Double Jeopardy by Antal E. Fekete

Keywords : Fekete | Gold Standard | Hedge | Wind |

Summary

The Constitution protects the citizen against "double jeopardy", that is, the judicial arm of the government cannot inflict harm on the citizen twice for one and the same reason. Apparently, the principle of double jeopardy does not apply to the monetary arm of the government. The Federal Reserve System can punish the citizen twice whenever it manipulates the rate of interest to his prejudice. In particular, savers are put in double jeopardy when the rate of interest is manipulated upwards. They are hit twice. First, when the purchasing power of the currency is decimated as prices rise; second, when the capital value of savings is decimated, both caused by rising interest rate structure. Producers are also hit twice when the rate of interest is manipulated downwards. First, when prices fall (or pricing power is lost, or market share is ckipprd). They are hit again for the second time as their burden of debt is increased, both caused by falling interest rate structure.

"Shabby secret" of the regime of irredeemable currency

In this series "Dismal Monetary Science" I have argued that the regime of irredeemable currency has brought the Nemesis of flowing and ebbing interest rates upon the savers and the producers. Paradoxically, savings accounts are pilfered when the rate of interest is manipulated upwards, and capital accounts are plundered when it is manipulated downwards. A lot of people have difficulty in understanding this. They are victims of propaganda by mainstream economists who mendaciously hail rising interest rates as godsend for the savers; while hailing falling interest rates as godsend for the producers. But the truth, as opposed to propaganda, is that savers are creditors who suffer capital losses as the rate of interest is driven up, and producers are debtors who suffer capital losses as the rate of interest is driven down. In other words, savers are in the same boat with the bondholders; producers, with the sellers of bonds. As bond prices vary inversely with the rate of interest, those in the first boat suffer losses when the rate of interest is rising; those in the second, when it is falling. Bondholders are locked in at the wrong rate as bond prices fall; sellers of bonds are locked in at the wrong rate as they rise.

This is the 'shabby little secret' of the immorality, nay, the criminality of the regime of irredeemable currency. It is a scheme enabling bond speculators, the multinational banks and the hedge funds, to drive down bond prices in order to tap into savings accounts, only to drive them up again in order to tap into capital accounts. It is: "heads: I win; tails: you lose."

The producer is plundered even if he is technically out of debt. To the extent he needs capital goods in order to produce, a falling interest-rate environment means that he has financed his production at rates far too high. This fact should be registered as a loss in the profit/loss statement of the enterprise, and should be compensated for by the injection of new capital, the same way as losses caused by damage to plant and equipment due to fire, for example, are. Instead, businesses are merrily paying out phantom profits as dividends, further weakening capital structure. They plunge into bankruptcy not knowing what has hit them. They don't realize that they are victims of a hidden deflationary process, a huge illicit wealth-transfer from producers to the financial sector. The obscene profits of bond speculators, the multinational banks and the hedge funds, do not come out of nowhere. Bond speculation is not a zero-sum game. Speculative profits are siphoned off clandestinely from the capital accounts of the producers. Like computer hacking, this is a crime that leaves no physical traces of break and entry. Producers are the silent, captive, and passive participants on the short side of the bond market, with their capital at stake whether they like it or not. They are like lambs to be slaughtered. Bond speculation aided and abetted by the government is responsible for denuding producers of their capital. What happened to the American industry during the past thirty-five years? Don't say that high-paying industrial jobs were "exported" to low-wage countries. Say that capital accounts have been plundered through falling interest rates and as a result a large part of American industry was bankrupted.

When governments inflicted global irredeemable currency on the world, they "forgot" to investigate the more far-reaching effects of their move. They looked at the problem of rising prices, and they were satisfied that central bankers can control it through "fine-tuning" the increase in the money supply. But they never looked at the problem of rising interest rates as it affects savings accounts. Worse still, they never looked at the more remote consequences, of the tide turning, and falling interest rates devastating capital accounts. This was criminal negligence, and the world still suffers from the consequences of it.

A low interest-rate structure must not be confused with a falling one. While the former is beneficial to producers, the latter is lethal. We may conclude that the best economic climate for all non-parasitical elements of society is the one with a stable interest-rate structure. It has been charged that the gold standard has failed to stabilize prices. However, in a dynamic economy the stabilization of prices is neither possible nor desirable. The great merit of the gold standard must be seen in the feat that it can stabilize the interest-rate structure so as to prevent the financial sector from becoming a vampire sucking the life-blood of the producing sector. This is an unstable world and the best one can do is to stabilize interest rates by adhering to a gold standard. Prices will then take care of themselves.

Pilfering and plundering has been going on since 1973 when stable interest rates were thrown to the wind in exchange for "floating". Now, 35 years later, we have to be prepared for something much worse: the disintegration of the world's payments system, which would devastate not just the savers and the producers, but everyone outside of the clique of multinational bankers and their lap dogs, the corrupt politicians. As the world reaches the saturation point of the dollar glut, the international monetary system will seize up. Of course, central banks will issue statements to the effect that they are standing by with all their resources to support the dollar. However, this is just whistling in the dark.

………Paradox inside of a paradox…….Debt at the trough

Antal E. Fekete

San Francisco School of Economics

aefekete@hotmail.com

Read all the other articles written by Antal E. Fekete

DISCLAIMER AND CONFLICTS
THE PUBLICATION OF THIS LETTER IS FOR YOUR INFORMATION AND AMUSEMENT ONLY. THE AUTHOR IS NOT SOLICITING ANY ACTION BASED UPON IT, NOR IS HE SUGGESTING THAT IT REPRESENTS, UNDER ANY CIRCUMSTANCES, A RECOMMENDATION TO BUY OR SELL ANY SECURITY. THE CONTENT OF THIS LETTER IS DERIVED FROM INFORMATION AND SOURCES BELIEVED TO BE RELIABLE, BUT THE AUTHOR MAKES NO REPRESENTATION THAT IT IS COMPLETE OR ERROR-FREE, AND IT SHOULD NOT BE RELIED UPON AS SUCH. IT IS TO BE TAKEN AS THE AUTHORS OPINION AS SHAPED BY HIS EXPERIENCE, RATHER THAN A STATEMENT OF FACTS. THE AUTHOR MAY HAVE INVESTMENT POSITIONS, LONG OR SHORT, IN ANY SECURITIES MENTIONED, WHICH MAY BE CHANGED AT ANY TIME FOR ANY REASON.

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