Friday, May 2, 2014

Some Reflections About Debt and Gold

Several FACTS  about gold are  not often considered.

1)    If each American had a 1 ounce gold coin that would be 316  million ounces. There are 32,150 troy ounces in a metric ton. Do the math. That is 9,829 T of gold.  The US government is supposed to hold 8,500 T of gold in Fort Knox and at the NY Fed.  The entire world supply ever mined is about 175,000 T.  All gold holdings by all national governments(central banks, IMF, etc.)  worldwide are about 35,000 T.  About 2,800 T is mined every year.  So if everybody in America had ONE gold coin it would take more than 3x what is mined every year to get them TWO...... 
2)    In 1920 a 1 ounce gold coin was equal to $20 and having TEN would not be uncommon.  Any person could go into any bank and exchange a $20 bill for a one ounce gold coin.
3)   It is estimated that there are 9 million financial asset millionaires in the USA today.  If half of them put 10% of their savings into gold it would be a minimum of $450 billion.   With 1 ton of gold worth approx $42 million, their gold would be approx 10,000 T or more than US government holdings.   There are millionaires in a lot of other countries too….
4)   The Federal Reserve “emits” $85 billion every month to purchase MBS and Treasury bonds.  That is approx equal to one year’s total world production of gold.  Which is easier?  To find, mine, and refine $85 billion worth of gold or push a button to ‘acquire’ a financial “asset”? 
5)   If a dollar is worth a dollar, what is gold worth?

The government likes political money because they can create it as needed.  That puts those of us who need to work to earn it in something of a quandary. The government’s position is that for the greater good it can create whatever money is necessary. They have developed a pretense of accounting by talking about “The Debt” but there is actually no “accounting” if debts can be created and then paid back with MORE debt.   Just as there is no “debt” associated with a counterfeiter that produces perfect hundred dollar bills , there is then  no difference in “good”(trustworthy)  or “bad”(counterfeit) money.

Printing whatever money is necessary to pay expenses and then requiring everyone to use that money is the antithesis of “sound” money.  It is legalized counterfeiting.  The government can create bonds and sell them or hold them itself and then cancel them at will.  It is a right pocket left pocket scam. Who can protest?  Once you have accepted that it is the right of the State to issue as much money as it needs to do what it must, what control, besides a pitiful little vote every 4 years, is possible?  The whole concept of money itself dissolves into irrelevance.  What you hold and what you work for is a political construct determined at every moment by the power that can issue it at will.   Why, in fact, do we pay taxes if the government can create whatever money it needs?

The “Debt” is actually a moral partnership between the government and the people.  The moral part comes in when considering how the new money is to be used and how the Debt is to be paid back. Many analysts have commented that the current debt is too large to be paid back and it is inevitably going to be defaulted on or inflated away. I think that likely.  If it is cancelled or defaulted on, then, through the money power, the government has the full and complete power to do whatever it wants irrespective of citizen’s votes.  It can create National Security State, American Empire, Nanny State, or it can just pay itself whatever it wants. It can pay newspapers to write nice stories. The result is that we “citizens” are all beggars for crumbs from the Kings’ Table.

Debt could be considered “the negative” of the positive that is known as money.  Practically speaking we consider money a unit of comparative value.  A dollar is  defined by its purchasing power. It is not based on anything.  It has a customary value that is understood to change gradually.  I do not think people consider how immoral debt cancellation by the State is.  A person goes bankrupt and fails his creditor but a government that goes bankrupt fails the entire citizenry.  How can a State fail its people?  When it mismanages so stupendously that it must cheat them to remain in power.  Here have a dollar—it’s not worth anything. The government defines what money will be – a dollar- and defines what it will be worth.  Does it reserve the right to change these determinations at any time if repaying its obligations is difficult? The Fed could theoretically expand the balance sheet to $10 T.  Then cancel it.  Of course the Fed would then be insolvent but would the Treasury?  No.  The Treasury could create another Fed or take the money creation role in house.  Old bonds held by others would be redeemed with new bonds and the Treasury would lose the income from the old cancelled bonds but what does a counterfeiter care if people burn the money he issues them?

Debt cancellation sounds like a good thing but it is a flagrant injustice.  It  certainly seems so to me who have saved what I have. What loyalty does the government deserve if it is busy picking favorites to benefit? Let’s consider an alternative scenario that would benefit me but not as much as some others:  why don’t we cancel everyone’s mortgage?  We have just made some Americans $5T richer.  But then we require the government to pay its debts and balance its books. WWG(Government)D? The same lousy options it has now would still be facing the government:  it could change some of its future promises, trim some current expenses, and increase taxes on its suddenly wealthier citizens. Its huge debt would still be there and our government representatives  would still have to work out which of the poor options available to them would be chosen.  But of course some would have already benefited. So cui bono?  The specific debt holders that are forgiven.  Everyone else pays. 

A counterfeiter does not need or care about “accounts”.  He produces all that he can get away with.  Why does the government not allow counterfeiters to make people ‘richer’?  At that critical point—it is all about the power.    I make the money, I call the shots, you do what you are told.  That is how it works.  In this model, the concept of freedom extends only to consumer choices not the social contract we live under.  That is where we are fellow citizens, do we like it?

Why is honest money like gold or silver not playing a larger role in our current monetary arrangements? People don’t understand the problem and they do not WANT to understand it. Essentially, gold is inconveniently rare, they don’t have any, and have no reason to prefer dollars (that they don’t have enough of) to gold(that they can’t actually BUY anything with).  If you ask most people, who is responsible for deciding how much money needs to be printed for everybody to use?  The answer will be, the government.  If you ask them how does the government know how much to print, they will answer, that is their job and why they have all those economists and departments full of civil servants.  If you ask them can the government print as much money  as it wants?  They will say yes. I ask, so YOU cannot print money or it is 10 years in the slammer as a counterfeiter, but the government CAN print as much as it likes and buy whatever it likes?  Do you feel there is a problem with this system?  No, they say, it is complicated and the government knows best. 

This makes for a very long and involved process of education.  What percent of the population actually thinks the government has the right and OUGHT to have the right to print all the money it wants and spend it on whatever it wants? I think it is at least 75%.  To them, it is like a “perk” of being a government official.  A majority of people unwilling to think or become informed citizens would necessarily reduce the value of gold and silver as money.  People are satisfied with how things work, even if they have to work 3 jobs and don’t themselves have any money.  It’s OK that some rich people get to fly private planes to Tahiti because they know the government official that makes up the money.  If they could get a job like that, they would do it for their friends too.  Is this where we are?   75% of the populace completely clueless about the benefits of a money that functions as money i.e. a store of value?  What will it take for a majority of people to become aware that their interests are being ignored and desire to do something about it?  Why don’t people engage more with politics?  I can answer that question, all those meetings that lead to no substantial changes are boring.  Politics would have to be REAL for people to put any time or effort into it.   

The entire society works because people think they have an idea of what money is.  What if they realize they everything they buy and work for is determined by what the government says it is worth?  There is no “number” for financial security.  Financial security only exists under rules of the game that are going to have to change .  If everybody’s money is someone else’s debt then it is surely the case that someone is not going to be paid.  How will this be determined?   Let me ask another question.  Should you “save” money if it is government policy to  reduce it’s value?  It is axiomatic that prudent people save for a rainy day but what exactly are they “saving”?  They are saving the government the aggravation of balancing its books by stealing current income and repaying with false promises.  Does the government “know” it is going to default?  Who is the government?  The Treasury Secretary will say growth in the economy will repay all debts just as a person in hoc will say their raise next year will pay off their credit cards.  If the economy does not “grow” it is already bankrupt.  So to what end working and saving?  The quicker people remove their money from systemic risk the better they will feel when the System implodes. 

So how can the government keep the unsustainable rocking along?  Boil all the frogs in different pots slowly….  Squeeze everybody and pay the army and the police....

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