself in with the others. I think my description of
hyperinflation is more in line with reality than others I've read. See here, here, here, here and here. But in this post I hope to show you where the MMTers
go wrong on hyperinflation, and to show why—and how—dollar
hyperinflation is the only possible outcome.
The "debtor" I had in mind for my section title was Weimar Germany
in the early '20s, not the USG today. The USG is the junkie. Weimar Germany
owed war reparations, a debt resulting from WWI that was essentially
denominated in gold. This was a debt in a hard currency (hard as in
difficult, not hard as in solid), unlike the USG who owes its debt to others
in its own currency. MMT got that part right. The USG cannot be forced into
involuntary default on its own currency debt. And because of this property,
USG debt is a monetary plane illusion when viewed from the physical plane. It
is a great store of nominal value, and a terrible store of real value.
Where MMT derails from the description track and goes careening off the prescription
cliff, the message is usually about the admirable goal of full employment.
You know, the Fed's other mandate. Indeed, L. Randall Wray's
book is titled Understanding Modern Money: The
Key to Full Employment and Price Stability.
But the bottom line is MMT's untested theory that the USG could pay
for full employment (hire anyone who wants to work) through raw monetary base
expansion while enjoying the same relatively stable prices of the last 30
years. And their best defense of this shark jump proposition appears to be
debunking the hyperventilators.
In Zimbabwe! Weimar Republic! How
Modern Money Theory Replies to Hyperinflation Hyperventilators
(Part 1) Randall Wray writes:
"MMTers are commonly
accused of promoting policy that would recreate the experiences of Zimbabwe
or Weimar Republic hyperinflations. These were supposedly caused by
governments that resorted to “money printing”
to finance burgeoning deficits—increasing the money supply at such a
rapid pace that inflation accelerated to truly monumental rates." (Wray)
He goes on to explain how the hyperventilators have
it all wrong. He shows how hyperinflation is more about an increase in money velocity
than volume; that hyperinflation begins with a loss of confidence, not too
much money. Any of this sound familiar? Then he beats a gold bug straw man or two before explaining to us
how modern money really works. Here's the most important part to
understand:
"You cannot print up Dollars in your basement.
Government has to keystroke them into existence before you can pay your taxes
or buy Treasuries." (Wray)
Notice he mentions taxes and Treasuries. This is important to understand.
Government money, which is the monetary base the economy uses as its
reference unit, is expanded when the USG spends, and only contracts when you
either 1. pay taxes, or 2. buy
Treasuries. He wasn't just throwing those out as two examples of how you
might spend your money. Those are the only two checks on base money
expansion. But the sneaky thing that MMT does is to marginalize the
importance of those two methods of contracting the base. Like this, as if
it's no big deal, a mere afterthought:
"Usually the treasury then sells bonds to let
banks earn higher interest than they receive on reserves." (Wray)
The basis of MMT is that government spending (base money expansion) is not
conditional on 1. taxing or 2. borrowing
that money (base money contraction). Expansion is not conditional on
contraction. This is obviously true because the base has been expanding. But
armed with this epiphany, along with the "obvious fact" that the hyperinflationists don't understand how modern money works, they jump to the conclusion that contracting the
monetary base after the government has expanded it is a fool's errand. And so
they go to great lengths to marginalize the need for contraction, especially
when unemployment is rising and the economy is in recession.
As it stands, our government still operates on the "antiquated"
condition that taxes plus borrowing must equal spending. So we periodically
raise the debt ceiling and we keep issuing Treasuries to match the entire
budget deficit. But QE is the new way to reverse the base money contraction
that happens when these Treasuries are sold. The Fed simply buys them from
the banks and credits the banks with the base money that was deleted when
they were purchased.
From an accounting perspective, this QE operation has the same effect as if
the government had spent more than taxes and borrowing combined, or as if the
government reduced taxes while keeping debt and spending constant. So armed
with this epiphany, MMT is able to marginalize QE as a mere fiscal operation rather than the "helicopter drop" those silly hyperventilators like to talk about. "Fiscal
operation" sounds pretty innocuous, doesn't it? But it's not quite that
tame.
What I'm going to show you is that there's something quite dangerous to the
dollar that is already well underway. From an accounting perspective, there's
not much difference between QE and the easy money prescriptions coming from
some of the MMTers. And these seemingly innocuous
"fiscal operations" are actually born of necessity arising, not in
the monetary plane, but from the physical trade deficit.
Unfortunately, the USG/Fed believes that trashing the dollar will help the
domestic US economy as a kind of short cut to growing exports and thereby
increasing wages and consumption demand. In other words, if we could just
make our products cheaper overseas through monetary plane operations, we
could sell more real stuff and thereby we'll have more money and all will be
peaches and cream.
But the problem is that, net-net, the US consumes
everything it produces and then some. This intractable problem cannot be
solved in the monetary plane, except through dollar hyperinflation! Here's
some more FOA:
"I point out that many, many other countries
also have the same "enormous resources; physical, financial, and
spiritual" that we have. But the degrading of our economic trading unit,
the dollar, places the good use of these attributes in peril. Besides, the
issue beyond these items is our current lifestyle. We buy far more than we
sell, a trade deficit. Collectively, net / net,
using our own attributes and requiring the use of other nation's as well.
Not unlike Black Blade's Kalifornians sucking up
their neighbors energy supplies (smile). We cannot place [our tremendous resources]
up as example of our worth to other nations unless we crash our lifestyle
to a level that will allow their export! Something our currency management
policy will confront with dollar printing to avert. Also:
NO, "this country will not turn over and simply give in" as you
state. But, we will give up on our currency! Come now, let's take reason in
grasp. Our American society's worth is not its currency system. Around the
world and over decades other fine people states have adopted dollars as their
second money, only to see their society and economy improve. Even though we
see only their failing first tier money. What changes is the recognition of
what we do produce for ourselves and what we require from others to maintain
our current standard of living. In the US this function will be a reverse
example from these others. We will come to know just how "above"
our capabilities we have been living. Receiving free support by way of an
over-valued dollar that we spent without the pain of work." (FOA)
That was written a decade ago. In the month that was written, the US as a
whole (Government sector plus domestic private sector) was living above its
means to the tune of $31.3B. That year we were living above our means by
$361B. In the decade since that was written, we have maintained an average
"excess consumption" of $48.5B per month and $581B per year. But
here's the thing—in the most recent third of that decade (2008-2011),
the domestic US private sector actually has crashed its lifestyle more
or less. The economy is in recession and unemployment is up over 9%. Yet the
government sector expanded its "lifestyle" to take up the
slack!
Remember these from my 2009 post No Free Lunch?
And for something a little more recent, here are two headlines I saw on
Drudge just last month:
DC area tops US income list;
average fed employee makes $126,000 a year...
Reid says government jobs must
take priority over private-sector jobs...
No wonder we're maintaining that trade deficit!
So I thought I'd come up with my own "physical plane identity" (kinda like an accounting identity in the monetary plane)
for "living above our means." Here's the legend:
USG=US Government sector
USP=US Private sector
BOP=Trade balance for both sectors combined
We know how much the USG is living above its means. That's the budget
deficit. And we also know how much the USG+USP combined are living above their
means. That's the BOP. So the "identity" looks something like this:
USG+USP=BOP
The annual USG budget deficit (how much the USG lives above its means, with
means equaling taxes) is about $1.4T. And the BOP is about $565B. So we get
this:
USG=$1.4T
BOP=$565B
$1.4T+USP=$565B
Or stated another way:
USP=(-$835B)
So the US private sector is actually living below its means by $835B if we
isolate it from the government sector. The government sector, on the other
hand, is living way above its means with 60% domestic support and 40% foreign
support. Stated another way, the US private sector is providing the USG with
$835B in goods and services in excess of taxes, or 60% of USG's "deficit
consumption."
Viewed this way, there's only one way to reduce that trade deficit (inflow of
free stuff): reduce the size of the USG monstrosity. Unfortunately, the USG
is totally incapable of voluntarily shrinking itself, especially because it
issues its own currency! The real problem, the heart of the matter, the
reason why the dollar will and must hyperinflate,
is that the US trade deficit, on the physical plane, is structural to the USG
who issues its own currency. Simple as that.
Here's what we get whenever the USG pretends to crash its own lifestyle:
http://www.youtube.com/watch?v=cWt8hTayupE&am...player_embedded
http://www.youtube.com/watch?feature=playe...p;v=_Rl1xgT3REE
I can almost hear the MMTers
screaming at their computer screens, "he doesn't understand how modern
money works!" ;)
Of course, MMTers don't think the USG should crash
its "lifestyle" at all. They think the USG needs more deficit
spending right now. Because deficit spending is not constrained by taxes
and/or borrowing and the hyperventilators don't
understand how modern money works so currency collapse can be essentially
ignored. Are you starting to catch on yet?
MMT is all about how it works from a monetary plane accounting
perspective with reckless disregard for why it works and why
the dollar monetary plane has stayed connected to the physical plane (no
hyperinflation) as long as it has. That last part, of course, is what this
blog is all about. MMTers, like most modern
economists, think the physical plane services the monetary plane, not the
other way around. They think you can fix problems in the real world by simply
controlling the monetary world. Why? Because everyone wants money, of course!
But herein lies the problem of what money actually is
to the real economy. Money is our shared use of some thing as a reference point for expressing the
relative value of all other things. And by expanding the base you don't simply
create money, you destroy the moneyness of it. As
MMT explains, the base is expanded when the government deficit spends, and it
is likewise contracted when the Treasury sells debt to anyone other than the
Fed. Those of you who read FOFOA regularly know the story of why
the dollar has not yet collapsed, but here's a very brief version for the
rest of you.
The US has enjoyed a non-stop inflow of free stuff including oil (a trade
deficit) ever since 1975, the last year we ran a trade surplus. In the 1970s,
following the Nixon Shock and the OPEC Oil Crisis, the US dollar went into a
tailspin. Because the US dollar was the global reserve currency, this was bad
news for the global economy. If the dollar had failed then, without a viable
replacement currency representing an economy at least as large as the US,
international trade would have ground to a standstill.
Europe was already on the road to a single currency, but it still needed
time, decades of time. So at the Belgrade IMF meeting in October of 1979, a
group of European central bankers confronted the newly-appointed Paul Volcker
with a "stern recommendation" that something big had to be done
immediately to stop the dollar's fall. Returning to the US on October 6,
Volcker called a secret emergency meeting in which he announced a major
change in Fed monetary policy.
Meanwhile, the European central bankers made the tough decision to support
the US dollar, at significant cost to their own economies, by supporting the
US trade deficit by buying US Treasuries for as long as it took to launch the
euro. As it turns out, it took 20 years. After the launch of the euro, the
Europeans slowly backed off from supporting the dollar. But right about that
same time, China stepped up to the plate and started buying Treasuries like
they were hotcakes. This may have been related to China's admission into the
WTO in 2001.
Then, sometime around 2007 or 2008, the dollar's Credibility Inflation peaked. The growth of the "economy's money" (credit
denominated in dollars) hit some kind of a mathematical limit (expanding to
the limit was wholly due to FOFOA's dilemma) and began to contract. Since then, China has slowly backed off from
supporting the dollar. We now know that China is more interested in using its
reserves to purchase technology and resource assets wherever they are for
sale than bonds from the US Treasury. China is also expanding the economic
zone that uses its monetary base as a reference point in trade
settlement to the ASEAN countries.
Meanwhile, the junkie USG has kept the free stuff flowing in by expanding the
monetary base. Sure, China still wants to sell her goods to the US, but she's
no longer supporting the price stability of the last 30 years by recycling
the dollar base expansion back into USG debt. Cullen says:
"We don’t need China to buy our bonds in
order to spend. China gets pieces of paper with old dead white men on them in
exchange for real goods and services."
(Cullen Roche)
While technically true, one has to wonder at the consequences of them not
buying our bonds, no?
"They have attempted to use their dollars to
purchase other USD denominated assets, but the US government has squashed
those efforts. So, instead of leaving these pieces of paper to collect dust
in vaults, they open what is the equivalent of a savings account with the US
government." (Cullen Roche)
So does that mean they're just stackin' 'em up now to collect dust rather than going after real
resources wherever they are for sale in the world?
Okay. So the USG doesn't owe a hard debt like Weimar Germany did in the early
'20s. But perhaps she has developed a structural addiction; a need for
something that's just as hard as foreign currency—real stuff from the
physical plane. Here is L. Randall Wray describing Weimar:
"The typical story about Weimar Germany is that
the government began to freely print a fiat money with no gold standing
behind it, with no regard for the hyperinflationary consequences. The reality
is more complex. First, we must understand that even in the early 20th
century, most governments spent by issuing IOUs—albeit many were
convertible on demand to sterling or gold. Germany had lost WWI and suffered
under the burden of impossibly large reparations payments—that had to
be made in gold. To make matters worse, much of its productive capacity had
been destroyed or captured, and it had little gold reserves. It was supposed
to export to earn the gold needed to make the payments demanded by the
victors. (Keynes wrote his first globally famous book arguing that Germany
could not possibly pay the debts—note these were external debts
denominated essentially in gold.)
The nation’s productive capacity was not even sufficient to satisfy
domestic demand, much less to export to pay reparations. Government knew that
it was not only economically impossible but also politically impossible to
impose taxes at a sufficient level to move resources to the public sector for
exports to make the reparations payments. So instead it relied on spending.
This meant government competed with domestic demand for a limited supply of
output—driving prices up. At the same time, Germany’s domestic
producers had to borrow abroad (in foreign currency) to buy needed imports.
Rising prices plus foreign borrowing caused depreciation of the domestic
currency, which increased necessitous borrowing (since foreign imports cost
more in terms of domestic currency) and at the same time increased the cost
of the reparations in terms of domestic currency.
While it is often claimed that the central bank contributed to the inflation
by purchasing debt from the treasury, actually it operated much like the Fed:
it bought government debt from banks—offering them a higher earning
asset in exchange for reserves. For the reasons discussed above, budget
deficits resulted from the high and then hyper- inflation as tax revenue
could not keep pace with rising prices. Finally in 1924 Germany adopted a new
currency, and while it was not legal tender, it was designated acceptable for
tax payment. The hyperinflation ended."
(Wray)
Let's happily skip over the fact that Wray compares the German central bank
during the Weimar hyperinflation to the Fed today when he writes:
"actually it [the Reichsbank] operated much
like the Fed: it bought government debt from banks." I have a better
comparison I want to try. I want to try a little word replacement game with
Wray's Weimar description. Let's replace Germany with the USG and the war
reparations debt with a trade deficit addiction and see how it looks. Other
than these few substitutions, I'll leave Wray's descriptive words alone:
"The USG had endured 30 years of
foreign-supported trade deficit and developed an addiction to free stuff. To
make matters worse, much of its productive capacity had been shipped overseas
during this time period. The US private sector could not possibly support the
USG’s addiction to real goods.
The nation’s productive capacity was not even sufficient to satisfy
domestic demand, much less to support USG demand. Government knew that it was
not only economically impossible but also politically impossible to impose
taxes at a sufficient level to move resources to the public sector to satisfy
the USG’s insatiable addiction. So instead, it relied on deficit
spending through raw base money creation. This meant government competed with
global demand for a limited supply of importable goods—driving prices
up. At the same time, the US private sector had to pay the same higher prices
without the benefit of issuing its own currency to buy needed imports. Rising
import prices forced the US economy to consume more of its own domestic
goods, which increased USG’s reliance on imports, and since foreign
imports cost more in terms of the domestic currency, this increased the cost
of the USG’s addiction in terms of domestic currency." (Me)
Now I want you to think especially hard about that last line,
"…this increased the cost of the USG’s addiction in terms of
domestic currency." This is the key to understanding why
we are headed toward all-out, balls-to-the-wall, in-your-face wheelbarrow
hyperinflation. This is it, the point I'm trying to get across to you.
That inflow of free goods that is structural to the status quo operation of
the US government is more dangerous to a monopoly currency issuer than the
war reparations debt in Weimar Germany. The USG is incapable of reducing that
inflow of real goods voluntarily and so the non-hyperinflation of the dollar
requires it to flow in for free. And it has been, up until recently.
Today we are debasing our monetary reference point in defense of that inflow
of goods from abroad. And, at this point, it is entirely attributable to the
USG alone, and not to the US economy at large which has contracted, unlike
the government. MMT says that Bernanke's QE is a simple like-kind swap of
paper for paper, or money for money. Cullen: "What they’ve
essentially done via QE2 is swap 0.25% paper for 2% paper and call it a day." In a sense, it is. But it is removing
newly created credit money (debt created by the USG) from the system and
replacing it with newly created base money. By increasing the volume of the
base which credit references for value, simultaneous with a constant inflow
of necessary goods, we are in essence devaluing—or more precisely
debasing—the credit money flow that flows in the opposite direction of
the goods flow. The fact that this doesn't show up immediately in
consumer prices is perfectly normal.
Henry Hazlitt: "What we
commonly find, in going through the histories of substantial or prolonged
inflations in various countries, is that, in the early stages, prices rise by
less than the increase in the quantity of money; that in the middle stages
they may rise in rough proportion to the increase in the quantity of money
(after making due allowance for changes that may also occur in the supply of
goods); but that, when an inflation has been prolonged beyond a certain
point, or has shown signs of acceleration, prices rise by more than the
increase in the quantity of money. Putting the matter another way, the value
of the monetary unit, at the beginning of an inflation, commonly does not
fall by as much as the increase in the quantity of money, whereas, in the
late stage of inflation, the value of the monetary unit falls much faster
than the increase in the quantity of money. As a result, the larger supply of
money actually has a smaller total purchasing power than the previous lower
supply of money. There are, therefore, paradoxically, complaints of a
'shortage of money.'"
Again, I want you to think about that last line or two, "As a result,
the larger supply of money actually has a smaller total purchasing
power than the previous lower supply of money. There are, therefore,
paradoxically, complaints of a "shortage of money."
So what does the supply of money have to do with the catastrophic loss of
confidence that is hyperinflation? Yes, the catastrophic loss
of confidence drives prices higher. This makes the present supply of
money insufficient to purchase a steady amount of goods (USG junkie
fix). True balls-to-the-wall hyperinflation requires a feedback loop of both value
and volume. Value drops, so volume expands, so value drops more….
Without the feedback loop, you simply get the Icelandic Krona or the Thai
Baht. With the USG in the loop, you get Weimar!
Think about a debtor who owes a hard debt to a loan shark versus a junkie who
owes a regular, ongoing, hard fix to himself. Which one is worse off? Which
more desperate? As I wrote above, this intractable problem cannot be solved
in the monetary plane, except through dollar hyperinflation!
Big Danger in "A Little Inflation"
I just received an advance copy of Jim Rickards'
new book, Currency Wars (thank you Steve and Jim). And while I haven't had a chance to read
it yet (because I've been working on this post), I have it on good authority
that Jim thinks the Fed is actually targeting 5% annual inflation right now
while saying 2% or a little more. This sounds credible to me.
So what's the danger in a little inflation?
If the dollar sinks, like they (the USG/Fed) want, sure, our exportable goods
will become relatively cheaper abroad (even though their price here won't
drop) and their (our trading partners’) exportable goods will become
more expensive here. This will appear as good old-fashioned price inflation,
since we’ll now have to outbid our own trading partners just
to keep our own production, and pay more for theirs. And while the
domestic private sector has already crashed its lifestyle somewhat, the
currency issuer has increased its "lifestyle" to
compensate.
The bottom line is that the USG cannot crash its own lifestyle.
And when the dollar starts to "sink", that pile of pennies in the
video above will be insufficient (not enough money). Luckily, that pile of
pennies represents the budget of the currency issuer himself. So he’ll
just increase it, to defend his lifestyle, while scratching his head at why
the trade deficit has nominally widened rather than narrowing as he thought
it would when he trashed the dollar.
One of the strongest arguments that the USD will not
hyperinflate like Weimar or Zimbabwe is that the
USG's debt is not denominated in a foreign currency. If it were, this would
be a different kind of hyperinflationary feedback loop we were facing. If all
the USG debt was in a foreign currency and the dollar started falling on the
foreign exchange market, that debt service would lead to hyperinflation. But
that is not the case. So it’s not the FX market (monetary plane) that
is the big danger to the dollar.
The dollar is the global reserve currency, so it is the physical plane
that is the biggest threat to the dollar in the same way the FX
market was a threat to the Weimar Mark. And it is not the nominal debt
service that is the threat like it was in the Weimar Republic, but it is the
structural (physical plane) trade deficit. To the USG, that is the same
threat as nominal debt service denominated in a foreign (hard) currency was
to Weimar Germany.
As the German Mark fell, there was "not enough money" to pay the
debt. And with a little inflation, there is "not enough money" to
buy our necessities from abroad.
Not Enough Money
On October 6, the Bank of England released this publication announcing a £75 billion increase in QE. In the press release,
they mentioned inflation:
"CPI inflation rose to 4.5% in August. The
present elevated rate of inflation primarily reflects the increase in the
standard rate of VAT in January and the impact of higher energy and import
prices. Inflation is likely to rise to above 5% in the next month or so,
boosted by already announced increases in utility prices. But measures of
domestically generated inflation remain contained and inflation is likely to
fall back sharply next year as the influence of the factors temporarily
raising inflation diminishes and downward pressure from unemployment and
spare capacity persists." (BOE)
That same day, Mervyn King made headlines saying "the UK was suffering from a 1930s-style shortage
of money."
"There is not enough money. That may seem unfamiliar to
people." he told Sky News. "But that's because this is the most
serious financial crisis at least since the 1930s, if not ever."
http://www.youtube.com/watch?v=JcqiebMpRDU&feature=player_embedded
It should be obvious from this video that Mervyn
King, at least, does not get that expanding the base which debases the
economy's money is not the best response to "not enough money." You
don't have enough money, so you make what you've got worth less? Perhaps he
meant the monetary base is too small for the credit clearing system. He did,
after all, reference the 1930s rather than the '20s. But, sadly, that's not
the case because he clearly said "we are injecting 75 billion
(with emphasis reminiscent of Dr. Evil) pounds directly into the British economy." But in King's
defense, he's doing no different than the Fed or the Reichsbank:
"While it is often claimed that the [Weimar]
central bank contributed to the inflation by purchasing debt from the
treasury, actually it operated much like the Fed: it bought government debt
from banks…" (L. Randall Wray)
"In proportion to the need, less money circulates in Germany now than
before the war." (Julius Wolfe, 1922)
"However enormous may be the apparent rise in the circulation in
1922, actually the real figures show a decline." (Karl Eister,
1923)
FOFOA
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