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In A Paper System, All Assets Are Backed by the Treasury Bond

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Published : August 17th, 2012
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In a gold-based monetary system, every asset is ultimately backed by gold. This does not mean that every debtor (including banks) keeps the full amount of its liability in gold coin just lying around. Why would one bother to borrow if one did not need the money?

It means that every asset generates a gold income and every asset could be liquidated for gold, if necessary. If a debtor declares bankruptcy, the creditor may take losses. But he can rely on the gold income stream for each asset or if need be he can sell the asset for gold.

In a gold-based monetary system, money is gold and gold is money. Money cannot disappear; it does not go “poof”. Bad credit can be defaulted and must be written off. But money merely changes hands.

In a gold system, the promise of the gold coin is the only reason why anyone extends credit in the first place. Since 1913, there was a step-by-step evolution to our present irredeemable paper system. Now creditors are forced to accept the government’s scrip as payment in full. It continues to work (for the moment) partly because of inertia, but mostly because there is (still) good credit behind the dollar.

Let’s look deeper at what backs the money in the present irredeemable paper system. Start by considering this brief anecdote. Joe buys some equipment from John, to be paid Net 30. We say that Joe owes John $10,000. Next month, Joe comes back and gives the money to John. Joe is out of debt, but has the debt been extinguished?

No. The debt has been transferred. Now the Federal Reserve owes John the money! Surprised? Don’t be.

The dollar is the liability of the Fed.

The Fed, like every bank, must balance liabilities and assets. There is even a technical term for when they have liabilities without matching assets. Bankrupt.” How does the Fed itself balance its liabilities?

The Treasury bond is the asset of the Fed.

Getting back to John, he deposits the money in the bank. The result is that the bank owes John the money, and the Fed owes the bank the money. The banks will typically buy Treasury bonds because they are “safe” and they pay a yield. In this case, the Treasury owes the bank the money.

Notice that whether the bank holds Treasury bonds directly, or whether it holds dollars that are the liability of the Fed backed by Treasury bonds as the asset, the Treasury bond ultimately backs the bank. And thus the Treasury bond ultimately back’s John’s asset, which is the deposit account.

The same principle holds true for other assets. A stock (equity) is valued based on the expected flow of dollars it will generate in the future. In addition, every company is obliged to hold dollars in a bank to cover payroll, pay suppliers, etc. Few companies could survive one minute past the default of their banks on these deposit accounts.

If this all seems perverse, that is because it is! The dollar is backed by the Treasury bond, and the Treasury bond is paid in dollars. It is circular, self-referential, and it is a ponzi scheme.

Under gold, the metal itself is the risk-free asset. This is not a mere definition, but an observation about reality. Gold simply is. It is not a promise and therefore cannot default. But under paper, the Treasury bond is defined as the risk-free asset. Obviously, one cannot eliminate risk by defining it out of existence.

It is important to emphasize that if a party’s asset goes bad—especially with the leverage employed today—it will be forced to default on its liability. By the design of the system, its financial assets are someone else’s liabilities (and its other assets depend on the liabilities of the Treasury). The ultimate “someone else” is the Treasury in all cases. When they default, all financial assets will be wiped out. This means all debtors will default. This means all creditors will take total losses. Creditors include not only corporate employers, but savers, pensioners, annuitants, etc.

The next time someone blurts out that the dollar works just as well as gold (or better than gold!), an explanation of this should shut him up.



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Keith Weiner is a technology entrepreneur and president of the Gold Standard Institute USA. He was the founder of DiamondWare, a Voice Over Internet Protocol software company, which he sold to Nortel in 2008. He is an Objectivist who has his PhD from the New Austrian School of Economics, with a focus on monetary science. Keith, who currently trades and analyzes precious metals and commodities, advocates a return to a proper gold standard and laissez-faire capitalism. He lives with his wife near Phoenix, Arizona.
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..."the Treasury in all cases" and to continue: The Treasury is backed by the mightiest industrial-military-espionage system the world has ever known (remember Eisenhower's warning). This sytem is now controlled by a political system that has an $ IV line from the same financial / corporate system made possible by a Supreme Court (last defence line of the Constitution) decision to allow unlimited campaign contributions from the same. Thus we end up with carnival type elections that more or less entertain the voters in a manner in which the voters are familiar and is similar to a sporting event. This system will not be changed by the voting public.

One of the most practical business persons I ever met told me once "there will be no change until people are hungry and cold". As long as the connected can get their "take", and can keep the voters from being hungry and cold (food stamps, heating oil subsidies, etc.), there will be little or no change. Theft in high places, like MF Global, Banking Cartels etc. will have unusual indemnity and ultimate control. Not sure this has ever been any different it's just now because of the internet we have a somewhat uncontrolled vehicle to be in the know and group together to exclaim how aghast we all are. When we were ruled by Kings it took distance and a fight to break away. Soon, the internet will even be in their control - notice the attempts at recent legislation. Travel is already controlled.

As humans, and in general, we like a fair playing field and if there is a foul and the ref misses it we get excited and point and shout and scream. If done once or twice, the crowd may be somewhat forgiving. If the referee continually does this we sense ineptness. If done ALL the time we sense the game is fixed. At this point we can leave the game or stay and watch. Since we have the whole family along (read nearby) we must stay and watch the game because we don't know where else to go and would miss them too much.

If MF Global, the investigation of manipulation of precious metals, the LIBOR scandal, GS continually goes unprosecuted and always gets a "Get Out of Jail FREE" card, then you know the game is rigged. This will NOT be remedied at the voting booth. There may be NO remedy except to pay the mob off for it's protection and just keep out of harms way. No amount of gold or silver or silly guns can protect you from this bunch of thieves. They will simply suffocate with endless paper, confiscate or taxicate but this mob will stay in control. But if you stay, you must pay.

Please understand, there may be no solution in the time we have remaining here.
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If I may, the remark of your business person " there will be no change until people are hungry and cold" is not true.

When the poor are hungry and cold, they do not make revolutions, because they cannot take the risk and know that they will die of cold and hunger if things go wrong.

Revolutions and change are made either by the structure in power when it cannot be fed or kept at bay anymore, or by a new economic class that does not have political clout. Just look at the French, the Russian and the American revolutions.

The idea that the poor make revolutions and that, for this reason, they should be bought and corrupted (the foodstamps and subsidies ou mention) is totally marxist by nature, and socialist in implementation (which is what the western states have become).
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The Russians and French were hungry and cold. The Colonists could see they would become so if the King could tax them endlessly and without representation from the Colonist as producers. We are (in a sense) right back where we started. At least on the Federal level we have taxation without representation. We elect our Congresspersons and they go to Washington where they are bought off by lobbyists and corporate campaign donations. I am speaking in general terms. On occasion, my Senator comes home with a bag of money she shows the local newspaper and they report she got this money for us so we can keep working on some boat we no longer need. Yeah!
All the while we are taxed directly on our wages and indirectly by the diminshed purchasing power of the currency in which we are paid. Taxation without representation.

Local, at least in a small state, one feels like one has representation and "say" at the voting booth.

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Revolutions on tax issues, I would follow that. American revolution and the american war for southern independance.

Concerning the French, the tax issue had become so obsolete that it was more productive not to work than work before the French revolution, and all the upper class was in a system of entitlements (charges) which had brought the debt level to unsustainable level. The system was going broke, and needed to be mended to keep on paying for the entitlements, thus the crisis of 1789, which was all but an anti royal mouvements.

Not much change with today, as you may see.

Did you know the VERY FIRST vote of the French National Assembly in 1789 was to decide ... to keep on paying the debt ? Everything was done to keep those payments : debt, sale of church assets, and so on.

Totalitarian economic measures were then put in place to try to sustain the un-economic system, and all hell broke loose in the "terror".

A new currency was created, the Franc Germinal (5 grams of 900/000 silver), which became the currency of Europe except England for 100 years.

As you say, we are right back where we started. By the way, isn't this the precise definition of a revolution to go around and to come back where you started ?
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Revolutions on tax issues, I would follow that. American revolution and the american war for southern independance. Concerning the French, the tax issue had become so obsolete that it was more productive not to work than work before the French revoluti  Read more
SNAFU - 8/20/2012 at 1:23 PM GMT
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