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Last week I
argued that the theory of a coming decline in prices just around the corner
was a balloon full of hot air, and like all such balloons it was bound to sail
into the atmosphere. So far from this “deflation” theory
being true, it is a deliberate falsehood and in fact is a very good indicator
that the exact opposite will happen.
The
rationale (not the real reason) for the existence of the Federal Reserve is
to combat what is called “deflation” and “depression”
(both assumed to come causelessly out of nowhere and to be bad. The
real reason for the Federal Reserve is to assist (and provide government
support for) the bankers in their creation of money.
In
the partial gold standard which existed in the U.S.
from 1788 to 1933, commercial banks were allowed to create money in excess of
their gold. The banker issued a gold receipt. This was sort of a
ticket for gold and was similar to the baggage receipt you get at the airline
or the receipt you get at a social function when you check your hat and
coat. The banker promised that he would always redeem his ticket for
gold whenever he was asked. But unlike the airline or the hat check
girl, these commercial bankers did not always keep their promises.
This
is very well illustrated by the events of the War of 1812. It had
become customary for bank tickets to circulate as money (since they could be
redeemed as money at any time). So when Congress declared war on England
in 1812, the war advocates promised the country that taxes would not be
necessary. Their idea was for the Government to borrow bank tickets and
use them to pay for the war. In short, the pro-war argument was, let us
have a war, and we don’t have to pay for it.
If
you study the literature of the day, you will find these bank tickets
referred to as bank notes. But this is more economic
gobble-de-gook. A note is a financial instrument which signifies a
debt. It promises repayment of principal, and it yields interest.
It is precisely because a true note yields interest that it cannot be used as
money. This is not only true in theory, but the experiment was actually
tried by Chaim Soloman (sometimes called the financier of the American Revolution
and the man who raised the money so that Washington
was able to attack Cornwallis at Yorktown
in 1781). Solomon issued low interest bearing notes, which were true
notes because they yielded interest, and tried to get people to use them as
money. But whenever anyone who carried these notes wanted to buy an
item, he would reach into his purse. He would pull out his regular
money and Solomon’s notes and think, “Hey, these notes earn me
interest. I am going to hold on to them.” Therefore,
Solomon’s notes did not circulate. They remained in
people’s purses. But of course to be money an economic good must
circulate. It must change hands. That is the distinguishing
feature of money. Thus Solomon’s experiment failed. His
notes failed to be money (i.e., to circulate) precisely because they were
notes (i.e., they yielded interest).
In
order to lend money to the Government, the commercial bankers issued the
above gold tickets (wrongly calling them notes) in much greater quantities
then they had gold. Then when the British sacked Washington
in December 1814, the people who held these tickets ran to the banks
demanding their gold. The banks could not honor their promises to pay
because they did not have enough gold. Banker tickets fell as low as 75¢
on the dollar.
President
Madison called a Cabinet meeting and asked how they were going to pay for the
war, and the bankers told him that they did not dare create any more money
(because the tickets would fall even further). When Madison
saw that it would take a tax increase to finance the war, he offered the
British generous terms, and peace was made (Treaty of Ghent)
before the end of the year.
The
War of 1812 set the bad example which has thrown American history off the
course intended by the Founding Fathers. The commercial bankers were
not punished for their default on their promises. They made money from
the interest on their government loans, but did not have to pay interest.
This
is not to condemn banking as such. The world was emerging from the
Middle Ages, when interest had not been understood. Later the correct
principles of banking were established in the form of the savings bank.
This was a bank which acquired capital by paying interest (e.g., a savings
account) and then made money by lending to borrowers (such as home buyers).
The good banker redirects capital to where it does the most good and makes a
profit in the process. He has a knowledge of who has the greatest
ability to produce wealth and aids such people in controlling the capital of
society.
Unfortunately,
the 20th century saw a regression to reactionary principles (all
dressed up and called progressive). Today’s “savings”
banks have become commercial banks, and a department of government (the
Federal Reserve) has been created to help them print money.
Counterfeiting has become “legal.” And the economies of
America and the world are being destroyed by massive issues of paper money.
Below
I have the chart of the monetary base (from the St. Louis Fed.) going back to
1984. The chart has to be studied carefully as it is arithmetic instead
of geometric. For example, the rise from 1984 to 2000 is a triple
(200%), but to a causal, unsophisticated reader it appears mild. The
rise, however, from September 2008 is anything but mild. The monetary
base has more than doubled in less than 2 years. This rise, by the way,
is the fault of the Republicans (Bernanke and Bush). Obama is guilty of
endorsing and continuing it, but thus far he has not earned the greater share
of the blame. (Isn’t it interesting how we always seem to have 2
parties but 1 policy. The Republicans pretend to favor the traditional
American policies of balanced budgets and low government spending, but they
never do what they say they favor.)
The
argument has been made that this rise in the monetary base will do no harm
because it has not yet been turned into money by the nation’s
banks. I wish I had a gram of gold for every time I have heard that
argument. I would be a very wealthy man. First, we cannot be sure
of this because the Federal Reserve is lying about the nation’s money
supply. They have reclassified demand deposits (which are money) as
time deposits (which are not money). The Fed is telling the individual
owners of these deposits that they are demand, but it is telling the nation
that they are time. They cannot be both.
Second,
the idea that there is a middle ground in which the Fed can create enough
money to stimulate the economy but not so much as to cause
“inflation” is more banker gobble-de-gook. These idiots do
not even know what the economy is, and when they use the word, the meaning it
has is ‘the bankers and their associated vested interests” (i.e.,
the paper aristocracy). So to “stimulate the economy” means
to help the paper aristocracy at the expense of the American working man.
This
idea goes back to Keynes, and ever since the 1930s the establishment
economists have been trying to find that middle ground. They
haven’t hit it once. Back in the 1950s Arthur Burns (later the
moving force behind the price and wage controls of 1971) complained that they
were getting inflation in a recession (1958), and that was not supposed to
happen. The fact that the “impossible” was happening,
however, did not faze Burns one iota. Like the Red Queen, he used to
believe 6 impossible things before breakfast.
Typically,
the banks do not start to lend until some time after the Fed has sharply
increased their reserves. That is the period we are now in. This
is a variable time lag because it is based on decisions by individual bank
managers, and it depends on how scared they have been by the previous
contraction. But lend they always do. And to have the money to
lend they have to create it out of nothing. A good clue here is an
increase in corporate profits (which is just starting to happen). As
profits increase (because of the low interest rates caused by the Fed),
business starts to dream of new projects. For these projects, they need
their bank loan.
As
the projects unfold, they create demand, and this demand begins in the
commodity markets (because all consumer goods come from commodities).
Neither is there any increased supply (as is sometimes argued) to offset this
increased demand. This is the stupidity of GDP. A free economy
(and all the businesses in it) has two jobs, not one. Yes, it is nice
to create more goods. But it is also crucially important TO CREATE
THOSE GOODS WHICH SATISFY THE CONSUMING PUBLIC’S MOST IMPORTANT
NEEDS. This is every business man’s number one concern.
WHAT DO THE PEOPLE WANT? In a free market, tremendous energy and effort
goes into answering this question. But in government projects, the
question is never considered. To measure only the quantity of goods
produced and to ignore the larger question of which goods are most wanted and
needed is insanity. In the 1930s, Stalin gave the Russian people
industrial goods when they needed food. Eight million starved to death,
but if they had had GDP in those days, then the Soviet GDP would have looked
very good.
At
the present time, the U.S. Government is promoting housing over
farming. We have too many houses and not enough food. Every
housing development starts by purchasing land, usually from a farmer.
It takes land out of agriculture, and the number of arable acres is falling
as the population is increasing. Two years ago, we had a food scare,
and there were food riots in several countries. The Government of Haiti
fell because of a food riot. That has to be considered a warning.
We have too many houses and not enough food. And when the commodity
pendulum goes into high gear, we will face food shortages far more
serious. To divert production from food into houses is not economic
growth, and this is a simple illustration of the absurdity of GDP, which
measures only quantity and ignores quality.
To
accurately gauge when U.S. prices are ready to accelerate to the upside (as
forecast by the monetary base above), watch first commodity prices and then
the prices of producer goods. When both of these have started to move
up, then consumer prices will be next in line. Remember, when consumer
prices exploded (13.3%) in 1979? In a little over a year (1-1-79 to
1-21-80), gold multiplied by almost a factor of 4 (although we are still
quite some distance from the corresponding event in our era).
Remember,
the current economic orthodoxy is a monster which only eats its own.
That is, it takes money only from those who believe it. Those who
retain their skepticism can retain their money.
The
newcomer to economics may be interested in the above as an intellectual
exercise. However, it is not. For the past 40 years, I have been
a member of the Austrian school of economics which has blown the Keynesians
out of the water with one correct prediction after the other. I was a
gold bug through the 1970s as the Keynesians lost their shirts. I
turned bearish on gold precisely at the Jan. 21, 1980 top and then became a
stock bug in Dec. 1981 and remained bullish on stocks for most of the next 25
years (stepping aside in Oct. 1987 to avoid Black Monday and on a few other
occasions). I turned bullish on gold again in Dec. 2002 (on the
breakout of the saucer bottom). Along the way I rejected Henry Kaufman
and Ravi Batra as they predicted depressions (in 1982 and 1990) and laughed
at the “Nobel” prize winners at Long Term Capital Management as
they lost $4 billion in 1998. On not one single occasion did any
Keynesian ever admit that his prediction had been wrong. So their
present claim of a coming deflation will prove equally absurd, and after my
rising prices prediction has proven correct, the economic establishment will
again refuse to admit their failure and it will be forbidden to acknowledge
my success.
This
is because Keynesianism is not a theory of economics. It is a
confidence game, and the question is not whether they can correctly predict
the future. The question is, can they gain your confidence and get you
to act in such a manner that they can steal your wealth.? This is why
they continually talk about confidence. “It is important that
everyone have confidence in the economy.” They are confidence
men, and the only question that matters to them is can they get you to have
confidence in them? They are liars, frauds and thieves, and they are
trying to reduce the American people to the status of serfs so that a
collection of rich riff-raff can live off the product of their labor.
That, by the way, is the explanation for the “taxpayer” bailout
of Wall Street in 2008. The normal method of robbing you by having the
Fed counterfeit money was too slow for the establishment crisis of that
year. So they just went in and took it. Now the political polls
tell us that the Republicans who opposed that bailout are going to win an
enormous victory thus proving that a paper money system is inimical to
democracy. They want you to become like the medieval serf so that they
can steal the product of your labor any time they like. The serf, of
course, did not have democracy. His only recourse was to grab his
pitchfork and confront his feudal lord by sheer numbers. (Neither was
the 2008 Wall Street bailout ever paid back, as you are being told.
What happened was that the slower process of having the Fed steal from you
via the counterfeiting of money went to work in ’08 and ’09, and
the Wall St. firms were able to pay back their “loans” from the
Government with the money made for them by the Fed. That is, they stole
from you in ’08, disguised as a loan, and then “repaid” the
loans in ’09 and ’10 with more money stolen from you. If
you buy these lies, you are on your way to becoming a modern serf. Not
only will your life be wretched, not only will the paper aristocracy be able
to steal from you any time it feels the need but you will have the added
disgrace of having given up your liberty when you had received it as a
gift (from the Founding Fathers).
To
guide people in protecting their property rights, I started the One-handed
Economist in 1996. I caught the commodity and gold bottoms in
1999-2001 but remained bullish on stocks until Jan. 2007. With the
passage of Obamacare this March, the government started to threaten our right
to life whereas previously it had only threatened our right to
property. It seems foolish to concentrate only on protecting our right
to property when the same government, fueled by the same ideology, is starting
to kill people. I have thereby added a small section on the right to
life. This explains how the political left is now setting up a giant
killing machine in imitation of the first country to adopt socialized
medicine (Germany) and how to avoid being caught in its web. Hopefully,
if Obamacare is repudiated after the Nov. election, this section will no
longer be necessary.
The
One-handed Economist is $300 per year. You may subscribe by
visiting my web site, www.thegoldspeculator.com and
pressing the Pay Pal button. Or you may send $290 ($10 cash discount)
via the U.S. mail to: The One-handed Economist, 614 Nashua St. #122, Milford,
N.H. 03055. Issues are published fortnightly every other Friday and
posted on the website (password protected). Special bulletins are
published when I feel that the market has made an important change. The
most recent issue (July 23, 2010) has an interesting section (p. 8) on Large
Trader shorts in gold and how this indicator is predicting a coming rally in
the gold price.
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 to the Gold
Speculator (the One Handed Economist)
You can subscribe
to Howard Katz’s thoughts on commodities, stocks, bonds and real estate
are available in a letter entitled The One-handed Economist and published
every two weeks giving specific advice on trades in stocks and futures. This
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