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The events of the last few months have been far more important than I
had originally given them credit for. The bottom line was when a group
of European nations, together with the International Monetary Fund, gave
loans to Greece
to pay off the rioters. That very day Jean-Claude Trichet
was in the financial markets buying bonds.
Of course, Trichet was not buying bonds with his own money.
None of the political figures we read about in the newspapers and who parade
about pretending to be full of love and generosity actually give their own
money. Indeed, even the European Central Bank did not give its own
money. Further, if we search through the countries of Europe, we do not
find a single one of them with extra money to give to Greece.
Then what was this
all about? Why were markets rushing up and down? Why were the
newspaper headlines screaming? Why was there violence in the streets,
with people being killed? Everybody wanted to borrow, and nobody had
any money to lend. That, of course, is the way of the world. If
you don’t like this fact, then I suggest you take it up with the
Creator of the world. If you don’t like the Creator you have now,
then just change your religion and get another Creator. No problem,
human beings have been doing that for a long, long time.
So Jean Claude Trichet did not have any money to lend to Greece.
Where did he get the money to buy European bonds? The answer is that he
printed the money out of nothing. That is, he counterfeited it.
Now Trichet is not the worst of a bad lot. He is more
like the best of a bad lot. And that is the problem. If Europe
could not stand up under these pressures, they can not
be trusted to stand up to similar pressures in the future. And whenever
someone in Europe in the future wants to
spend more money than he has earned, this will be the “solution.”
Of course, the
printing of euros will depreciate the value of the
euro. Thus, when the people of Greece
go to spend their money, they will find that there has been a general rise in
prices. The printing of money does not create wealth, and they are just
as poor as they were before.
There are two
dramatis personae in this sad tale. The first consists of the
protestors. These are mostly members of the Greek anarchist movement
which dates from the protests against the Greek military junta in 1973.
These protests led to the fall of the junta in 1974 and its replacement by a
democracy in 1975.
These people live in
a world where there are only two political parties, a party of love/peace and
a party of hate/war. (Supporters of the second party prefer to call it
a party of strength or practicality.) The party of love and peace is
called the left. The party of hate and war is called the right.
These two parties are continually contesting with each other. First the
left wins. Then the right wins, etc. For example, Julius Caesar
was on the political left during his lifetime (1st century
B.C.). But those who followed in his footsteps and called themselves
“Caesars” morphed into the political right (Kaiser, Czar)
What characterizes
the political left is their ability to explode into violence while still
maintaining the self-image of love and peace. The typical leftist will
have the idea firmly fixed in his head, “I am a person of love”
while he is throwing a bomb or murdering a fellow human being. For
example, Stalin was described in the media as a person of the left even while
he was murdering his fellow Bolsheviks and killing millions of his own countrymen.
(Stalin killed, not only Trotsky, but pretty much all of the original
Bolsheviks who made the 1917 revolution with him.) Frequently, these
leftists will switch over to the right (Mussolini and Hitler). Then, a
person of the right might feel remorse for his crimes and switch over to the
left. Both sides have lost the concept of a middle ground where human
beings have rights and where everyone’s rights are respected.
This ability to twist
one’s mind into a pretzel and believe what one wants to believe is very
characteristic of both left and right. The Greek protestors, you
remember, were trying to get more wealth by rioting n the street, setting
fires and killing people. Yet these actions characteristically destroy
wealth, not create it.
The second dramatis
personae in this story is the paper aristocracy. All central banks in
the world today create money out of nothing. This has a set of
consequences which transfer wealth from one group to another, as follows:
The most important
task of any central bank is the manipulation of the rate of interest away
from its free market level. Prior to the 1780s, charging interest was
banned in all countries. (In 1786-87, it was legalized in the northern U.S.
and Britain.)
Since there are always many people who want to go back to the past, there is
always a political force for zero interest rates, and it is the bias of all
central banks to lower the (real) rate of interest below its free market rate
(which was about 5% real for over a century during the period when the U.S.
had little or no central banking).
The way it
manipulates interest rates is by buying government securities, Treasury bills
being a good example. A one-year T-bill is redeemed at par (100).
It is issued at some price below par, and the interest consists of the
difference between the issuing price (or current price) and par. For
example, a T-bill may be issued for 95. It is redeemed at 100.
Thus the interest received by the buyer is 5/95 = 5.26%. The current
U.S. rate for the 1 year T-bill is 0.35%.
Modern central banks
have no capital of their own (although historically central banks started out
as ordinary banks and then got special privileges from the government).
The only way that a modern central bank gets money is by printing it
(although this is usually covered over with a collection of lies. For
example, modern American money contains the words “Federal Reserve
Note.” But a note is a credit instrument. It certifies that
one party owes money to another, and all notes specify the interest rate
which the borrower has agreed to pay to the lender.
It can be proven in
economic theory and has been the case in every society in which money has
circulated that notes (or other credit instruments) cannot circulate as
money. This is because people will not use them as money. When a
person has both a note and ordinary money and wants to buy something, he
decides to keep the note (because it pays interest). He pays for his
purchase with (non-interest bearing) money. Thus, it is the
non-interest bearing instrument which circulates and acts as a medium of
exchange. In other words, a “Federal Reserve Note” is not a
note. And calling it a note was simply one of many lies which emanated
from the group around J.P. Morgan at the time they slipped over the Federal
Reserve System on a country which had regressed badly in its knowledge of
economics.
In modern central
banking, pieces of paper, which have been printed up by the central bank
(emblazoned with all kinds of fancy words and symbols to impress the
ignorant), are declared to be money by the government (in what is known as a
legal tender law). This says that you must treat this fancy paper as
though it had more economic value than similar pieces of paper. The
original paper dollars issued by the Federal Reserve in 1933 were required to
be treated as though they had the same value as 1/20 oz. gold. This
value does not come from it being a note or a security. It comes
because the government has “blessed” this piece of paper with the
words “legal tender.”
It should be noted
that, although the situation may differ from country to country, here in the
U.S. the legal tender enactments by Congress are illegal, hence null and
void. This is because we have two levels of law in the U.S. There
is the government’s law, imposed on the people. And there is the
people’s law, imposed on the government. The people’s law
is the Constitution. This is the supreme law, and any statute
law which conflicts with it is null and void. (Those interested may
read the debates of the constitutional convention, Aug. 16, 1787, in The
Madison Papers. The authors of the Constitution were very
hostile to the paper money which had been issued during the 1770s and early
1780s and intended to ban it. The vote to ban paper money in America
was 9 states to 2 states, and this has never been changed.) Thus, our
current government is illegal. This is not a laughing matter because
the Coinage Act of 1792 imposes the death penalty for debasement of
the currency, a fact which should give Ben Bernanke, Alan Greenspan and Paul
Volcker serious pause.
“SEC. 19. And be it further enacted, That if any of
the gold or silver coins which shall be struck or coined at the said mint
shall be debased or made worse as to the proportion of fine gold or fine
silver therein contained, or shall be of less weight or value than the same
ought to be… every such officer or person who shall commit any or
either of the said offences, shall be deemed guilty of felony, and shall suffer death.”
Our current U.S. money has not only been made worse
as to the proportion of gold therein contained. It has been made zero.
As the central bank
buys Treasury Securities with its printed money, it forces their price up,
and, as we have seen, this forces the interest rate down. But low
interest rates are beneficial to borrowers (which are primarily the
nation’s large corporations). They are harmful to savers (who are
primarily the middle class). In this regard, the central bank is
stealing enormous amounts of wealth from the nation’s middle class and
giving it to the very rich.
As noted, as a side effect
of the lowering of interest rates, the central bank acts like a
counterfeiter, printing money out of nothing. This causes all prices to
rise. However, they do not rise equally. The wages of labor rise
more slowly than the prices of goods. Thus real wages go down.
Because of this, real wages have been declining in this country since 1972
(one year after Nixon completed the abolition of the U.S. gold
standard). Since real wages are declining, real corporate profits go up.
I call the people who
benefit from the printing of money and easing of credit the paper
aristocracy. The paper aristocracy always wants more paper money and is
trying at all times and in all countries to urge the central bank to issue
more money. To accomplish this, there have to be a continuous series of
crises (real or imagined) to serve as an excuse.
So behind the Greek
protestors are the paper aristocracies of the world stirring up the media
into a hysteria. The paper money Trichet is now issuing will raise
prices throughout Europe, including Greece, and the Greek protestors, instead
of getting richer (as they think) will get poorer (in real terms).
Trichet’s claim that he will sterilize the money he is now creating is
a standard central bank lie. I have heard that promise many times, but
I have never seen it kept.
That is what is going
on in the world today: a group of stupid and venal people who think they can
get something for nothing by throwing a tantrum and acting like children and
a group of sophisticated and shadowy rich people who manipulate these fools
behind the scenes and use them to steal from the ordinary people of our time.
This may be the end
of the attempt to make the euro into a semi-sound money, which started so auspiciously
a decade ago. The idea of a paper currency bound down by rules now
appears as a failure. The only money which has prevented the
depreciation of the currency in world history is gold or silver, and this is
the only system which has brought prosperity to mankind.
I invite interested
readers to subscribe to my fortnightly (every 2 weeks) newsletter, the One-handed
Economist. This applies my general theory of economics to specific
stocks and commodities, making recommendations as to what to buy and what to
sell. You may subscribe by visiting my website, www.thegoldspeculator.com, and pressing the Pay Pal button ($300) of by mailing a check for
$290 ($10 cash discount) to The One-handed Economist, 614 Nashua St. #122,
Milford, N.H. 03055. Thank you for your interest.
Howard Katz
The Gold
Speculator
Howard S. Katz is the editor/publisher of the One-handed Economist, a
financial letter which combines fundamental and technical analysis. He was a
bug on gold in the 1970s and became a bug on gold again in late 2002.
Subscribe
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