inflation Archives - Page 2 of 3

The Folly of the Fed’s Central Planning

by Ron Paul – Ron Paul Institute for Peace and Prosperity:

Over the last 100 years the Fed has had many mandates and policy changes in its pursuit of becoming the chief central economic planner for the United States. Not only has it pursued this utopian dream of planning the US economy and financing every boondoggle conceivable in the welfare/warfare state, it has become the manipulator of the premier world reserve currency.

As Fed Chairman Ben Bernanke explained to me, the once profoundly successful world currency – gold – was no longer money. This meant that he believed, and the world has accepted, the fiat dollar as the most important currency of the world, and the US has the privilege and responsibility for managing it. He might even believe, along with his Fed colleagues, both past and present, that the fiat dollar will replace gold for millennia to come. I remain unconvinced.

At its inception the Fed got its marching orders: to become the ultimate lender of last resort to banks and business interests. And to do that it needed an “elastic” currency. The supporters of the new central bank in 1913 were well aware that commodity money did not “stretch” enough to satisfy the politician’s appetite for welfare and war spending. A printing press and computer, along with the removal of the gold standard, would eventually provide the tools for a worldwide fiat currency. We’ve been there since 1971 and the results are not good.

Many modifications of policy mandates occurred between 1913 and 1971, and the Fed continues today in a desperate effort to prevent the total unwinding and collapse of a monetary system built on sand. A storm is brewing and when it hits, it will reveal the fragility of the entire world financial system.

The Fed and its friends in the financial industry are frantically hoping their next mandate or strategy for managing the system will continue to bail them out of each new crisis.

The seeds were sown with the passage of the Federal Reserve Act in December 1913. The lender of last resort would target special beneficiaries with its ability to create unlimited credit. It was granted power to channel credit in a special way. Average citizens, struggling with a mortgage or a small business about to go under, were not the Fed’s concern. Commercial, agricultural, and industrial paper was to be bought when the Fed’s friends were in trouble and the economy needed to be propped up. At its inception the Fed was given no permission to buy speculative financial debt or U.S. Treasury debt.

It didn’t take long for Congress to amend the Federal Reserve Act to allow the purchase of US debt to finance World War I and subsequently all the many wars to follow. These changes eventually led to trillions of dollars being used in the current crisis to bail out banks and mortgage companies in over their heads with derivative speculations and worthless mortgage-backed securities.

It took a while to go from a gold standard in 1913 to the unbelievable paper bailouts that occurred during the crash of 2008 and 2009.

In 1979 the dual mandate was proposed by Congress to solve the problem of high inflation and high unemployment, which defied the conventional wisdom of the Phillips curve that supported the idea that inflation could be a trade-off for decreasing unemployment. The stagflation of the 1970s was an eye-opener for all the establishment and government economists. None of them had anticipated the serious financial and banking problems in the 1970s that concluded with very high interest rates.

That’s when the Congress instructed the Fed to follow a “dual mandate” to achieve, through monetary manipulation, a policy of “stable prices” and “maximum employment.” The goal was to have Congress wave a wand and presto the problem would be solved, without the Fed giving up power to create money out of thin air that allows it to guarantee a bailout for its Wall Street friends and the financial markets when needed.

The dual mandate was really a triple mandate. The Fed was also instructed to maintain “moderate long-term interest rates.” “Moderate” was not defined. I now have personally witnessed nominal interest rates as high as 21% and rates below 1%. Real interest rates today are actually below zero.

The dual, or the triple mandate, has only compounded the problems we face today. Temporary relief was achieved in the 1980s and confidence in the dollar was restored after Volcker raised interest rates up to 21%, but structural problems remained.

Nevertheless, the stock market crashed in 1987 and the Fed needed more help. President Reagan’s Executive Order 12631 created the President’s Working Group on Financial Markets, also known as the Plunge Protection Team. This Executive Order gave more power to the Federal Reserve, Treasury, Commodity Futures Trading Commission, and the Securities and Exchange Commission to come to the rescue of Wall Street if market declines got out of hand. Though their friends on Wall Street were bailed out in the 2000 and 2008 panics, this new power obviously did not create a sound economy. Secrecy was of the utmost importance to prevent the public from seeing just how this “mandate” operated and exactly who was benefiting.

Since 2008 real economic growth has not returned. From the viewpoint of the central economic planners, wages aren’t going up fast enough, which is like saying the currency is not being debased rapidly enough. That’s the same explanation they give for prices not rising fast enough as measured by the government-rigged Consumer Price Index. In essence it seems like they believe that making the cost of living go up for average people is a solution to the economic crisis. Rather bizarre!

The obsession now is to get price inflation up to at least a 2% level per year. The assumption is that if the Fed can get prices to rise, the economy will rebound. This too is monetary policy nonsense.

If the result of a congressional mandate placed on the Fed for moderate and stable interest rates results in interest rates ranging from 0% to 21%, then believing the Fed can achieve a healthy economy by getting consumer prices to increase by 2% per year is a pie-in-the-sky dream. Money managers CAN’T do it and if they could it would achieve nothing except compounding the errors that have been driving monetary policy for a hundred years.

A mandate for 2% price inflation is not only a goal for the central planners in the United States but for most central bankers worldwide.

It’s interesting to note that the idea of a 2% inflation rate was conceived 25 years ago in New Zealand to curtail double-digit price inflation. The claim was made that since conditions improved in New Zealand after they lowered their inflation rate to 2% that there was something magical about it. And from this they assumed that anything lower than 2% must be a detriment and the inflation rate must be raised. Of course, the only tool central bankers have to achieve this rate is to print money and hope it flows in the direction of raising the particular prices that the Fed wants to raise.

One problem is that although newly created money by central banks does inflate prices, the central planners can’t control which prices will increase or when it will happen. Instead of consumer prices rising, the price inflation may go into other areas, as determined by millions of individuals making their own choices. Today we can find very high prices for stocks, bonds, educational costs, medical care and food, yet the CPI stays under 2%.

The CPI, though the Fed currently wants it to be even higher, is misreported on the low side. The Fed’s real goal is to make sure there is no opposition to the money printing press they need to run at full speed to keep the financial markets afloat. This is for the purpose of propping up in particular stock prices, debt derivatives, and bonds in order to take care of their friends on Wall Street.

This “mandate” that the Fed follows, unlike others, is of their own creation. No questions are asked by the legislators, who are always in need of monetary inflation to paper over the debt run up by welfare/warfare spending. There will be a day when the obsession with the goal of zero interest rates and 2% price inflation will be laughed at by future economic historians. It will be seen as just as silly as John Law’s inflationary scheme in the 18th century for perpetual wealth for France by creating the Mississippi bubble – which ended in disaster. After a mere two years, 1719 to 1720, of runaway inflation Law was forced to leave France in disgrace. The current scenario will not be precisely the same as with this giant bubble but the consequences will very likely be much greater than that which occurred with the bursting of the Mississippi bubble.

The fiat dollar standard is worldwide and nothing similar to this has ever existed before. The Fed and all the world central banks now endorse the monetary principles that motivated John Law in his goal of a new paradigm for French prosperity. His thesis was simple: first increase paper notes in order to increase the money supply in circulation. This he claimed would revitalize the finances of the French government and the French economy. His theory was no more complicated than that.

This is exactly what the Federal Reserve has been attempting to do for the past six years. It has created $4 trillion of new money, and used it to buy government Treasury bills and $1.7 trillion of worthless home mortgages. Real growth and a high standard of living for a large majority of Americans have not occurred, whereas the Wall Street elite have done quite well. This has resulted in aggravating the persistent class warfare that has been going on for quite some time.

The Fed has failed at following its many mandates, whether legislatively directed or spontaneously decided upon by the Fed itself – like the 2% price inflation rate. But in addition, to compound the mischief caused by distorting the much-needed market rate of interest, the Fed is much more involved than just running the printing presses. It regulates and manages the inflation tax. The Fed was the chief architect of the bailouts in 2008. It facilitates the accumulation of government debt, whether it’s to finance wars or the welfare transfer programs directed at both rich and poor. The Fed provides a backstop for the speculative derivatives dealings of the banks considered too big to fail. Together with the FDIC’s insurance for bank accounts, these programs generate a huge moral hazard while the Fed obfuscates monetary and economic reality.

The Federal Reserve reports that it has over 300 PhD’s on its payroll. There are hundreds more in the Federal Reserve’s District Banks and many more associated scholars under contract at many universities. The exact cost to get all this wonderful advice is unknown. The Federal Reserve on its website assures the American public that these economists “represent an exceptional diverse range of interest in specific area of expertise.” Of course this is with the exception that gold is of no interest to them in their hundreds and thousands of papers written for the Fed.

This academic effort by subsidized learned professors ensures that our college graduates are well-indoctrinated in the ways of inflation and economic planning. As a consequence too, essentially all members of Congress have learned these same lessons.

Fed policy is a hodgepodge of monetary mismanagement and economic interference in the marketplace. Sadly, little effort is being made to seriously consider real monetary reform, which is what we need. That will only come after a major currency crisis.

I have quite frequently made the point about the error of central banks assuming that they know exactly what interest rates best serve the economy and at what rate price inflation should be. Currently the obsession with a 2% increase in the CPI per year and a zero rate of interest is rather silly.

In spite of all the mandates, flip-flopping on policy, and irrational regulatory exuberance, there’s an overwhelming fear that is shared by all central bankers, on which they dwell day and night. That is the dreaded possibility of DEFLATION.

A major problem is that of defining the terms commonly used. It’s hard to explain a policy dealing with deflation when Keynesians claim a falling average price level – something hard to measure – is deflation, when the Austrian free-market school describes deflation as a decrease in the money supply.

The hysterical fear of deflation is because deflation is equated with the 1930s Great Depression and all central banks now are doing everything conceivable to prevent that from happening again through massive monetary inflation. Though the money supply is rapidly rising and some prices like oil are falling, we are NOT experiencing deflation.

Under today’s conditions, fighting the deflation phantom only prevents the needed correction and liquidation from decades of an inflationary/mal-investment bubble economy.

It is true that even though there is lots of monetary inflation being generated, much of it is not going where the planners would like it to go. Economic growth is stagnant and lots of bubbles are being formed, like in stocks, student debt, oil drilling, and others. Our economic planners don’t realize it but they are having trouble with centrally controlling individual “human action.”

Real economic growth is being hindered by a rational and justified loss of confidence in planning business expansions. This is a consequence of the chaos caused by the Fed’s encouragement of over-taxation, excessive regulations, and diverting wealth away from domestic investments and instead using it in wealth-consuming and dangerous unnecessary wars overseas. Without the Fed monetizing debt, these excesses would not occur.

Lessons yet to be learned:

1. Increasing money and credit by the Fed is not the same as increasing wealth. It in fact does the opposite.

2. More government spending is not equivalent to increasing wealth.

3. Liquidation of debt and correction in wages, salaries, and consumer prices is not the monster that many fear.

4. Corrections, allowed to run their course, are beneficial and should not be prolonged by bailouts with massive monetary inflation.

5. The people spending their own money is far superior to the government spending it for them.

6. Propping up stock and bond prices, the current Fed goal, is not a road to economic recovery.

7. Though bailouts help the insiders and the elite 1%, they hinder the economic recovery.

8. Production and savings should be the source of capital needed for economic growth.

9. Monetary expansion can never substitute for savings but guarantees mal–investment.

10. Market rates of interest are required to provide for the economic calculation necessary for growth and reversing an economic downturn.

11. Wars provide no solution to a recession/depression. Wars only make a country poorer while war profiteers benefit.

12. Bits of paper with ink on them or computer entries are not money – gold is.

13. Higher consumer prices per se have nothing to do with a healthy economy.

14. Lower consumer prices should be expected in a healthy economy as we experienced with computers, TVs, and cell phones.

All this effort by thousands of planners in the Federal Reserve, Congress, and the bureaucracy to achieve a stable financial system and healthy economic growth has failed.

It must be the case that it has all been misdirected. And just maybe a free market and a limited government philosophy are the answers for sorting it all out without the economic planners setting interest and CPI rate increases.

A simpler solution to achieving a healthy economy would be to concentrate on providing a “SOUND DOLLAR” as the Founders of the country suggested. A gold dollar will always outperform a paper dollar in duration and economic performance while holding government growth in check. This is the only monetary system that protects liberty while enhancing the opportunity for peace and prosperity.

Article originally posted at The Ron Paul Institute for Peace and Prosperity.

Bear Market Extremes Equals Bull Market Wealth

by Jeff Clark – Hard Assets Alliance:

I want to congratulate you.

Gold and silver have been in a downtrend for over three years. And yet you’ve held on.

In spite of violent selloffs and a prolonged bear turn in the market, you’ve been patient. You see the big picture. You’ve steeled your emotions and rebuffed the negative mantra from the mainstream. You get it. You understand that sooner or later the fiscal and monetary path the world has embraced and praised won’t work.

And you will soon be rewarded. I can’t give you a date, but I can tell you it’s a question of when, not if.

How can I make such a claim?

History.

The Gold Market at Extremes

I measured the duration and degree of every bear market in gold and silver in modern history and compared them to our current situation. It’s quite revealing.

In each chart, the black line represents our current bear market. Here are the data for gold since the early 1970s:

Gold has endured deeper selloffs, but as you can see, it’s one of the longest on record. And if the price were to slip further and close below $1,142 (on a fix basis), it would officially be the longest bear market in modern history. I’ll also point out that gold declined 1.8% last year, making 2013/2014 the first back-to-back annual loss since 1997/1998.

Silver’s performance is even more dramatic. Since the 1960s, only one bear market has registered a bigger price decline, and only two were longer (assuming the bottom was $15.28 on November 6 last year).

These data all point to a bear market that has reached an extreme level.

That’s not to say prices can’t go lower, but history suggests that the end to the downtrend is close, if not already behind us. Your patience will soon get a vacation.

But does that mean the price is ready to take off again?

Gold Is Insurance, Not an Investment

While you can sell gold for a profit or a loss like any other investment, the most accurate way to view gold is as an alternate currency—the only one history has shown to provide monetary protection during a major currency devaluation. And the ongoing currency dilution around the globe today is comparable to some of the most notorious in history.

Yes, I think we’ll all make a lot of money in our HAA accounts. But gold’s primary role as insurance is more important right now.

Consider the risks we investors and consumers face:

• What if banks begin lending out the money the Fed has loaned them?

• What if the Fed decides it needs another round of QE, regardless of what they call it?

• What if interest rates rise, whether initiated by the Fed or pushed higher by the markets?

• What happens when—not if—the stock market enters a correction and mainstream investors begin losing money? What if the average investor remembers 2008 and decides to bail? How will the Fed react?

• What will be the mainstream reaction if the real estate market goes flat or reverses? How would the Fed respond?

• What happens if the economy legitimately grows—and kickstarts inflation?

• What happens if the debt load overwhelms the Fed’s printing efforts? Will they give up or double down?

• What if a developed country selectively or fully defaults on its debt?

• What if we reach a tipping point where other countries tire of the nonstop currency dilution and slow or reverse their treasury purchases?

• What happens if the markets lose confidence in the Fed or other central banks’ ability to manage their respective economies and markets?

• What if politicians don’t institute serious fiscal reforms, and Fed interventions are reduced to nothing more than monetizing deficit spending by causing inflation?

• How would global central bankers respond if deflation takes root?

• What happens if the geopolitical conflicts deteriorate and lead to war?

• What happens when—not if—control of the gold market shifts to China, away from North America?

The point is that we face increased systemic risk. Central bankers have painted themselves into a corner, and there is no easy exit from their policy mistakes. Since these issues have not been dealt with effectively, and political leaders show no sign of doing so, systemic risk has greatly increased. Sooner or later there must be a reckoning—the math doesn’t work, and history has demonstrated the outcome of such fiscal setups numerous times. Certainly, more caution is warranted than what most mainstream commentators suggest.

This is a major reason why I continue to buy gold and silver, and why I recommend you do, too. It’s not a speculation on rapid gains, but essential wealth insurance. In fact, the next bull market in gold will likely be spurred by one or more of the above risks materializing.

So instead of wondering if the gold price has bottomed, I recommend asking these questions:

• How much have you personally allocated to precious metals to offset the risk of a currency or similar crisis of major proportion? The need for monetary insurance against those risks is high, and rising. Given the elevated risk, a commensurate level of insurance is necessary. Fire insurance is designed to provide enough funds to rebuild your entire home, not just the basement. So one ounce of gold or one tube of silver won’t cut it.

• Does your portfolio stand on a foundation of mostly paper assets? If stocks and bonds comprise the lion’s share of your investments, your overall investment risk is very high.

• How correlated are your investments to the stock market? If mainstream investments decline, how will your overall portfolio be impacted? Gold and the S&P are typically negatively correlated; with both at extremes, now is a good time to make sure you strike the right balance.

• Have you stored some assets outside your political jurisdiction? The prospect of capital controls has grown.

In other words, it is less about the exact price and date of the bottom for this market and more about how you will protect yourself against the risks outlined above—they are real, in spite of what we read in mainstream headlines. If any transpire, they will wreak havoc on your investment portfolio and your ability to maintain your current lifestyle. That’s worth insuring.

In the meantime, the extreme nature of the current bear market means that current prices are a potentially life-changing opportunity.

Join me in creating bull market wealth—by taking advantage of current bear market prices.

Article originally posted in the January issue of Smart Metals Investor at HardAssetsAlliance.com.

Brighter Days Ahead for Gold

by Hard Assets Alliance:

“It’s a new dawn, it’s a new day.” —Nina Simone

Those lyrics from the timeless Nina Simone song Feeling Good certainly draw a parallel to the present state of gold.

After a rough couple of years, gold begins 2015 with a clean state. It will take time to shake off its hangover, but the yellow metal is looking good early into the new year.

Of course, gold still has its fair share of critics. Willem Buiter, chief economist at Citigroup, recently referred to gold as a “shiny bitcoin.” Refuting such a ludicrous statement isn’t worth the digital ink. Instead, we’ll keep it short and simply say: Such a statement ignores 6,000 years of human history.

Not all gold bears are as controversial. Most analysts pessimistic about gold’s near-term outlook cite the strong dollar, rising interest rates, and deflated energy prices as headwinds, though we would argue that each of these factors actually reinforces the need to hold gold… but that’s a discussion for another day.

Rather, let’s take a look at what some of the sharpest financial minds are saying about gold:

• In terms of gold price expectations, it appears that the repair of technical picture is now behind us and that a stable bottom has formed. The next 12-month price target is the USD 1,500 level. Longer term, a parabolic trend acceleration, with a long-term target of USD 2,300 by the end of the cycle.—Ron Stoferle, Incrementum Lichtenstein

• In the long term, however, I am more bullish on the gold price than I have ever been. All central bankers want inflation, and one day they will get it. Betting on inflation is the surest thing I have ever bet on in my life.—Pierre Lassonde, Chairman of Franco-Nevada (FNV)

• The lengthy bottoming process in gold seems to be nearing its close. The conditions that led to a decade-long rise in the gold price in 1999 are quite similar to today. Gold is not just ignored but hated by mainstream investors—it’s the Rodney Dangerfield of investment concepts.—John Hathway, Comanager of Tocqueville Gold Fund

Optimism about gold is also showing up where it matters most: the spot price. Gold has climbed nearly 12% since its November low and is off to its hottest start since 2008. Last week’s surprise announcement by the Swiss government to sever its peg to the euro provided the latest boost. It’s yet another reminder to own gold, the only asset that isn’t somebody else’s liability. We see this as a recurring theme in 2015.

Article originally posted in the January issue of Smart Metals Investor at HardAssetsAlliance.com.

Ron Paul on How to Restore America – Don’t Avert the Government Shutdown!

by Ron Paul – Ron Paul Institute for Peace and Prosperity:

The political class breathed a sigh of relief Saturday when the US Senate averted a government shutdown by passing the $1.1 trillion omnibus spending bill. This year’s omnibus resembles omnibuses of Christmas past in that it was drafted in secret, was full of special interest deals and disguised spending increases, and was voted on before most members could read it.

The debate over the omnibus may have made for entertaining political theater, but the outcome was never in doubt. Most House and Senate members are so terrified of another government shutdown that they would rather vote for a 1,774-page bill they have not read than risk even a one or two-day government shutdown.

Those who voted for the omnibus to avoid a shutdown fail to grasp that the consequences of blindly expanding government are far worse than the consequences of a temporary government shutdown. A short or even long-term government shutdown is a small price to pay to avoid an economic calamity caused by Congress’ failure to reduce spending and debt.

The political class’ shutdown phobia is particularly puzzling because a shutdown only closes 20 percent of the federal government. As the American people learned during the government shutdown of 2013, the country can survive with 20 percent less government.

Instead of panicking over a limited shutdown, a true pro-liberty Congress would be eagerly drawing up plans to permanently close most of the federal government, starting with the Federal Reserve. The Federal Reserve’s inflationary policies not only degrade the average American’s standard of living, they also allow Congress to run up huge deficits. Congress should take the first step toward restoring a sound monetary policy by passing the Audit the Fed bill, so the American people can finally learn the truth about the Fed’s operations.

Second on the chopping block should be the Internal Revenue Service. The federal government is perfectly capable of performing its constitutional functions without imposing a tyrannical income tax system on the American people.

America’s militaristic foreign policy should certainly be high on the shutdown list. The troops should be brought home, all foreign aid should be ended, and America should pursue a policy of peace and free trade with all nations. Ending the foreign policy of hyper-interventionism that causes so many to resent and even hate America will increase our national security.

All programs that spy on or otherwise interfere with the private lives of American citizens should be shutdown. This means no more TSA, NSA, or CIA, as well as an end to all federal programs that promote police militarization. The unconstitutional war on drugs should also end, along with the war on raw milk.

All forms of welfare should be shut down, starting with those welfare programs that benefit the wealthy and the politically well connected. Corporate welfare, including welfare for the military-industrial complex that masquerades as “defense spending,” should be first on the chopping block. Welfare for those with lower incomes could be more slowly phased out to protect those who have become dependent on those programs.

The Department of Education should be permanently padlocked. This would free American schoolchildren from the dumbed-down education imposed by Common Core and No Child Left Behind. Of course, Obamacare, and similar programs, must be shut down so we can finally have free-market health care.

Congress could not have picked a worse Christmas gift for the American people than the 1,774-page omnibus spending bill. Unfortunately, we cannot return this gift. But hopefully someday Congress will give us the gift of peace, prosperity, and liberty by shutting down the welfare-warfare state.

Article originally posted at The Ron Paul Institute for Peace and Prosperity.

How Fiat Money Enslaves Society

submitted by jwithrow.

Journal of a Wayward Philosopher
How Fiat Money Enslaves Society

January 1, 2015
Hot Springs, VA

Happy New Year!

The markets stayed in bed today nursing their hangovers so we have no updates for you. Check back with us tomorrow for market updates.

We have recently been discussing the difference between fiat money and real money so I thought it would be prudent to kick off 2015 by discussing how fiat money enslaves society.

I know, nobody is walking around in shackles and chains – the slavery is much more subtle than that. But I firmly believe this is the single most important issue of our time. You cannot understand finance and economics unless you understand how fiat money operates. And you cannot become financially independent unless you understand finance and economics.

So here’s how it works:

Government creates a currency and decrees it money. Being the narcissist institution that it is, Government usually prints faces of past government officials on the physical currency. Next Government creates a central bank and declares that the central bank will issue and manage the currency. Government then implements an income tax to supplement the other taxes in existence and decrees that all taxes must be paid with the government’s currency. Government then passes legal tender laws requiring citizens to accept its currency as payment for all private debts as well. The penalty for not paying taxes or for not accepting government currency as payment is jail.

In this way the government/central bank alliance has effectively created a situation where everyone under the government’s claimed jurisdiction is forced to use its fiat money. There is no way to completely opt out; at minimum everyone has to acquire enough fiat money to pay taxes or else they will be thrown in jail. And we’re not talking about one or two little taxes; we are talking about taxes on all income earned, taxes on all investment gains earned, taxes on all real estate owned, taxes on all vehicles owned, taxes on all gas purchased for those vehicles, taxes on all food and goods purchased, and taxes on any inheritance received. Virtually everything you do is taxed!

Add up all of the taxes across all levels of government and it is very likely you are paying out 50% of what you earn in taxes, especially if you live in a major metropolitan city. That means you are working six months of the year just to pay the government.

But wait, it gets even better!

The central bank is free to issue as much new fiat money as it pleases and the record clearly shows that all central banks very much enjoy creating lots of new currency. The law of supply and demand tells us that each unit of currency will be worth less as new currency enters the economy – this is intuitive. What’s less intuitive is something called the Cantillon Effect.

Classical economist Richard Cantillon noticed something very important about inflation back around 1730 in France. Cantillon observed that the original recipients of newly created money enjoyed much higher standards of living at the expense of later recipients. The reason for this, Cantillon noted in his economic treatise Essai, is because of the disproportionate rise in prices as a result of inflation; prices do not rise until after the first recipients of the new money spend it into the general economy.

What this means is the very act of creating new money from nothing effectively steals purchasing power from everyone except those who first receive the new money!

So who first receives the new money? Why, governments and their favored institutions of course! This is how governments and their favored institutions grew to be so fantastically large in the 1900’s – they steadily picked the public’s pocket for an entire century!

To tie it all together: Government creates currency from nothing and forces you to use it by levying all manner of taxes on you that can only be paid with the government’s fiat money. Then Government’s buddy, the central bank, inflates the money supply which depreciates the value of the currency you are forced to use and transfers that lost purchasing power from you to Government. This makes it very difficult for you to save money because the money constantly loses value over time. The result is you have to work harder and harder just to pay off Government lest it throw you in jail. And that is how fiat money enslaves society.

This process is why you could drive down Main Street in Small Town USA back in 1950 and see bustling storefronts and a vibrant economy. Drive down that same Main Street today and you will probably see empty buildings and boarded up windows. You just can’t earn an honest living as a small proprietor or shopkeep anymore because you are Cantillon’s last recipient of new money in those businesses. Decades of unrestricted inflation has destroyed the value of the money to the point where small proprietors cannot earn enough of it to keep up with rising prices. Fiat money has hollowed out Middle America to the point where there’s not much of it left. This is exactly what has happened throughout history where fiat money has been implemented – the middle class is destroyed.

Governments have experimented with fiat money all through history and the most recent monetary model is the most deceptive to date. Fortunately, a fiat monetary system always sows the seeds of its own destruction and cannot last forever. In the meantime you can employ some basic financial strategies to protect yourself once you understand how the fiat money system works. We’ll look at some of those strategies in a later entry.

Until the morrow,

Joe Withrow
Wayward Philosopher

For more of Joe’s thoughts on the “Great Reset” and the fiat monetary system please read “The Individual is Rising” which is available at http://www.theindividualisrising.com/. The book is also available on Amazon in both paperback and Kindle editions.

Capitalism Without the Capital

submitted by jwithrow.

Journal of a Wayward Philosopher
Capitalism Without the Capital

December 25, 2014
Hot Springs, VA

Merry Christmas!

The markets are closed today in honor of this wonderful holiday so we have no updates for you in this entry. Check back in with us tomorrow for market updates. We do have an important entry for you today, however. It’s not nearly as important as spending time with your family on Christmas Day but, since you are here nonetheless, we will carry on.

Earlier this month we watched as the U.S. national debt came up behind $18 trillion, whipped into the passing lane without signaling, and sped off into the distance. Where is the national debt going in such a rush? I’m not sure, but I’d wager it’s someplace not worth going to.

As the national debt raced past we noted that total credit market debt has ballooned up to 330% of GDP with considerable help from the Fed’s efforts to pump in $4.3 trillion worth of hot air.

The television analysts accept it all as normal but we must ask the question: How in the world did we get to this point?

Much of the apparent prosperity we have enjoyed over the last several years has been borrowed from the future. The world’s three major central banks – The Federal Reserve, the European Central Bank, and the Bank of Japan – have each been engaged in an outrageous financial experiment; they have been creating massive amounts of currency out of thin air to purchase government debt by the boat-load.

Remember, debt is nothing more than a promise to pay for present spending with future earnings. These central banks, in collusion with their respective government, are really engaged in a scheme to transfer massive amounts of wealth from the public in the future to themselves in the present. There will be serious consequences to this madness.

It is important to realize that none of this chicanery has anything to do with capitalism… there’s no capital even in sight! The money created by the central banks of the world may act much like real capital, but it is just a clever impersonator.

Capital, according to the Ludwig von Mises Institute, is defined as the goods that were produced by previous stages of production but do not directly satisfy consumer’s needs. In short, capital is real savings and real resources.

Capital formation is actually quite simple – just save more than you consume and you will have capital.

We are currently doing the opposite – we are consuming way more than we produce. That’s how you end up with debt piled to the ceiling. This is true on the macro level (governments, multi-national corporations, etc.) and it is true on the micro level (individuals, local communities). The credit-based money and the massive debt have driven capital into hiding… we suspect for fear of being called a greedy capitalist.

And that, in a nutshell, is the answer to our question: we got to this point by embracing central banking and fiat money thus abandoning capitalism and its sound monetary system.

Sound Money once kept debt and the central planners at bay.

What was the secret?

Sound Money was like your grumpy friend that just won’t ever agree to do anything. You ask him to go to the movies and he says nope. You ask him to go to the ball game and he says he’ll watch it on T.V. You ask him to go to the bar and he says he has beer in the fridge at home already. Eventually you learn there’s nothing you can talk him into doing so you stop trying. That’s why governments and central banks hated Sound Money; it would never agree to any of their best laid plans.

You see, Sound Money could not be infinitely printed by governments or central banks. Originally, before governments got into the money business, money could not be printed at all; it had to be dug out of the ground and then minted into a coin. Later, governments took it upon themselves to stockpile gold in a vault and create paper currencies 100% backed by the gold. Always one to offer something it doesn’t have at a price it cannot sustain, Government reduced the gold backing of its currency over time and then, in 1971, it cut ties to gold altogether. That was the requiem for Sound Money and ever since then there has been absolutely no limits on the amount of currency central banks can create. Which means there has also been absolutely no limit on how much debt governments can rack up.

So here we are.

But just because there have been no limits to all of this economic madness in the short run does not mean there will never again be any limits. History shows that market forces cannot be perpetually suppressed and distorted – eventually the market will win out. The Day of Reckoning will come.

Until the morrow,

Joe Withrow
Wayward Philosopher

IBC – What’s it all about?

by R. Nelson Nash
Author of Becoming Your Own Banker
Article originally published in the October issue of BankNotes

It should be evident to most people that the last 100 years have been very violent in the financial world. Why? What happened to cause all this turbulence?

During this period we have witnessed the bloodiest century of all time. Two World Wars. Endless smaller wars all over the earth. An influenza epidemic after WWI. Nations formed and then self-destructed. New diseases coming into existence. Endless turmoil in the Mid-East. Empires coming apart. Financial euphoria followed by inevitable busts. Unbelievably powerful weapons and weapon systems. Propaganda perpetrated on an unsuspecting public such as man-made global warming. The list could take several pages to itemize them.

So, what’s going on? All of these actions are preceded by thoughts of the people involved at any time and place. Or, maybe it could be best described as lack of thought! It appears to me that people have forgotten how to live. It could be that they never learned how to live in the first place. Maybe it could be because of the way people feel. We seem to have a generation of “touchy-feely” folks that are in places of leadership and they influence the actions of every-day people.

Wars make absolutely no sense, but it is evident that this behavior is a common denominator throughout this time frame. Nothing good came from them. Yet, wars are glorified in the minds of many people. Things like Tom Brokaw’s book, The Greatest Generation. In reality it was a disaster — because of what it did to the minds of the people. They heard lies and came to believe them. Our country had already adopted Socialist ideas a number of years earlier, but this head-long plunge gained tremendous momentum during this period. I was there to witness it as a teenager and have seen it unfold to become the monster that we have today.

The historian, Dr. Clarence B. Carson wrote a masterful book entitled, The World In The Grip Of An Idea back in the 1970’s. He did a great job of explaining how we got into this abominable situation. The book needs to be re-published and Dr. Paul Cleveland and Dr. L. Dwayne Barney are in the process of re-writing it at this time. The world needs this book very much and so I encourage you to get a copy when it becomes available.

From my own perspective, money is the real common denominator in human action. The great Austrian Economist, Ludwig von Mises points out that the business cycle is caused by central banks. They inflate the money supply dramatically and people can’t tell the difference between “real money” and the “counterfeit money” (fiat money has no real basis). They feel that it is real wealth and so they do things that are totally irrational. This creates booms in the economy. In due course of time, reality rears its ugly head, and the bust follows.

This pattern has a long history, but it seems that every generation during the boom years feels that “Yes, those things happened in the past – but, this time it’s different!” This is nothing but hubris in its purest form. It is the “Arrival Syndrome” that I describe in my book, BECOMING YOUR OWN BANKER. It is the worst thing that can happen to the human mind!

Government debt all over the world is huge. But, consumer debt in these nations is approximately equal in volume. Bankers have created a mind-set in people that “you don’t have to save money– just spend, spend, spend! We are going to take care of your financial needs.” A local Credit Union advertises “Get a Legacy Lifestyle Loan from us.” Translated: “If you don’t like your present lifestyle, then get a loan from us so you can live the way you want to today! Don’t worry about having to repay the loan.”
We are bombarded with such stuff every day. If you listen to financial advertising very long then it becomes “hourly!”

Your local, commercial banks are the primary source of inflation. They lend money that doesn’t exist. If anyone else did that they would be put in jail! But, this chicanery has been going on so long that most everyone considers it normal.

In the video, Banking With Life, Dr. Paul Cleveland points out that people confuse money with wealth. Wealth is your productivity, and things that you own. Money is just the medium of exchange that we use to acquire wealth. Creating a pool of money from which to buy wealth is a necessary function in an economy. This pool of money is known as banking! We could not live the way we do today without the concept of banking! It is sovereign! Some party in your life is going to be the banker whether you recognize it or not!

That party should be you! John Donne (1572-1631) gave us the thought, “No man is an island.” Therefore, this Infinite Banking Concept must involve other people in the form of a contractual relationship. The perfect financial instrument to accomplish this has been in existence for over 200 years. It is known as Dividend-paying Whole Life Insurance (Preferably with a Mutual Company – one that is owned by the policy owners). Your medium of exchange must be warehoused somewhere! There are no exceptions!

This is a place that cannot inflate the money supply. This Infinite Banking Concept has been taught through my book, Becoming Your Own Banker and the follow-up book, Building Your Warehouse of Wealth. Further explanation is provided by How Privatized Banking Really Works by Carlos Lara and Robert P. Murphy, PhD.

Through these books and seminars that are taught all over the USA and Canada, there are now thousands of people who will never have to make loans from an institution that inflates the money supply and creates “booms and busts.” You, too, can become your own banker!

Please see the October issue of BankNotes for the original article and others like it.

Fiat Money Undermines Society

submitted by jwithrow.

Journal of a Wayward Philosopher
Fiat Money Undermines Society

October 14, 2014
Hot Springs, VA

The S&P is checking in at $1,878 today, gold is up to $1,234, oil is down to $85, bitcoin is up to $403, and the 10-year is now down to 2.20%. All in a day’s work, I suppose.

Autumn is truly a beautiful season. There is a gentle, crisp breeze in the air up here in the mountains of Virginia and a myriad of red, orange, and yellow leaves dot the landscape. As we await Maddie’s entrance, wife Rachel and I will spend the day making homemade apple cider to celebrate such a fine season!

Last week I suggested that fiat money always seems to undermine the morality and stability of society throughout history. Let’s examine this a little bit more today.

First, we must be clear about what fiat money is. Fiat money is any currency that derives its value from government law and regulation. The word ‘fiat’ is Latin for “let it be done”. Essentially, fiat money is what the government says is money. Once decreeing something as money, governments usually force people and businesses to use whatever it is through legal tender laws. Fiat money has taken different forms throughout history. Today we primarily use electronic credit-based national currencies (U.S. dollars, Euros, Yen, etc.) as our fiat money. We still use fiat paper currency also but we are gradually transitioning away from this form of money. Here in the United States we use “Federal Reserve Notes” as our paper currency. Take a look at what the bills in your wallet say to confirm this.

Societies, to the extent that you can pinpoint a beginning and end to them, have not started out with fiat money. Historically, society starts out with free-market money – usually gold, silver, or some other valuable commodity – and then unwittingly moves to fiat money as its government becomes more and more corrupt.

Rome was using a pure silver “denarius” at the beginning of the 1st century, A.D. Roman emperors then learned how to ‘print’ money by melting down their silver coins, adding cheap base metal into the mix, then re-minting the denarius with a lower silver content. This enabled them to mint more silver coins than they had melted down, but the denarius was no longer pure silver.

The denarius was 85% silver by the year 100. By 218, the denarius was down to only 43% silver content. And by year 244 the denarius contained only .05% silver. This meant that each Roman denarius coin could purchase 99.95% less than what it could originally purchase! In other words, everyday prices were 99.95% higher for Romans in year 244 than they were in year 1.

So why in the world did the Roman emperors debase their currency so much? Why, for great wars, great public works, and to enrich themselves, of course! You have read all about the Roman Empire in the history textbooks. Maintaining an empire requires soldiers and soldiers require food, water, and payment. Oh, and weapons. This gets more and more expensive as the empire gets bigger and bigger. I bet you have read about the coliseum too – it was very expensive to build and maintain. Who was going to pay for it all?

The emperor certainly wasn’t about to curtail his lavish lifestyle to chip in. Instead he turned to dishonest fiat money: he melted down silver coins and made more of them with a lesser silver content. Then he paid the soldiers and workers and pretended like nothing was different about the money. As the currency was debased, Roman society got poorer and the government became more corrupt. Eventually the Roman Empire became impoverished and collapsed.

Looking farther east, Marco Polo documented the use of fiat money in China:

“You might say that [Kublai] has the secret of alchemy in perfection… the Khan causes every year to be made such a vast quantity of this money, which costs him nothing, that it must equal in amount all the treasure of the world.”

He continues:

“Population and trade had greatly increased, but the emissions of paper notes were suffered to largely outrun both… All the beneficial effects of a currency that is allowed to expand with a growth of population and trade were now turned into those evil effects that flow from a currency emitted in excess of such growth. These effects were not slow to develop themselves… The best families in the empire were ruined, a new set of men came into the control of public affairs, and the country became the scene of internecine warfare and confusion.”

The same thing happened in France when John Law introduced fiat paper currency in 1716: the currency was inflated into oblivion and the society was impoverished. And in Weimar Germany in the 1920’s – it got to the point where Germans were using paper marks to heat their furnaces! Argentina has followed suit a couple times in the late 1900’s. Zimbabwe was one of the wealthiest countries in Africa until its government ramped up the printing presses in 2008 and implemented price controls. It wasn’t long before civilized society was wiped out in Zimbabwe and people could no longer get enough food and water for themselves.

Do you notice a trend?

Fast forward to present day: the U.S. dollar has lost 98% of its value since the Federal Reserve was implemented in 1913. Much of this devaluation has occurred since all ties to gold were removed in 1971. What has happened to our cost of living?

Technology has also boomed since 1971 such that the means of production and distribution are much more efficient today than ever before. It seems to me this scenario should have reduced the cost of living for everyone. But has it? It wasn’t that long ago when an average American household consisted of only one wage earner. This one income was enough to provide a high quality of life for the family while the spouse stayed home to raise the kids. Most households now require two incomes just to get by.

The American standard of living is going in the wrong direction and this is largely due to fiat money. Further, the fiat money is used primarily for the same things it has always been used for throughout history – war, public works, and the enrichment of the political class…

I will leave it there for today but I hope my point was made.

Until the morrow,

Joe Withrow
Wayward Philosopher

For more of Joe’s thoughts on the Great Reset and regaining individual sovereignty please read “The Individual is Rising” which is available at http://www.theindividualisrising.com. The book is also available on Amazon in both paperback and Kindle editions.

The Middle-Class is Fading

submitted by jwithrow.

The middle-class is fading. Fast.

The jobs that have been lost since the financial system teetered on implosion in 2008 have not come back. Those jobs are not coming back. More education won’t bring them back. More laws won’t bring them back.

The government’s job report says that more and more jobs are being created, but guess what? They are mostly low paid part-time or temporary jobs; they are not the middle management jobs in the high rise buildings.

As for why the middle-class is being wiped out, it’s no mystery. This very same scenario has occurred all throughout history. One can look back as far as the time of the Roman Empire and see that there is nothing new under the sun. History rhymes and those ignorant of history are doomed to repeat its mistakes.

You see, every time the currency of the land has been inflated and debased, the middle-class has been destroyed. Inflation transfers value from those who must work to earn currency to those who control the currency supply.

They don’t tell you this in school. They don’t tell you this in college. They don’t even tell you this if you major in finance or economics. They probably don’t know themselves. So most people never understand what is happening. Their paycheck gets bigger and bigger so they can’t figure out why they can never get ahead. They don’t realize that their bigger paycheck is buying less and less. They don’t understand the difference between nominal income and real income.

In Roman times it was the government that controlled the currency supply. The Romans would collect taxes and tributes from citizens and conquered peoples and they would then melt the precious metal coins and add in cheaper metals such as copper to re-mint more coins of lower value. They would then pay the Roman army with these cheaper coins and pretend that they had the same value as before. The general market caught on to this process and began to charge higher prices for food and goods in response. The middle-class was destroyed over time and eventually the economy collapsed. Then the Empire fell.

In modern times it is the Federal Reserve and the other central banks of the world that control the currency supply. They do this by simply creating currency units from nothing and using the new currency as they see fit. They inject some of this new currency into the banking system, they use some of the new currency to buy government debt, and they inject some of the new currency into the IMF and foreign central banks. This directly leads to more and more debt and an increase in consumer prices across the board.

They are printing currency at will so why is the middle-class working so hard for 2% annual raises?

The rules of the game have changed and those unable to recognize this and adjust accordingly will be wiped out with the middle-class – just as has happened throughout history.

Sound Money

submitted by jwithrow.

The most important facet of free market capitalism is sound money. If you don’t have sound money then you don’t have free market capitalism – you have something else.

Sound money is simply money that serves as a reliable store of value. Put another way, sound money is money that does not constantly lose its purchasing power. Sound money affords one a reasonable expectation that one unit of money today will buy the same amount of goods and services as one unit of money tomorrow. And next month. And ten years from now.

What a novel concept!

Anyone who has taken a finance course is familiar with the time value of money principle. In finance class, we learn to discount our money over time based on the inflation rate. We are taught, correctly, that present dollars are worth more than future dollars.

What we are not taught is that this is a deformation of free market capitalism!

The general market has chosen gold and silver to serve as money throughout most of history because the precious metals are particularly well suited for this purpose: they are limited in supply, they have functional utility outside of the monetary system, and, unlike our money today, they cannot be created from nothing.

Make no mistake about it, that’s where our money comes from today: nothing. It is created from nothing and then loaned into existence at interest. See the Hidden Secrets of Money video series for a more thorough examination of our money.

You see, money should not be a function of government nor should it be a function of a central bank behind closed doors. And it certainly shouldn’t be created from nothing. This is why the U.S. Constitution only authorizes gold and silver as legal tender; the Founders knew well the virtues of sound money and the dangers of fiat currency.

Did you know that the U.S. dollar was defined by the Coinage Act of 1792 to be 371.25 grains of fine silver? This act set the standard weight and measure of the dollar in terms of silver and individuals in the market were still free to accept or reject coins of differing weights and measures as they saw fit.

But we digress.

Here is why sound money is important to you:

Every dollar to your name is constantly losing value and there is no way for you to predict how much value your savings will lose over time.

This is a direct result of the monetary system that is in place whereby central banks create money from nothing and then lend that money to governments and to commercial banks at interest. That money then enters the economy when governments spend it and when commercial banks lend it out to customers. This is done constantly and it is why your money constantly loses value. Such a system has a profound impact on people from every walk of life.

How can we accurately plan for anything long-term if our money is constantly losing value? We can only guess.

What we do know from history is that sound money leads to a stable economy while fiat money leads to booms and busts.

The general market prefers the former while big government prefers the latter.

For more information on the sound money principle see the article links below. For a lot more information on sound money and monetary history see the book links below.

The Principle of Sound Money

The Simplicity of Sound Money

An Introduction to Sound Money