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So many faces in and out of my life
Some will last
Some will just be now and then
Life is a series of hellos and goodbyes
I'm afraid it's time for goodbye again
Say goodbye to Wall Street
Say goodbye, my baby
Say goodbye to Wall Street
Say goodbye, my baby
Equity versus Credit
This is the difference between gold and dollars. One is limited and the other
is unlimited. Gold and equity are limited. Dollars and credit are unlimited.
The two cannot be mixed without a negative outcome for society.
Imagine two neighbors. Both are unemployed, yet neither are worried about it
at the moment. One neighbor has a stash of gold coins. The other has a FICO
score of 800. One has equity, the other has credit. For the time being they
can each live on what they have. Eventually both will have to get a job, but
hopefully you can see the difference.
Gold Credit?
In my post, The End of a Currency, I wrote about a
perfect gold standard in which there was no monetary inflation and no
monetary interest on loans. Someone asked, "why would anyone make a loan
in this perfect system?" The simple answer is that they would not.
The more complicated answer is that savers would not loan their gold in the
way we think of loans today, with only a piece of paper obliging the borrower
to return the gold plus some interest. And certainly not with a mere piece of
paper requiring the return of only the principle. Even if it would be
worth more when it was returned, the same positive result could be had by
burying one's gold, eliminating risk.
No, the way that gold would "go to work" in this perfect gold
standard is only through equity investment. One man might provide the gold
while another would provide the labor and knowledge and together they would
share in the profit or loss of the joint venture.
(On a side note, all major religions originally promoted only this kind of
economic activity. Loans for a specific nominal return that included interest
were forbidden. Christianity called it usury. Judaism called it neshekh,
meaning "a bite". And Islam called it riba, meaning "excess or
addition".[1][2])
Which Came First,
the Chicken or the Egg?
Which came first? The greed of the banksters to make usurious loans to the
people? Or the demand of the people to borrow frivolous capital for whatever
economic activity they chose without sharing profits?
Adam Smith (1723-1790) taught us that economies emerge as bottom-up
spontaneous self-organized order that naturally arises from social
interactions, not from top-down bureaucratic design. This is also true of
banks.
Banks emerge in economies because man has the innate desire for a
credit-based system in which he can engage his own economic folly at someone
else's risk. Given pure equity, the individual man will not lend, but still
demands to borrow. And as a society, we (rightly or wrongly) end up demanding
that the risk of loss is spread far and wide. We say, "don't mind
borrowing it, but damned if I'm gonna lose it!" (See: FDIC)
And with the recent bailout of the banks, it is repelling to think that we
are responsible. It is true. We are all, as a society, responsible for the
actions taken. It was a foregone conclusion a long time ago. That if losses
ever loomed large enough to bring down the system, society at large would end
up covering the losses. This is the very nature of the system we have built
as a society. A system that sprung up from man's desire to borrow, not from
man's desire to lend or steal. That came later.
I do not make these statements in support of the bankers or the bailouts. I
find them just as revolting as the next guy. But as a pragmatist, I am
looking for a realistic explanation of what is happening.
Inflation
As a credit-based system emerges along side an equity-based monetary system,
all kinds of problems arise for society, not the least of which is inflation.
The interest portion of all loans requires growth in the money supply over
time. And on a large economic scale, this growth can be quite substantial.
As the lenders' credit-paper notes are "seasoned" over time they
begin to circulate as near-money at a discount to the original equity they
represented. And as the "money supply" grows, so does the disparity
of value between credit and equity. At first, governments always keep the two
tied at par through legal tender laws, but this only drives real equity into
hiding and credit must expand even faster to cover the loss of equity from
the monetary system. But sooner or later the credit portion must be devalued
against the equity portion and ultimately, the link between the two is
severed.
Society as a whole decides what society's official money is. And once the
link between credit and equity is stretched to the breaking point, credit
alone is declared to be official money. Thus begins the ultimate unrestrained
inflation.
Political Risk
Money, whatever it is declared to be, is constantly at risk from the body
politic. The infantile will of the collective is the risk faced by all monetary
systems. If gold is a part of that system, then it is the people's gold,
their savings, that is at risk from the collective's grabbing hands. The
collective is most often described as the government, but governments cannot
take bold actions without at least the implicit support of the majority.
In our current crisis, it is the dollar that is at risk. The collective has
given implicit support to unlimited government printing in hopes that it will
slow the fall from the collapse of credit derivatives. We now also have the
central bank of central banks suggesting printing support to guarantee the
sum total of bank credit derivatives numbering five to ten times larger than
the entire value of all equity on the planet earth.
Central Banks Must Agree Global Clearing Supervision, BIS Says
Sept. 14 (Bloomberg) -- Central banks must coordinate global supervision of
derivatives clearinghouses and consider offering them access to emergency
funds to limit systemic risk, according to the Bank for International
Settlements.
It is the political will of the collective, now facing momentous losses, that
is the biggest threat to the dollar. This will is already set in stone. And
we have yet to see the full impact of this will as pension funds fail and
state and local governments face inevitable insolvency.
The dollar's collapse through the loss of its reserve status has already
begun. But it is the political risk, this political will inside the US that
ensures that this collapse will be a hyperinflation the likes of which the
world has never seen. Never before has a global reserve currency imploded.
The stage is now set, the audience seated, the lights dimmed, and a low,
rumbling, tympanic drum roll can be heard rising from under the stage.
Evolution of the
Dollar
Over the past 65 years, the US dollar has been parlayed into a cost advantage
for the United States greater than any other currency scheme throughout all
of history. The reason this advantage has been so great was that the true
inflation cost of the currency was concealed from the pricing markets.
In the fiat-gold systems of the past, steep price inflations always signaled
that the official money was about to be destroyed and redenominated. This
fear carried forward into our present purely symbolic currency system, but we
soon evolved to accept price inflation as the cost of doing business. As long
as it was low enough that we could out-gain it through other investments, the
benefits that our fiat trading economy provided were readily accepted.
Over time we have grown numb to the slow, hidden increases of the inflation
tax. In moderation, this tax would have been somewhat acceptable, in an
immoral sort of way, as society stole the productivity and efficiency gains
(from those that could provide such) to pay for itself. But alas, hidden
theft is just too good of a process for our collectivist political system not
to expand on.
And in the US it is our political system's MO that government does exactly
what the majority demands, and then expands the inflation tax to cover it. It
has been this way since before we were born!
The Catch
But here's the catch. Since 1971 at least, and probably since 1944, the US
dollar has been EXPORTING most of its inflation. And in doing so, it has
built up an enormous inflation tax deficit on all dollar based assets. The
full amount of this deficit is unknown because it has been masked, hidden,
rejigged, absorbed and papered over time and time again. But one thing is for
sure. The full price of this tax is way, way above anything we imagine. Most
of it hidden over many years in the "dollar reserve function".
As a credit-based currency expands, the market acts as the lever that
balances equity values against the expanding currency within its legal tender
zone. But in the case of the dollar, a constant outflow lasting decades has
been absorbed and held in reserve (think reservoir) outside of the dollar
zone.
In addition to this main monumental price deception, the little bit of price
inflation that actually did seep into the dollar zone was either suppressed
through the gold and oil price manipulation scheme, masked by CPI rigging, or
simply papered over with low interest rates and intentional asset bubbles. In
other words they handed out free money to pay for what little price inflation
actually showed up, in the form of HELOCs on overpriced homes.
So even though prices have risen over the last 40 years, don't assume the
inflation tax has been paid. Don't even assume we have made a down payment on
it. Just think about the gains we have seen in the US ever since our purely
symbolic currency became the global reserve. (Actually, ever since our
gold-backed paper fiat currency became the global reserve and then somehow
managed to retain that privilege after switching to pure fiat!) Think of the
standard of living improvements. Think of the growth. Think of the military
expansion. Think of the social program expansion. Think of all the spending
we've done over the last 40 years, compared to the producing we've done.
Our spending has gone parabolic while our production has collapsed. And now
we are mostly a service industry workforce and a consumer driven economy. The
result of decades of decadence. The result of public and private profligacy.
And now the tax is due.
Hugo Salinas Price's graph [3] gives us a good visual depiction of some
of this unpaid inflation tax.
Payment of this enormous inflation tax deficit will present itself to us as a
sudden hyperinflation. It will be perceived and reported by the media as
something that was done to us by China. But now, at least you know the truth.
Refuge
The taxman is at our door. The mother of all taxes is now due. But curiously,
there is a refuge. There is a haven in which you can hide. Can you guess what
it is?
Of course it is physical gold in your physical possession. But gold will not just
protect you from this 65-year inflation tax. As the system collapses from its
own weight, gold will first reveal its true value. And then, from
there, it will hold its true value as paper burns all around it.
And once we make it through this firestorm to the other side, gold will
continue to be THE world class refuge from the future inflation tax that is
sure to come.
You see, the Siamese twins, credit and equity, have finally been separated.
Gold has been demonetized! It is now a world class wealth asset. A tradable
wealth asset. A portable wealth asset. A durable wealth asset. Money, which
has been deemed by society to be fiat currency only, no longer needs to carry
the heavy burden of ALSO being a store of value. No longer must we raise entire
industries that suck in generations of our best and brightest talent for the
sole purpose of designing paper wealth derivative products in a vain attempt
to make money be a store of value. No longer. Say goodbye to Wall Street.
Sincerely,
FOFOA
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