Saturday, July 10, 2010

Book review: Case for Gold: A Minority Report of the United State Gold Commission ; by Ron Paul

purchasing power

Pee Wee Herman used to have a word of the day, and whenever it came up in conversation, everybody had to SCREAM REAL LOUD! My word for today is "fiat", which means "by royal decree"... something is so, merely because the King says it is so. Printed paper money is called "fiat currency" because its value comes from the say-so of the government (as opposed to something being inherently valuable, like food, or a tool). A dollar is fiat currency. It is legal tender because the government says it is.
Q: Why would the government want to bless pieces of paper with such power?
A: Because carrying around dollars is easier than carrying around bags of gold, or items to barter with. Fiat currency is convenient.
Good system, right?

Going off the rails
Well, maybe not. Fiat currency has a spotty track record. Germany got into trouble in the 1930's by printing too many Reichsmarks, so they didn't seem valuable any more- regardless what the government said. The same thing happened to Argentina in the 1990's. And in Zimbabwe in 2007. And in Yugoslavia in 1994. And in Greece in 1944. And in Taiwan in 1949.

fate of currencies

...So there are a bunch of examples where countries printed too much money. And when that happens, the currency looses its ability to buy goods and services, which devistates the economy. What happened to all those countries? Were they just stupid? Why would it be so common that countries just suddenly print too much money?

Q:Who even decides how much money to print?
A:The Treasury Department used to, but now the Federal Reserve does. That in itself is a very long and important story, but not the focus of this book, so I'll leave it alone for now.

To print or not to print
How does the Fed decide how much money to print? Since it is a private corporation, they don't have to tell us how they make those kinds of decisions. To keep the economy perfectly stable, they would have to balance the circulating dollars with the goods and services for sale. As the economy and population grow, more money would be required. The trick is that neither the economy or the population grow evenly, so its hard to get the balance right. And that's if you want to keep everything perfectly stable. A much bigger trick is avoiding the temptations to print money:

1) Per the agreement the Federal Reserve Bank has with our government, taxpayers pay interest on the money the Fed prints, as a sort of fee for using it. Incidentally, when the Treasury Dept printed it, there was no such fee- money belonged to the people. The interest we pay the Federal Reserve corporation (for virually no real work) creates a very handsome profit for its owners. In fact, the Federal Reserve Bank is one of the most profitable private corporations of all time. All this results in a lot of temptation to print more money.

2) The other temptation has to do with timing. When the Federal Reserve prints a bunch of dollars, it releases them into circulation through banks that participate in the Federal Reserve system (basically all the banks you've every heard of operating in America). Like I said, if too many dollars are printed, their value goes down... eventually. But if you're lucky enough to be the very first person holding all those new dollars, the system hasn't had time to feel the effect of the new money. It has the same buying power as earlier. Taking advantage of that effect, the government (the Fed's only customer) likes to contract with the Fed to print more money, and then use it to pay off debts. Debtholders don't complain, because they are the second people to hold that new money, and the system still hasn't adjusted. It's only when the dollars have changed hands a bunch of times, and it gets down to poor schmucks like you and I that vendors start to realize "Hey, I can raise my prices, and customers are still willing to pay." That's called inflation, and it's why a candy bar that cost 35 cents in 1970 now costs $1.25. If you could pay your debts with money that is worth less than what you borrowed it for, wouldn't you be tempted to do so? That's a lot of temptation for the government. And since the Fed makes interest off every dollar they are asked to print, they are more than willing to indulge.

What choice do we have?
Okay.. so there may be problems with our currency system... but what other options do we have? Even if we throw the parasitic Federal Reserve off our backs, won't we still face the temptation to inflate our money to pay off debts? (...and in a wicked cycle, won't the perception that we are paying our debts off with "easy money" encourage us to accrue additional debt?) What can we do?

It so happens that the temptations to overprint fiat currency have been well known for at nearly three hundred years. Britain and the United States both used to have a mechanism built into their currencies to avoid overprinting: the gold standard. Under this system, a dollar could only be printed if the government held a corresponding amount of gold in reserve. To show that the system was being properly accounted, dollars could be exchanged for the appointed amount of gold on request. Most people did not request the equivalent amount in gold, since the paper money was more convenient. If the government wanted to print more money, it would have to obtain more gold. This inhibited reckless printing.

Britain abandoned the gold standard in the 1931, as they were unable or unwilling to pay back their debts from World War I without inflating the currency (i.e. reducing its value). The U.S., under pressure from ballooning defense spending, followed suit in 1971.

The result has been a steady decline in the purchasing power of the dollar. The cost of goods and services increases rapidly, and wages follow much more slowly. The effects of this are hardest on the working poor, and retirees living on their savings. Retirees, in effect, worked hard to earn dollars, saved them away, and spent them when they were worth less... bad deal. These are the ravages of inflation, which discourages saving. Why save your money in a savings account that yields 2% annually, when the dollar loses more than that in purchasing power? Without a stable currency that retains its value over long periods, it becomes impossible to make long-term plans, such as retirement. Ron Paul puts forth a reasoned arguement that gold (or a gold-standard paper) is the best currency for retaining long-term value.

gold bars

Why Gold?
I'll say right up front that an asset-linked currency doesn't have to be linked to gold. You could have an "oil standard", where dollars are linked to an amount of oil in reserve. You could have an "oatmeal standard", for that matter. Gold happens to be a good asset for this purpose because it seems to exist at a good balance between obtainability and value:

Obtainability There are more rare, and more valuable hard assets than gold. If something is too rare and too valuable, however, it becomes an impractical medium for exchange. Suppose the currency were linked to original Leonardo DaVinci paintings... if the government needed to print more money, but it couldn't get its hands on one of the very limited number of paintings (the market for these being relatively illiquid), the economy would stagnate. A currency needs to be based on something that is obtainable enough to allow for expansion of the money supply, if it is truly needed.

Store of value Gold has been used for art and jewelry for thousands of years, so it is fair to say that it is widely admired for its beauty. There seems to be an inherant value to it which is accepted across cultures. In addition, it is difficult to extract from the Earth. With a few historical exceptions (e.g. surface deposits along the Klondike River), hundreds of tons of rock must be displaced to yield a few ounces of gold. Thus, each ounce represents many man-hours of labor, as well as equipment and energy spent. In this sense, it is a store of value; you can't get it without expending these resources, or an equivalent amount in currency. A further nice benefit: since it is a natural element, it can't be counterfeited.

Keeping on this path
Without the disciplene imposed by the gold standard, deficit spending has allowed our national leaders to spend us into massive debt.
National Debt
As it gets more and more difficult to pay our debts (i.e. debt repayment becomes a larger fraction of our budget)
national debt as a percentage of GDP becomes more and more tempting to further inflate the currency. Obviously, there are limits to that strategy. To avert a hyperinflationary collapse, a nation must either:
(1) Put its financial house in order...this includes paying off debts, and reducing spending. That's politically unpopular, because it means cutting vote-winning entitlements and spending programs, so don't hold your breath waiting for that.
(2) Effectively "hit reset" by collapsing the currency and introducing a new currency. This might sound painless, and would no doubt be presented to the voting public as painless, but in the long term might be the worst thing you could do. Replacing a currency doesn't work if the new currency does't have legitimacy. That means you couldn't just have the same old gang who ran the old currency into the ground (i.e. the Federal Reserve) standing behind the new currency saying "Trust us, it's good this time." To make a new currency work, it would have to have the assurances of a "higher authority". With other currencies that have failed in the past, this has meant the International Monetary Fund (IMF). Once a nation is in the clutches of the IMF, they have essentially lost their freedom- the IMF controls their money supply, and collateralizes it with the country's real estate and natural resources. John Perkins describes in his book [book:Confessions of an Economic Hitman] how nations who go down this path frequently lose all their prized real estate, oil and mining rights, forestry rights, and water supply to offshore foreign banks when the IMF moves in. How are they supposed to climb out of endless debt servitude when that happens? They aren't. An IMF "occupation" only benefits the IMF, who directs victim nation trade polices (destroying protections for domestic industries) to benefit IMF-affiliated (i.e. crony-owned) institutions. Like the Federal Reserve, which appears public (i.e. affiliated with the United Nations and the World Bank), the IMF is controlled by the private Bank of International Settlements After we gave private bankers a $12 trillion bailout of taxpayer money in 2008-2009, there has been a lot of discussion about the weakening dollar, and a push by our financial leadership to collapse the dollar and replace it with something the IMF calls Special Drawing Rights (SDR's).

Obviously, I do not support this plan, and I hope you don't either.

You got the Power!
Of course you can call or write your elected representatives to discourage them from printing more money, or to plead with them not to replace the dollar with SDR's ...I hope you do that.

What you might not know is how independently you can function without the dollar. We are so conditioned against taking initiative and acting independently these days, but who says you have to use dollars when you do your shopping? Throughout the nation, many smaller communities have seen the advantages of printing their own locally-issued money. Some of these currencies enjoy wide acceptance from community-based vendors. Farmers' markets in particular seem to be places where local currencies enjoy acceptance. This local money tends to support small producers and sellers. Wal-Mart and their ilk hate local-issue currency, because they like taking dollars out of your community and sending it to their headquarters out of state. Community-issued money tends to keep circulating in small towns, supporting its businesses, and providing a fair medium of trade, free of the averice of Fed bankers and out-of-control Congressional spenders.
sample local currency
Isn't it true that local currencies could be inflated, or otherwise tampered with? Absolutely, but that has not been the general experience with local-issue money. It is created by a town's businesses, who have an interest in its success. If a local-issue currency were to go off track, you actually know and have access to the responsible parties. You could even take them to court, depending on the agreement of its issuance... try doing that with the Federal Reserve!

If local-print dollars aren't available where you live, maybe you'd like to consider joining the digital gold economy. By holding tradable ounces of gold in an account, you can spend digital gold with a small but growing number of vendors. Does that sound like a lot of hassle? It's less involved than getting a credit card. This is still a developing area in currencies, so due diligence is advised. I mention digital gold because its mere existance shows that the public has caught on to what a scam fiat currencies are. It seems clear there is a desire of the public to return to an honest money system represented by gold.

Good luck!

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