Liberty Dollars held by collectors may be subject to seizure as contraband by federal law enforcement, officials with the U.S. Attorney’s Office and Secret Service said Aug. 24.
Statements by officials for those two federal law enforcement agencies seem to reverse the position taken in comments released from the United States Attorney’s Office in Charlotte, N.C., and published in Coin World in April, that mere possession of Liberty Dollars did not constitute a violation of any federal statute.
That position has apparently changed, although officials of the U.S. Secret Service — which would be the federal agency likely charged with executing any possible seizures — would not provide any definitive comments concerning under what circumstances Liberty Dollars would be seized.
The revised stance is tied to the Liberty Dollar being determined in a federal court to violate federal counterfeiting statutes. Liberty Dollars, metallic medallic pieces, were privately promoted as a form of currency that could be used in commerce as an alternative to Federal Reserve notes.
U.S. Attorney’s Office
Jill Rose, chief of the criminal division for the U.S. Attorney’s Office in Charlotte, N.C., told Coin World Aug. 24 that the Liberty Dollar medallions are confiscable as contraband regardless if they are being exhibited for educational purposes only.
Rose served as lead prosecutor in the Bernard von NotHaus case. Von NotHaus, creator of the Liberty Dollars, was convicted in federal court in March on multiple charges involving the alternative currency.
Rose said because von NotHaus’ conviction included violations of Sections 485 and 486 of Title 18 of the United States Code, the Liberty Dollar medallions were determined to be counterfeits, contraband and subject to seizure.
The Liberty Dollar represented “a pyramid scheme imbedded with fraud” that had nothing to do with barter or trade, according to Rose.
“Barter is an equal and knowing exchange,” which the Liberty Dollar was proven in court not to be, Rose said.
U.S. Secret Service
Also on Aug. 24, in addition to speaking with Rose, Coin World talked separately with Glen Kessler, assistant special agent in charge in North Carolina for the U.S. Secret Service.
Kessler could not provide a blanket position the Secret Service would take toward those owning Liberty Dollars, whether one piece or significantly more.
He said if a Secret Service agent witnessed something considered to be contraband, such as Liberty Dollars, they would be duty-bound to confiscate it.
Kessler subsequently conferred with his Secret Service superiors as to the agency’s specific position on the Liberty Dollar and potential confiscation.
Kessler informed Coin World the morning of Aug. 25 that because the publication has a worldwide audience, he had to defer additional comments to the U.S. Secret Service Office of Public Affairs.
George Ogilvie, the public affairs officer for the U.S. Secret Service in Washington, D.C., said Aug. 25 the bureau had no comment on Liberty Dollars and indicated that Coin World would have to call back in a few weeks.
Asked what would be different in a few weeks as to under what circumstances seizure of Liberty Dollars would be enforced, Ogilvie responded, “We don’t have anything to say.”
Soon after von NotHaus’ March 18 conviction, Coin World obtained and published comments from the U.S. Attorney’s Office in Charlotte stating that while mere possession of Liberty Dollar medallions was not a violation of federal statutes, actual use or intent to use them in the manner for which von NotHaus was convicted would be considered a violation.
Millions of Liberty Dollars in copper, silver and gold versions are in the hands of collectors and supporters of the Liberty Dollar medallions who have been concerned the medallions could be confiscated by federal authorities.
And that possibility is now apparently real.
Exhibit banned by ANA
The reversal of opinion surfaced after a Michigan collector sought to display his award-winning Liberty Dollar exhibit at the American Numismatic Association World’s Fair of Money in Rosemont, Ill. Aug. 16 to 20. ANA officials denied the collector the opportunity amid fears the exhibit’s contents would be seized off the convention bourse floor by federal authorities. The collector had exhibited the collection in various venues previously.
The collector, James Zylstra, had originally hoped his 11th time since 2009 in setting up the competitive numismatic exhibit of medallions would be during the ANA World’s Fair of Money in Rosemont. Leading up to the convention, as late as immediately prior to the Aug. 16 official opening, ANA exhibit judges and ANA legal counsel A. Ronald Sirna Jr. sought a written declaration from the Department of Justice that Liberty Dollars could be exhibited for educational purposes without fear of confiscation. No such declaration was forthcoming.
ANA officials also spoke with officials of the United States Mint. The U.S. Mint’s legal counsel, Daniel P. Shaver, referred ANA officials to the U.S. Secret Service.
As a result of not receiving a written declaration on federal agency letterhead permitting their display, ANA officials denied Zylstra the opportunity to exhibit the Liberty Dollars at the ANA convention over concerns the medallic contents of the exhibit could be seized.
Zylstra told Coin World he was disappointed by the ANA’s decision. Although Zylstra said he is concerned with what action federal officials might take involving his collection of Liberty Dollars, he said he is planning to display his award-winning exhibit of Liberty Dollars at the fall Michigan State Numismatic Society Convention in November in Dearborn where he has exhibited before and won recognition for the Liberty Dollars exhibit.
But Zylstra may need the same written declaration as the ANA sought before he can exhibit the Liberty Dollars there, as Sirna is also legal counsel for MSNS.
Sirna could not be reached Aug. 25 for additional comment.
CSNS convention exhibit
Zylstra last mounted his exhibit of Liberty Dollar medallions, paper warehouse receipts and promotional materials in April 2011 during the Central States Numismatic Society Convention in Rosemont, Ill., at the same Donald Stephens Convention Center where the ANA World’s Fair of Money was just held.
The 2011 CSNS convention was held a month after von NotHaus’ conviction and the determination of the Liberty Dollar’s status.
Contacted Aug. 25 by Coin World concerning the issues of displaying Liberty Dollars, CSNS legal counsel Steven Bieda said he would bring both the subject of permitting exhibits of Liberty Dollars and also of permitting dealers to sell the pieces on the CSNS convention bourse floor before CSNS officials for review and recommendations, including a review of exhibit bylaws to protect the organizations, as both issues will be recurring topics.
“I am not the exhibits chair, nor have I been asked for an opinion on displaying ‘liberty dollars’ from our exhibits chair,” said Bieda, who studied and enjoyed Zylstra’s exhibit at the CSNS convention. “However, if I were asked, I would not have any problem allowing such an exhibit, especially as one of the stated goals of the exhibits is to foster numismatic knowledge and education.”
Bieda said he has not seen any indication from federal authorities that they plan a concerted move to confiscate privately held Liberty Dollars.
“I note that the pieces are being sold and traded on on-line auction sites such as eBay, and have personally seen these pieces sold at local coin shows and coin shops, all without any apparent legal consequence,” Bieda said. “Thus, it would be my recommendation that should an exhibitor want to place an exhibit involving these pieces, and assuming that all the other relevant exhibitor criteria is satisfied, that they be allowed to do so.
“In any event, the hosting numismatic association would not be responsible should the federal government or any other legal authority take legal action or move to confiscate that or any other exhibit. That risk is entirely on the exhibitor.”
Zylstra earned a third-place award in the medals category for his Liberty Dollar exhibit at the 2011 CSNS convention. Zylstra has also won awards for the exhibit displayed at a Florida United Numismatists convention, and earned a first place when the exhibit was placed on display in Fort Worth, Texas, in March 2010 during the ANA National Money Show.
As Bieda noted, Liberty Dollars are actively traded in the collector marketplace.
Coin World has not been able to determine whether ANA officials or officials at other conventions and shows would ban the sale of Liberty Dollars on the bourse floor.
As of Aug. 25, no movement by federal officials has been seen toward the confiscation of Liberty Dollars offered for sale online, including through auction sites such as eBay.
Liberty Dollar introduction
Zylstra first learned of Liberty Dollars in November 2008 when a business card was placed on the windshield of his car in a shopping center parking lot while he was wintering in Clearwater, Fla.
Zylstra said he was intrigued by the premise of Liberty Dollars, but wanted to create a balanced exhibit offering different points of view.
Zylstra’s “Bonafide or Bogus?” exhibit comprises approximately 20 Liberty Dollar medallions in copper, silver and gold versions in different diameters, weights and face values, as representative examples, although many more multiple designs and varieties were produced than are represented in the exhibit.
Also included in the exhibit were full-color paper warehouse receipts that were backed by precious metals, along with Liberty Dollar promotional materials and historical information.
Zylstra said he includes in his exhibit information explaining von NotHaus’ bartering philosophy and why von NotHaus believes the Liberty Dollar is important; explores the legal ramifications from the side of the federal government, including providing a chronology of legal developments; and examines the Liberty Dollar from the view of consumers who appreciate being able to hold a piece of silver in their hands.
Zylstra said he obtained most of his Liberty Dollars from a Liberty Dollar regional currency officer in Michigan and another in New York who were part of von NotHaus’ Liberty Dollar distribution network.
Bernard von NotHaus
Following a six-day trial, on March 18, a federal jury in Statesville, N.C., convicted von NotHaus — founder of NORFED (National Organization for the Repeal of the Federal Reserve and the Internal Revenue Code), its subsequent Liberty Services, and monetary architect of the Liberty Dollar — of conspiracy against the United States; making coins resembling and similar to U.S. coins; of issuing, passing, selling and possessing Liberty Dollar coins; and of issuing and passing Liberty Dollar coins intended for use as current money.
Von NotHaus is free on bond pending sentencing.
NORFED and Liberty Services promoted Liberty Dollars as an alternative currency for use in commerce, and reported that it’s successfully used in transactions in various locales. Liberty Dollars were sometimes touted by the program’s adherents as “private voluntary barter currency.”
Not barter
On April 12, Ron Whitney, executive director for the International Reciprocal Trade Association (www.irta.com), based in Portsmouth, Va., issued a statement denouncing the Liberty Dollars as not being part of the modern trade and barter industry.
The extensive statement emphasized the outcome of the von NotHaus trial did not set a federal government precedent against private barter currencies.
“Mr. von NotHaus was convicted of the charges of counterfeiting and making and selling currency, barter had nothing to do with the case,” Whitney said. “The modern trade and barter industry was recognized by the U.S. government as a legal alternative form of commerce by the Tax Equity and Fiscal Responsibility Act (TEFRA), passed in 1982 whereby barter exchanges were deemed third party record keepers and required to comply with IRS 1099B reporting laws.”
Whitney explained that “barter sales conducted through barter exchanges are taxable sales reported annually to the IRS.”
“The Liberty Dollar’s verdict is completely separate from the legally recognized modern trade and barter industry and in our view it does not represent an effort on the government’s part to declare valid TEFRA compliant barter transactions as illegal activity,” Whitney said.
The complete statement can be accessed online at the IRTA website.
Tuesday, August 30, 2011
Warren Buffett's Berkshire Still Hasn't Paid Back Taxes
Yes, Uncle Warren, savior of Bank of America, poster-grandpa of tax hikes on the rich, has been less than forthcoming with back taxes owed to the IRS.
NY Post
Billionaire Warren Buffett says folks like him should have to pay more taxes -- but it turns out his firm, Berkshire Hathaway, hasn’t paid what it’s already owed for years.
That’s right: As Americans for Limited Government President Bill Wilson notes, the company openly admits that it owes back taxes since as long ago as 2002.
“We anticipate that we will resolve all adjustments proposed by the US Internal Revenue Service (“IRS”) for the 2002 through 2004 tax years ... within the next 12 months,” the firm’s annual report says.
It also cites outstanding tax issues for 2005 through 2009.
Obvious question: If Buffett really thinks he and his “mega-rich friends” should pay higher taxes, why doesn’t his firm fork over what it already owes under current rates?
Sacred Economics: Chapter 7, "The Crisis of Civilization" (Pt. 8)
The following is the eighth installment from Sacred Economics: Money, Gift, and Society in the Age of Transition, available from EVOLVER EDITIONS/North Atlantic Books. You can read the Introduction here, and visit the Sacred Economics homepage here.
We have bigger houses but smaller families;
more conveniences, but less time.
We have more degrees but less sense;
more knowledge but less judgment;
more experts, but more problems;
more medicines but less healthiness.
We've been all the way to the moon and back,
but have trouble in crossing the street to meet our new neighbor.
We built more computers to hold more copies than ever,
But have less real communication;
We have become long on quantity,
but short on quality.
These are times of fast foods but slow digestion;
Tall men but short characters;
Steep profits but shallow relationships.
It's a time when there is much in the window
But nothing in the room. --Authorship unknown
The financial crisis we are facing today arises from the fact that there is almost no more social, cultural, natural, and spiritual capital left to convert into money. Centuries of near-continuous money creation have left us so destitute that we have nothing left to sell. Our forests are damaged beyond repair, our soil depleted and washed into the sea, our fisheries fished out, and the rejuvenating capacity of the earth to recycle our waste saturated. Our cultural treasury of songs and stories, of images and icons, has been looted and copyrighted. Any clever phrase you can think of is already a trademarked slogan. Our very human relationships and abilities have been taken away from us and sold back, so that we are now dependent on strangers, and therefore on money, for things few humans ever paid for until recently: food, shelter, clothing, entertainment, child care, cooking. Life itself has become a consumer item.
Today we sell away the last vestiges of our divine endowment: our health, the biosphere and genome, even our own minds. Pythagoras's dictum, "All things are number," has nearly come true: the world has been converted into money. This is the process that is culminating in our age. It is almost complete, especially in America and the "developed" world. In the "developing" world (notice how these terms assume our own economic system as the destination of other societies) there still remain people who live substantially in gift cultures, where natural and social wealth is not yet the subject of property. Globalization is the process of stripping away these assets, to feed the money machine's insatiable, existential need to grow. Yet this strip-mining of other lands is running up against its limits too, both because there is almost nothing left to take and because of growing pockets of effective resistance.
The result is that the supply of money -- and the corresponding volume of debt -- has for several decades outstripped the production of goods and services that it promises. It is deeply related to the problem of overcapacity in classical economics. To defer the Marxian crisis of capital -- a vicious circle of falling profits, falling wages, depressed consumption, and overproduction in mature industries -- into the future, we must constantly develop new, high-profit industries and markets. The continuation of capitalism as we know it depends on an infinite supply of these new industries, which essentially must convert infinite new realms of social, natural, cultural, and spiritual capital into money. The problem is that these resources are finite, and the closer they come to exhaustion, the more painful their extraction becomes. Therefore, contemporaneous with the financial crisis we have an ecological crisis and a health crisis. They are intimately interlinked. We cannot convert much more of the earth into money, or much more of our health into money, before the basis of life itself is threatened.
An ancient Chinese myth helps illuminate what is happening. There was a monster, it is said, called the tao tie, which was possessed of an insatiable appetite. It consumed every creature around it, even the earth itself, yet it was still hungry. So it turned finally to its own body, eating its arms, legs, and torso, leaving nothing but the head.
A head cannot live without its body. Faced with the exhaustion of the nonmonetized commonwealth that it consumes, financial capital has turned to devour its own body: the industrial economy that it was supposed to serve. If income from production of goods and services is insufficient to service debt, then creditors seize assets instead. This is what has happened both in the American economy and globally. Mortgages, for example, were originally a path toward owning your own home free and clear, starting with 20 percent equity. Today few ever dream of actually one day repaying their mortgage, but only of endlessly refinancing it, in effect renting the house from the bank. Globally, Third World countries find themselves in a similar situation, as they are forced to sell off national assets and gut social services under IMF austerity programs. Just as you might feel your entire productive labor is in the service of debt repayment, so is their entire economy directed toward producing commodity goods to repay foreign debt.
IMF austerity measures are exactly analogous to a court-imposed debt-payment plan. They say, "You are going to have to make do with less, work harder, and devote a greater proportion of your income to debt payments. You will give me everything you own and turn over all your future earnings to me!" Worker pensions, teacher salaries, minerals, oil-all are turned to debt service. The forms of slavery have changed over the years, but not the essential directive. The irony is that in the long term, austerity measures don't even benefit the creditors. They choke off economic growth by reducing consumption, demand, and business investment opportunities. Jobs evaporate, commodity prices fall, and the debtor people and nations are less able than ever to make their payments.
Incapable of thinking beyond the short term, the money interests love austerity because the debtor is essentially saying, "We will devote more of our labor and resources toward the servicing of debt." It allows unserviceable debts to be serviced just a little while longer. This is what is happening in Europe at the time of this writing (2010), as governments slash pensions and agree to privatize social services so that they can assure bondholders that they will be paid. The rumblings of austerity are audible here in America too, in the form of alarums about the federal deficit. From within the logic of bond markets and budget deficits, the case for greater fiscal responsibility is unassailable. From outside that logic, it is absurd: are we to be forced by mere numbers, mere interpretation of bits, to erode the standard of living of the many for the sake of preserving the wealth of the few?
Eventually, debtors run out of disposable income and seizable assets. The crash underway today should have actually happened many years ago, except that various phony and inflated assets were created to keep it going a little longer as the financial tao tie cannibalized itself, covering debt with more debt. The efforts to shore up this edifice cannot work, because it must keep growing -- all those debts bear interest. Yet the authorities keep trying. When you hear the phrase "rescue the financial system," translate it in your mind into "keep the debts on the books." They are trying to find a way for you (and debtor nations too) to keep paying and for the debt to keep growing. A debt pyramid cannot grow forever, because eventually, after all the debtors' assets are gone, and all their disposable income devoted to debt payments, creditors have no choice but to lend debtors the money to make their payments. Soon the outstanding balance is so high that they have to borrow money even to pay interest, which means that money is no longer flowing, and can no longer flow, from debtor to creditor. This is the final stage, usually short, though prolonged in our day by Wall Street's financial "wizardry." The loans and any derivatives built on them begin to lose their value, and debt deflation ensues.
Essentially, the proximate financial crisis and the deeper growth crisis of civilization are connected in two ways. Interest-based debt-money compels economic growth, and a debt crisis is a symptom that shows up whenever growth slows.
The present crisis is the final stage of what began in the 1930s. Successive solutions to the fundamental problem of keeping pace with money that expands with the rate of interest have been applied, and exhausted. The first effective solution was war, a state that has been permanent since 1940. Unfortunately, or rather fortunately, nuclear weapons and a shift in human consciousness have limited the solution of endless military escalation. War between the great powers is no longer possible. Other solutions -- globalization, technology-enabled development of new goods and services to replace human functions never before commoditized, technology-enabled plunder of natural resources once off limits, and finally financial autocannibalism -- have similarly run their course. Unless there are realms of wealth I have not considered, and new depths of poverty, misery, and alienation to which we might plunge, the inevitable cannot be delayed much longer.
The credit bubble that is blamed as the source of our current economic woes was not a cause of them at all, but only a symptom. When returns on capital investment began falling in the early 1970s, capital began a desperate search for other ways to maintain its expansion. When each bubble popped -- commodities in the late 1970s, S&L real estate investments in the 1980s, the dotcom stocks in the 1990s, and real estate and financial derivatives in the 2000s -- capital immediately moved on to the next, maintaining an illusion of economic expansion. But the real economy was stagnating. There were not enough needs to meet the overcapacity of production, not enough social and natural capital left to convert into money.
To maintain the exponential growth of money, either the volume of goods and services must be able to keep pace with it, or imperialism and war must be able to escalate indefinitely. All have reached their limit. There is nowhere to turn.
Today, the impasse in our ability to convert nature into commodities and relationships into services is not temporary. There is little more we can convert. Technological progress and refinements to industrial methods will not help us take more fish from the seas-the fish are mostly gone. It will not help us increase the timber harvest -- the forests are already stressed to capacity. It will not allow us to pump more oil -- the reserves are drying up. We cannot expand the service sector -- there are hardly any things we do for each other that we don't pay for already. There is no more room for economic growth as we have known it; that is, no more room for the conversion of life and the world into money. Therefore, even if we follow the more radical policy prescriptions from the left, hoping by an annulment of debts and a redistribution of income to ignite renewed economic growth, we can only succeed in depleting what remains of our divine bequest of nature, culture, and community. At best, economic stimulus will allow a modest, short-lived expansion as the functions that were demonetized during the recession are remonetized. For example, because of the economic situation, some friends and I cover for each other's child care needs, whereas in prosperous times we might have sent our kids to preschool. Our reciprocity represents an opportunity for economic growth: what we do for each other freely can be converted into monetized services. Generalized to the whole society, this is only an opportunity to grow back to where we were before, at which point the same crisis will emerge again. "Shrink in order to grow," the essence of war and deflation, is only effective, and decreasingly so, as a holding action while new realms of unmonetized social and natural capital are accessed.
The current problem is therefore much deeper than today's conventional wisdom holds. Consider this typical example from a financial journal:
"[Paul] Volcker is right. The collateralized debt obligations, collateralized mortgage-backed securities, and other computer-spawned complexities and playthings were not the solutions to basic needs in the economy, but to unslaked greed on Wall Street. Without them, banks would have had no choice but to continue to devote their capital and talents to meeting real needs from businesses and consumers, and there would have been no crisis, no crash, and no recession."1
This describes only the most superficial level of a deeper problem of which the collateralized debt obligations (CDOs) and so forth are mere symptoms. The deeper problem was that there were insufficient "real needs" to which banks could devote their capital, because only those needs that will generate profits beyond the interest rate constitute valid lending opportunities. In an economy plagued by overproduction, such opportunities are rare. So, the financial industry played numbers games instead. The CDOs and so on were a symptom, not a cause, of the financial crisis that originated in the impossibility of economic growth keeping pace with interest.
Various pundits have observed that Bernard Madoff's Ponzi scheme was not so different from the financial industry's pyramid of mortgaged-based derivatives and other instruments, which themselves formed a bubble that, like Madoff's, could only sustain itself through an unceasing, indeed exponentially growing, influx of new money. As such, it is a symbol of our times -- and even more than people suppose. It is not only the Wall Street casino economy that is an unsustainable pyramid scheme. The larger economic system, based as it is on the eternal conversion of a finite commonwealth into money, is unsustainable as well. It is like a bonfire that must burn higher and higher, to the exhaustion of all available fuel. Only a fool would think that a fire can burn ever-higher when the supply of fuel is finite. To extend the metaphor, the recent deindustrialization and financialization of the economy amount to using the heat to create more fuel. According to the second law of thermodynamics, the amount created is always less than the amount expended to create it. Obviously, the practice of borrowing new money to pay the principal and interest of old debts cannot last very long, but that is what the economy as a whole has done for ten years now.
Yet even abandoning this folly, we still must face the depletion of fuel (remember, I mean not literal energy sources, but any bond of nature or culture that can be turned into a commodity). Most of the proposals for addressing the present economic crisis amount to finding more fuel. Whether it is drilling more oil wells, paving over more green space, or spurring consumer spending, the goal is to reignite economic growth -- that is, to expand the realm of goods and services. It means finding new things for which we can pay. Today, unimaginably to our forebears, we pay even for our water and our songs. What else is left to convert into money?
As far as I know, the first economist to recognize the fundamental problem and its relation to the money system was Frederick Soddy, a Nobel laureate and pioneer of nuclear chemistry who turned his attention to economics in the 1920s. Soddy was among the first to debunk the ideology of infinite exponential economic growth, extending the reasoning of Thomas Malthus beyond population to economics. Herman Daly describes Soddy's view succinctly:
"The idea that people can live off the interest of their mutual indebtedness ... is just another perpetual motion scheme -- a vulgar delusion on a grand scale. Soddy seems to be saying that what is obviously impossible for the community -- for everyone to live on interest-should also be forbidden to individuals, as a principle of fairness. If it is not forbidden, or at least limited in some way, then at some point the growing liens of debt holders on the limited revenue will become greater than the future producers of that revenue will be willing or able to support, and conflict will result. The conflict takes the form of debt repudiation. Debt grows at compound interest and as a purely mathematical quantity encounters no limits to slow it down. Wealth grows for a while at compound interest, but, having a physical dimension, its growth sooner or later encounters limits."2
This association of economic growth with resource consumption is especially common today among Peak Oil theorists, who forecast economic collapse as oil production begins its "long descent." Their critics contend that economic growth can and does happen independent of energy use, thanks to technology, miniaturization, efficiency improvements, and so on. Since 1960, U.S. economic growth has outstripped energy use, a trend that accelerated in the 1980s. (See Figure 1.) Germany has done even better, having essentially flat energy use since 1991 despite considerable economic growth. However, this objection only illustrates a larger point. Yes, it is possible to maintain economic growth by displacing it from the consumption of one part of the commons to another-by burning gas instead of oil or by commoditizing human services or intellectual property instead of the cod fishery-but aggregated over the totality of the social, natural, cultural, and spiritual commons, the basic argument of Peak Oil remains valid. Instead of Peak Oil, we are facing Peak Everything.
When the financial crisis hit in 2008, the first government response, the bailout and monetary stimulus, was an attempt to uphold a tower of debt upon debt that far exceeded its real economic foundation. As such, its apparent success was temporary, a postponement of the inevitable: "pretend and extend," as some on Wall Street call it. The alternative, economic stimulus, is doomed for a deeper reason. It will fail because we are "maxed out": maxed out on nature's capacity to receive our wastes without destroying the ecological basis of civilization; maxed out on society's ability to withstand any more loss of community and connection; maxed out on our forests' ability to withstand more clear-cuts; maxed out on the human body's capacity to stay viable in a depleted, toxic world. That we are also maxed out on our credit only reflects that we have nothing left to convert into money. Do we really need more roads and bridges?3 Can we sustain more of them, and more of the industrial economy that goes along? Government stimulus programs will at best prolong the current economic system for two or three years, with perhaps a brief period of growth as we complete the pillage of nature, spirit, body, and culture. When these vestiges of the commonwealth are gone, then nothing will be able to stop the Great Unraveling of the money system.
Although the details and timeline of this unraveling are impossible to predict, I think we will first experience persistent deflation, stagnation, and wealth polarization, followed by social unrest, hyperinflation, or currency collapse. At that moment, the alternatives we are exploring today will come into their own, offering an opportunity to build a new and sacred economy. The farther the collapse proceeds, the more attractive the proposals of this book will become.
In the face of the impending crisis, people often ask what they can do to protect themselves. "Buy gold? Stockpile canned goods? Build a fortified compound in a remote area? What should I do?" I would like to suggest a different kind of question: "What is the most beautiful thing I can do?" You see, the gathering crisis presents a tremendous opportunity. Deflation, the destruction of money, is only a categorical evil if the creation of money is a categorical good. However, you can see from the examples I have given that the creation of money has in many ways impoverished us all. Conversely, the destruction of money has the potential to enrich us. It offers the opportunity to reclaim parts of the lost commonwealth from the realm of money and property.
We see this happening every time there is an economic recession. People can no longer pay for various goods and services, and so have to rely on friends and neighbors instead. Where there is no money to facilitate transactions, gift economies reemerge and new kinds of money are created. Ordinarily, though, people and institutions try to hang on to the old ways as long as possible. The habitual first response to economic crisis is to make and keep more money -- to accelerate the conversion of anything you can into money. On a systemic level, the debt surge is generating enormous pressure to extend the commodification of the commonwealth. We can see this happening with the calls to drill for oil in Alaska, commence deep-sea drilling, and so on. The time is here, though, for the reverse process to begin in earnest-to remove things from the realm of goods and services and return them to the realm of gifts, reciprocity, self-sufficiency, and community sharing. Note well: this is going to happen anyway in the wake of a currency collapse, as people lose their jobs or become too poor to buy things. People will help each other, and real communities will reemerge.
Even if you care mostly about the security of your own future, community is probably the best investment you can make. When the financial system unravels, most investments become mere pieces of paper or electronic data files. They derive value only from the web of social agreements that contains and interprets them. Even physical gold doesn't provide much security when things get really bad. In times of extreme crisis, governments typically confiscate private gold holdings -- Hitler, Lenin, and Roosevelt all did so. If even the government falls apart, then people with guns will come and take your gold or any other store of wealth.
I sometimes read the financial website Zero Hedge for its remarkable insight into the pretenses and machinations of the financial power elite. In that website's dim view, no asset class except physical gold and other physical commodities is safe today. I agree with its logic as far as it goes, but it does not go far enough. If the system breaks down to the point of hyperinflation, then the institution of property -- as much a social convention as money is -- will break down too. In times of social turmoil, I can't imagine anything more dangerous than possessing a few hundred ounces of gold. Really the only security is to be found in community: the gratitude, connections, and support of the people around you. If you have wealth now, I recommend, as your investment advisor, that you use it to enrich the people around you in lasting ways.
In the meantime, before the collapse of the current system, anything we do to protect some natural or social resource from conversion into money will both hasten the collapse and mitigate its severity. Any forest you save from development, any road you stop, any cooperative playgroup you establish; anyone you teach to heal themselves, or to build their own house, cook their own food, or make their own clothes; any wealth you create or add to the public domain; anything you render off-limits to the world-devouring Machine will help shorten the Machine's life span. And when the money system collapses, if you already do not depend on money for some portion of life's necessities and pleasures, then the collapse of money will pose much less of a harsh transition for you. The same applies on the social level. Any form of natural wealth, whether biodiversity, fertile soil, or clean water, and any community or social institution that is not a vehicle for the conversion of life into money, will sustain and enrich life after money.
I am referring to money as we know it. I will soon describe a money system that does not drive the conversion of all that is good, true, and beautiful into money. It enacts a fundamentally different human identity, a fundamentally different sense of self, from what dominates today. No more will it be true that more for me is less for you. On a personal level, the deepest possible revolution we can enact is a revolution in our sense of self, in our identity. The discrete and separate self of Descartes and Adam Smith has run its course and is becoming obsolete. We are realizing our own inseparability, from each other and from the totality of all life. Usury belies this union, for it seeks growth of the separate self at the expense of something external, something other. Probably everyone reading this book agrees with the principles of interconnectedness, whether from a spiritual or an ecological perspective. The time has come to live it. It is time to enter the spirit of the gift, which embodies the felt understanding of nonseparation. It is becoming abundantly obvious that less for you (in all its dimensions) is also less for me. The ideology of perpetual gain has brought us to a state of poverty so destitute that we are gasping for air. That ideology, and the civilization built upon it, is what is collapsing today.
Resisting or postponing the collapse will only make it worse. Finding new ways to grow the economy will only consume what is left of our wealth. Let us stop resisting the revolution in human beingness. If we want to outlast the multiple crises unfolding today, let us not seek to survive them. That is the mind-set of separation; that is resistance, a clinging to a dying past. Instead, let us shift our perspective toward reunion and think in terms of what we can give. What can we each contribute to a more beautiful world? That is our only responsibility and our only security.
I will develop this theme -- right livelihood and right investing -- later in this book. We can engage in conscious, purposeful money destruction in place of the unconscious destruction of money that happens in a collapsing economy. If you still have money to invest, invest it in enterprises that explicitly seek to build community, protect nature, and preserve the cultural commonwealth. Expect a zero or negative financial return on your investment-that is a good sign that you are not unintentionally converting even more of the world to money. Whether or not you have money to invest, you can also reclaim what was sold away by taking steps out the money economy. Anything you learn to do for yourself or for other people, without paying for it; any utilization of recycled or discarded materials; anything you make instead of buy, give instead of sell; any new skill or new song or new art you teach yourself or another will reduce the dominion of money and grow a gift economy to sustain us through the coming transition. The world of the Gift, echoing primitive gift societies, the web of ecology, and the spiritual teachings of the ages, is nigh upon us. It tugs on our heartstrings and awakens our generosity. Shall we heed its call, before the remainder of earth's beauty is consumed?
1. Coxe, 13.
2. Daly, "The Economic Thought of Frederick Soddy," 475.
3. Some might say that Third World countries do need more roads and bridges to raise their standard of living. Consider, however, that big infrastructure projects, exemplary of World Bank investment, are key to the integration of formerly autonomous economies into the global commodity economy. Perhaps what they need is not more roads and bridges. Perhaps what they need is protection from the depredations of the global commodity economy, of which roads and bridges are an agent.
Image by Brooks Elliot, courtesy of Creative Commons license.
Wait…What? Warren Buffett’s Berkshire Hathaway Hasn’t Paid Its Taxes
Ironic, isn’t it? When Warren Buffett penned that op-ed demanding he be taxed more, we assumed that meant he had actually paid his taxes. Not quite the case. Buffett’s famed company, Berkshire Hathaway, owes taxes that are nearly a decade old.
Read the rest of this entry »
Read the rest of this entry »
The Slow Disappearance of the American Working Man
As President Barack Obama puts together a new jobs plan to be revealed shortly after Labor Day, he is up against a powerful force, long in the making, that has gone virtually unnoticed in the debate over how to put people back to work: Employers are increasingly giving up on the American man.
If that sounds bleak, it's because it is. The portion of men who work and their median wages have been eroding since the early 1970s. For decades the impact of this fact was softened in many families by the increasing number of women who went to work and took up the slack. More recently, the housing bubble helped to mask it by boosting the male-dominated construction trades, which employed millions. When real estate ultimately crashed, so did the prospects for many men. The portion of men holding a job—any job, full- or part-time—fell to 63.5 percent in July—hovering stubbornly near the low point of 63.3 percent it reached in December 2009.
These are the lowest numbers in statistics going back to 1948. Among the critical category of prime working-age men between 25 and 54, only 81.2 percent held jobs, a barely noticeable improvement from its low point last year—and still well below the depths of the 1982-83 recession, when employment among prime-age men never dropped below 85 percent. To put those numbers in perspective, consider that in 1969, 95 percent of men in their prime working years had a job.
Men who do have jobs are getting paid less. After accounting for inflation, median wages for men between 30 and 50 dropped 27 percent—to $33,000 a year— from 1969 to 2009, according to an analysis by Michael Greenstone, a Massachusetts Institute of Technology economics professor who was chief economist for Obama's Council of Economic Advisers. "That takes men and puts them back at their earnings capacity of the 1950s," Greenstone says. "That has staggering implications."...
Full article:
http://finance.yahoo.com/career-work...Nsb3dkaXNhcA--
If that sounds bleak, it's because it is. The portion of men who work and their median wages have been eroding since the early 1970s. For decades the impact of this fact was softened in many families by the increasing number of women who went to work and took up the slack. More recently, the housing bubble helped to mask it by boosting the male-dominated construction trades, which employed millions. When real estate ultimately crashed, so did the prospects for many men. The portion of men holding a job—any job, full- or part-time—fell to 63.5 percent in July—hovering stubbornly near the low point of 63.3 percent it reached in December 2009.
These are the lowest numbers in statistics going back to 1948. Among the critical category of prime working-age men between 25 and 54, only 81.2 percent held jobs, a barely noticeable improvement from its low point last year—and still well below the depths of the 1982-83 recession, when employment among prime-age men never dropped below 85 percent. To put those numbers in perspective, consider that in 1969, 95 percent of men in their prime working years had a job.
Men who do have jobs are getting paid less. After accounting for inflation, median wages for men between 30 and 50 dropped 27 percent—to $33,000 a year— from 1969 to 2009, according to an analysis by Michael Greenstone, a Massachusetts Institute of Technology economics professor who was chief economist for Obama's Council of Economic Advisers. "That takes men and puts them back at their earnings capacity of the 1950s," Greenstone says. "That has staggering implications."...
Full article:
http://finance.yahoo.com/career-work...Nsb3dkaXNhcA--
Stephen King: The magicians of monetarism have very few tricks left up their sleeves
Developed economies are ending up with economic permafrost, where attempts to kick-start growth bump into economic reality
Somehow, investors have got it into their heads that the world is run by magicians always capable of pulling rabbits out of hats. Last week was a case in point. Ben Bernanke, the chairman of the US Federal Reserve, gave a speech at Jackson Hole, Wyoming, at the annual shindig of central bankers, academics and assorted policy wonks. Would he wave his magic wand? Did he have a few tricks up his sleeve? Would the world's economic problems come to an abrupt end?
As it turned out, Mr Bernanke promised little, announcing only that there would be an extra day set aside at the next scheduled meeting of the Federal Open Market Committee (FOMC) in September to discuss further policy options. Big deal. Still, it was enough to get investors excited again. A two-day meeting? What could be going on in the Federal Reserve monetary laboratory? Was there financial alchemy at work? Had the FOMC hired Harry Potter to help conjure up some new economic spells?
We already have a pretty good idea of what is left in the monetary locker. The Federal Reserve could decide to buy bonds at longer-dated maturities that tend to have a more direct influence on the cost of borrowing for households and companies, thus widening the Fed's direct influence over the broader economy. It could buy up a range of less liquid assets such as property or equities (subject to a change in the law). It could choose to buy not just domestic IOUs but also foreign IOUs in a bid to steer the dollar down to a lower level (although what Congress would make of a Federal Reserve hell-bent on building up holdings of Greek or Portuguese government debt is anybody's guess).
It could even decide to print more money and give the newly-created notes to the government to allow a "monetised" tax cut, turning the Fed chairman into "Helicopter Ben" (a policy which sounds great in theory but, as the experiences of Weimar, post-war Hungary and, more recently, Zimbabwe suggest, may not be quite so clever in practice).
And ... well, that's about it. In the world of monetary economics, we're getting to the end of the line. Investors hope and pray for a bit of central-bank alchemy because they know that, otherwise, life could become jolly uncomfortable. Yet this view is remarkably myopic. It's true that, following the Fed's decision to adopt a further round of quantitative easing last year – so-called QE2 – markets rallied and, for a while, investors made hay. But, aside from a short-run shift in the ownership of assets (if yields on risk-free assets are pushed down to artificially low levels, riskier assets become relatively more attractive), it's a lot more difficult to argue that there has been any kind of follow-through in terms of economic recovery. Indeed, consensus growth forecasts have tumbled this year, reflecting both disappointing outcomes and mounting recessionary fears. Markets have, as a result, sold off.
Even worse, unconventional policies have led to unexpected effects which may simply mean that central bankers are nothing like as powerful or influential as they'd sometimes like to think. In his Jackson Hole speech, Mr Bernanke talked about the "temporary" effect of the run-up in commodity prices earlier in the year as if this was something completely unrelated to the monetary policies pursued by the Federal Reserve and other developed-world central banks. Yet, arguably, rising commodity prices were both a result of excessive monetary stimulus and a cause of the more recent slowdown in economic activity.
The effects of the Fed's monetary decisions spread far and wide. Other nations loosely tie their currencies to the US dollar reflecting both its role as the world's reserve currency and the Fed's reputation – mostly earned following the tough monetary medicine dispensed by Paul Volcker in the 1980s – as a guardian of price stability. Many of those nations, however, are not going through the financial traumas which have beset the US. American households may be frantically deleveraging and Washington may have got itself tied up in fiscal knots, but other countries have responded to low US interest rates and unconventional monetary policies with considerably more vigour. Most of these nations are to be found in the emerging world. Emerging nations are, by definition, at a different stage of economic development compared with the US and much of Europe. Their growth tends to be a lot more commodity-intensive. Any monetary action which puts a bit of rocket fuel into emerging-market growth engines is likely to lead to higher demand for commodities. Raw materials prices then rise and the rest of us find our fuel and food bills heading higher.
This process explains some apparent oddities regarding the economic situation in the US, the UK and other developed nations. The level of economic activity is remarkably depressed. The accompanying table shows that, among the G7 nations, only Canada currently enjoys a level of gross domestic product (GDP) above the early-2008 pre-crisis peak. All other nations have lower GDP, in some cases considerably so. Things look even worse if actual levels of activity today are compared with expected levels as gauged by consensus forecasts made in 2008 before the financial crisis. GDP is at least 5 per cent lower than expected and, in some cases, more than 10 per cent lower.
Given the scale of the financial crisis, none of this may seem particularly surprising. What is odd, however, is the persistence of inflation. Economists tend to think about inflationary pressures in relation to the amount of spare capacity in an economy, as measured by the so-called "output gap". Given the contraction in activity in recent years, inflation has proved to be remarkably sticky. Yet it's difficult to come up with any obvious "domestic" explanation for this stickiness. Money supply growth is incredibly weak and wage growth is non-existent. The usual suspects are very well behaved.
Instead, inflation is elevated because commodity prices have been rising. And those increases have simultaneously squeezed spending power in the Western world. If prices rise but wages don't follow, people are genuinely worse off. And, with excessive levels of debt, they're not going to borrow any more to offset the hit to real incomes. Instead, we end up with economic "permafrost", a world in which attempts to kick-start economic growth raise hopes but ultimately bump into a chilly economic reality.
Central bankers, then, are sometimes more like magicians than we'd ever like to believe. They are great at providing us with entertaining illusions but, when things go badly wrong, those illusions are revealed for what they really are: we are deceived for a short while into believing that economic recovery is underway but, eventually, we realise that much of what we've seen is no more than smoke and mirrors.
British households £11 a week worse off as high transport and food costs squeeze families
Squeezed: Family budgets have been hit by high transport and food prices
Households had £166 a week of discretionary income to spend last month, down 6.4 per cent compared to the same period last year. The consumer prices index rate of inflation edged up to 4.4 per cent in July, from 4.2 per cent the previous month.
Higher transport costs, coupled with food prices and increasing unemployment, have all strained family budgets – the cost of travelling has gone up 16.5 per cent year on year while food prices have remained high despite food price inflation easing marginally.
The supermarket also said that typical earnings rose marginally faster over the year to last month but conditions in the labour market remained challenging.
Charles Davis, managing economist at think-tank Cebr, said: ‘Pressure on household finances continued to mount up in July as the cost of essential spending grows rapidly while wage increases remain slow.’
Energy companies British Gas, E.ON, Npower, Scottish Power and Scottish & Southern Electric have piled more pressure on family budgets as they all announced price increases in recent weeks.
And commuters are bracing themselves for further misery from January as rail fares are expected to jump by an average of 8 per cent.
The American economy is in shambles and Bernanke has no clue what to do about it
Activist Post
For most informed people in the United States, it has become clear that over the past century the private Federal Reserve has been doing nothing other than systematically devaluing and debasing the dollar while destroying the American economy in every way imaginable.
This notion was just made that much more concrete after this year’s central bank meeting in the Teton Mountains of Wyoming.
The stock market continues to be marked with increased volatility, which some analysts believe will be the new norm for months or years to come, and hiring has slowed while the jobless rate, which is now conservatively exceeding 9%, continues to rise.
By all metrics the American economy has not recovered in any way and by most metrics it is continuing to degrade at a dangerous pace.
However, the mainstream media continues to pretend that none of this is true by pointing to small rallies in certain stock sectors and currencies as proof of “investors […] starting to entertain the notion that the economy may yet avoid slipping back into recession” as Reuters reports.
Where they get the support for this notion is beyond me as even Ben Shalom Bernanke, the current chairman of the private Federal Reserve cartel, has yet to present any solutions or even ways to mitigate this economic disaster.
Instead of presenting a single solution, all Bernanke is able to do at this point is give hollow guarantees and weak assurances of an economic recovery.
Take, for instance, Alan Ruskin, the head of G10 currency strategy at Germany’s Deutsche Bank, who was quoted by Reuters as saying, “For all the focus on QE issues, we should not lose sight of (Bernanke’s) most important message that the Fed does not foresee the economy heading into renewed recession, even if there is plenty of fragility.”
Of course, like Bernanke, Ruskin could not give a single concrete answer or solution if pressed to do so. Then again, the mainstream media fails to ever press for answers from these individuals, instead opting to pretend these ambiguous and questionable statements are somehow legitimate.
Recently I published an article going over just a few of the options we have to actually get America back on the road to economic recovery.
Why? Because these organizations have no real interest in economic recovery so long as it means clamping down on rampant speculation, high-frequency trading and stock manipulation, fraudulent savings and loan practices and anything that impinges on the ludicrous profit margins afforded to multinational corporations thanks to “free trade” and globalism.
Like their American counterparts, the overseas banking cartels are making ambiguous demands of politicians. Take, for instance, the new Chief of the International Monetary Fund, Christine Lagarde’s call on legislators to “act now” in order to prevent further economic downturn.
No actual plans of action are ever presented, the only thing it seems these individuals are good far is making demands. Unfortunately, demands will not put us back on the road to recovery, nor do they do anything other than create an atmosphere of fear.
The demands coming from Lagarde and others are confusing to say the least. They want governments to rein in the budget problems and fix their economies, but they do not want them to make too many spending cuts.
Without outlining specific, viable solutions, these statements are all but totally useless. Our economy in the United States, and in turn the entire world’s economy, needs a concrete direction, and one that is not based on austerity measures.
If we continue to just complain and demand others make the changes necessary to return the economy to a positive trajectory, we will continue to stagnate indefinitely.
Sources:
U.S., European economies still fragile
Analysis: Economic leaders fear policy paralysis
Madison Ruppert is the Editor and Owner-Operator of the alternative news and analysis database End The Lie and has no affiliation with any NGO, political party, economic school, or other organization/cause. If you have questions, comments, or corrections feel free to contact him at admin@EndtheLie.com
Thieves Steal 175,000 Feet Of Copper Wire From Overhead Lights On I-95
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| Copper Theft - Wiki Commons Image |
Business Insider
Rising copper prices and a bad economy are giving thieves reason to rob Interstate-95 of its copper wiring, used in overhead lights.
According to CBS Miami, the larceny of over 175,000 feet of copper wire has rendered useless the lighting over a 33-mile stretch of Palm Beach County. The thievery has taken place over the last six months in 18 separate locations.
"Obviously, the economy has driven this," Florida Highway Patrol spokesman Tim Frith said, referring to the recent increase in this criminal activity. "It does present itself as a kind of crime of convenience."
Palm Beach County isn't the only stretch of I-95 where this is a problem. The South Carolina legislature recently enacted the "Copper Theft Bill", which looks to curb copper theft and make it easier to track scrap metal transactions.
Read Full Article
The Rescue That Missed Main Street
FOR the last three years we have been told repeatedly by government officials that funneling hundreds of billions of dollars to large and teetering banks during the credit crisis was necessary to save the financial system, and beneficial to Main Street.
But this has been a hard sell to an increasingly skeptical public. As Henry M. Paulson Jr., the former Treasury secretary, told the Financial Crisis Inquiry Commission back in May 2010, “I was never able to explain to the American people in a way in which they understood it why these rescues were for them and for their benefit, not for Wall Street.”
The American people were right to question Mr. Paulson’s pitch, as it turns out. And that became clearer than ever last week when Bloomberg News published fresh and disturbing details about the crisis-era bailouts.
Based on information generated by Freedom of Information Act requests and its longstanding lawsuit against the Federal Reserve board, Bloomberg reported that the Fed had provided a stunning $1.2 trillion to large global financial institutions at the peak of its crisis lending in December 2008.
The money has been repaid and the Fed has said its lending programs generated no losses. But with the United States economy weakening, European banks in trouble and some large American financial institutions once again on shaky ground, the Fed may feel compelled to open up its money spigots again.
Such a move does not appear imminent; on Friday Ben S. Bernanke, the Fed chairman, told attendees at the Jackson Hole, Wyo., conference that the Fed would take necessary steps to help the economy, but didn’t outline any possibilities as he has done previously.
If the Fed reprises some of its emergency lending programs, we will at least know what they will involve and who will be on the receiving end, thanks to Bloomberg.
For instance, its report detailed the surprisingly sketchy collateral — stocks and junk bonds — accepted by the Fed to back its loans. And who will be surprised if foreign institutions, which our central bank has no duty to help, receive bushels of money from the Fed in the coming months? In 2008, the Royal Bank of Scotland received $84.5 billion, and Dexia, a Belgian lender, borrowed $58.5 billion from the Fed at its peak.
Walker F. Todd, a research fellow at the American Institute for Economic Research and a former assistant general counsel and research officer at the Federal Reserve Bank of Cleveland, said these details from 2008 confirm that institutions, not citizens, were aided most by the bailouts.
“What is the benefit to the American taxpayer of propping up a Belgian bank with a single New York banking office to the tune of tens of billions of dollars?” he asked. “It seems inconsistent ultimately to have provided this much assistance to the biggest institutions for so long, and then to have done in effect nothing for the homeowner, nothing for credit card relief.”
Mr. Todd also questioned the Fed’s decision to accept stock as collateral backing a loan to a bank. “If you make a loan in an emergency secured by equities, how is that different in substance from the Fed walking into the New York Stock Exchange and buying across the board tomorrow?” he asked. “And yet this, the Fed has steadfastly denied ever doing.”
If these rescues were intended to benefit everyday Americans, as Mr. Paulson contended, they have failed. Main Street is in a world of hurt, facing high unemployment, rampant foreclosures and ravaged retirement accounts.
This important topic of bailout inequities came up in Congress earlier this month. Edward J. Kane, professor of finance at Boston College, addressed a Senate banking panel convened on Aug. 3 by Sherrod Brown, the Ohio Democrat. “Our representative democracy espouses the principle that all men and women are equal under the law,” Mr. Kane said. “During the housing bubble and the economic meltdown that the bursting bubble brought about, the interests of domestic and foreign financial institutions were much better represented than the interests of society as a whole.”
THIS inequity must be eliminated, Mr. Kane said, especially since taxpayers will be billed for future bailouts of large and troubled institutions. Such rescues are not really loans, but the equivalent of equity investments by taxpayers, he said.
As such, regulators who have a duty to protect taxpayers should require these institutions to provide them with true and comprehensive reports about their financial positions and the potential risks they involve. These reports would counter companies’ tendencies to hide their risk exposures through accounting tricks and innovation and would carry penalties for deception.
“Examiners would have to challenge this work, make the companies defend it and protect taxpayers from the misstatements we get today,” Mr. Kane said in an interview last week. “The banks really feel entitled to hide their deteriorating positions until they require life support. That’s what we have to change. We must put them in position to be punished for an intent to deceive.”
Given the degree to which financial regulators are captured by the companies they oversee, prescriptions like Mr. Kane’s are going to be fought hard. But the battle could not be more important; if we do nothing to protect taxpayers from the symbiotic relationship between the industry and their federal minders, we are in for many more episodes like the one we are still digging out of.
EVALUATING bailout programs like the Troubled Asset Relief Program and the facilities extended by the Fed against “the senseless standard of doing nothing at all,” Mr. Kane testified, government officials tell taxpayers that these actions were “necessary to save us from worldwide depression and made money for the taxpayer.” Both contentions are false, he said.
“Bailing out firms indiscriminately hampered rather than promoted economic recovery,” Mr. Kane continued. “It evoked reckless gambles for resurrection among rescued firms and created uncertainty about who would finally bear the extravagant costs of these programs. Both effects continue to disrupt the flow of credit and real investment necessary to trigger and sustain economic recovery.”
As for making money on the deals? Only half-true, Mr. Kane said. “Thanks to the vastly subsidized terms these programs offered, most institutions were eventually able to repay the formal obligations they incurred.” But taxpayers were inadequately compensated for the help they provided, he said. We should have received returns of 15 percent to 20 percent on our money, given the nature of these rescues.
Government officials rewarded imprudent institutions with stupefying amounts of free money. Even so, we are still in economically stormy seas. Doesn’t that indicate that it’s time to try a different tack?
But this has been a hard sell to an increasingly skeptical public. As Henry M. Paulson Jr., the former Treasury secretary, told the Financial Crisis Inquiry Commission back in May 2010, “I was never able to explain to the American people in a way in which they understood it why these rescues were for them and for their benefit, not for Wall Street.”
The American people were right to question Mr. Paulson’s pitch, as it turns out. And that became clearer than ever last week when Bloomberg News published fresh and disturbing details about the crisis-era bailouts.
Based on information generated by Freedom of Information Act requests and its longstanding lawsuit against the Federal Reserve board, Bloomberg reported that the Fed had provided a stunning $1.2 trillion to large global financial institutions at the peak of its crisis lending in December 2008.
The money has been repaid and the Fed has said its lending programs generated no losses. But with the United States economy weakening, European banks in trouble and some large American financial institutions once again on shaky ground, the Fed may feel compelled to open up its money spigots again.
Such a move does not appear imminent; on Friday Ben S. Bernanke, the Fed chairman, told attendees at the Jackson Hole, Wyo., conference that the Fed would take necessary steps to help the economy, but didn’t outline any possibilities as he has done previously.
If the Fed reprises some of its emergency lending programs, we will at least know what they will involve and who will be on the receiving end, thanks to Bloomberg.
For instance, its report detailed the surprisingly sketchy collateral — stocks and junk bonds — accepted by the Fed to back its loans. And who will be surprised if foreign institutions, which our central bank has no duty to help, receive bushels of money from the Fed in the coming months? In 2008, the Royal Bank of Scotland received $84.5 billion, and Dexia, a Belgian lender, borrowed $58.5 billion from the Fed at its peak.
Walker F. Todd, a research fellow at the American Institute for Economic Research and a former assistant general counsel and research officer at the Federal Reserve Bank of Cleveland, said these details from 2008 confirm that institutions, not citizens, were aided most by the bailouts.
“What is the benefit to the American taxpayer of propping up a Belgian bank with a single New York banking office to the tune of tens of billions of dollars?” he asked. “It seems inconsistent ultimately to have provided this much assistance to the biggest institutions for so long, and then to have done in effect nothing for the homeowner, nothing for credit card relief.”
Mr. Todd also questioned the Fed’s decision to accept stock as collateral backing a loan to a bank. “If you make a loan in an emergency secured by equities, how is that different in substance from the Fed walking into the New York Stock Exchange and buying across the board tomorrow?” he asked. “And yet this, the Fed has steadfastly denied ever doing.”
If these rescues were intended to benefit everyday Americans, as Mr. Paulson contended, they have failed. Main Street is in a world of hurt, facing high unemployment, rampant foreclosures and ravaged retirement accounts.
This important topic of bailout inequities came up in Congress earlier this month. Edward J. Kane, professor of finance at Boston College, addressed a Senate banking panel convened on Aug. 3 by Sherrod Brown, the Ohio Democrat. “Our representative democracy espouses the principle that all men and women are equal under the law,” Mr. Kane said. “During the housing bubble and the economic meltdown that the bursting bubble brought about, the interests of domestic and foreign financial institutions were much better represented than the interests of society as a whole.”
THIS inequity must be eliminated, Mr. Kane said, especially since taxpayers will be billed for future bailouts of large and troubled institutions. Such rescues are not really loans, but the equivalent of equity investments by taxpayers, he said.
As such, regulators who have a duty to protect taxpayers should require these institutions to provide them with true and comprehensive reports about their financial positions and the potential risks they involve. These reports would counter companies’ tendencies to hide their risk exposures through accounting tricks and innovation and would carry penalties for deception.
“Examiners would have to challenge this work, make the companies defend it and protect taxpayers from the misstatements we get today,” Mr. Kane said in an interview last week. “The banks really feel entitled to hide their deteriorating positions until they require life support. That’s what we have to change. We must put them in position to be punished for an intent to deceive.”
Given the degree to which financial regulators are captured by the companies they oversee, prescriptions like Mr. Kane’s are going to be fought hard. But the battle could not be more important; if we do nothing to protect taxpayers from the symbiotic relationship between the industry and their federal minders, we are in for many more episodes like the one we are still digging out of.
EVALUATING bailout programs like the Troubled Asset Relief Program and the facilities extended by the Fed against “the senseless standard of doing nothing at all,” Mr. Kane testified, government officials tell taxpayers that these actions were “necessary to save us from worldwide depression and made money for the taxpayer.” Both contentions are false, he said.
“Bailing out firms indiscriminately hampered rather than promoted economic recovery,” Mr. Kane continued. “It evoked reckless gambles for resurrection among rescued firms and created uncertainty about who would finally bear the extravagant costs of these programs. Both effects continue to disrupt the flow of credit and real investment necessary to trigger and sustain economic recovery.”
As for making money on the deals? Only half-true, Mr. Kane said. “Thanks to the vastly subsidized terms these programs offered, most institutions were eventually able to repay the formal obligations they incurred.” But taxpayers were inadequately compensated for the help they provided, he said. We should have received returns of 15 percent to 20 percent on our money, given the nature of these rescues.
Government officials rewarded imprudent institutions with stupefying amounts of free money. Even so, we are still in economically stormy seas. Doesn’t that indicate that it’s time to try a different tack?
Class Action - Shareholders Vs. Goldman Sachs, Congress Gives Millions Of Foreclosures To Wall St. Slumlords, Euro Bailout In Doubt As Hysteria Sweeps Germany (LINKS)
(LINKS)
VIDEO - Double amputee 400m runner Oscar Pistorius qualifies for the semi-finals at the IAAF world championships in Daegu, South Korea.
- Jackson Hole - Gloomy, Pessimistic Central Bankers Are Everywhere - WSJ
- Bank Of America Sells Part Of China Bank Stake, Raises $8 Billion
- Euro Bailout in DOUBT as 'hysteria' sweeps Germany - Ambrose Evans
- Consumer Spending climbs 0.8% in July
- Class Action Lawsuit - Shareholders Vs. Goldman Sachs
- Congress Giving Millions of Foreclosed Homes To Wall Street Slumlords
- Obama nominates Krueger to replace Goolsbee as chief White House economist
- Greek banks to merge, form Europe's biggest INSOLVENT Bank
- Matt Stoller - What Eric Schneiderman Reveals About Obama
- Peeking Below The Calm Surface Waters Of French Bank Liquidity
- Prepare to Be Forgiven, All Ye Mortgage Sinners
- Recession Has Lit the Fuse on Explosive Student Loan Debt
James Grant On Gold, Failures Of Keynesian Money Printing And The Fed (Video & Transcript)
Watch Video
Video - Indiana University graduate and hilarious anti-Fed proselytizer Jim Grant holds court - May 31, 2011
Scan the headlines in the James Grant archives...
Here are a few of our favorites:
Transcript courtesy of Gold Money
James Turk: I'm James Turk. I'm a director of the GoldMoney Foundation, and I'm here this evening with Jim Grant, the Founder and Editor of Grant's Interest Rate Observer. Information could be found at GrantsPub.com. Jim, it's a real pleasure to speak with you.
Jim Grant: Well thank you, James. It is good to be here.
James: We're going to be speaking tonight at the Committee for Monetary Research and Education, and you've got a very provocative title for your presentation. I wonder if we could talk a little bit about that.
Jim: Yes indeed. The title, I think it's "Carter Glass, Roll Over."
James: Carter Glass being?
Jim: Carter Glass is the legislative father of the Federal Reserve System who, 102 years ago, helped to usher in an institution which today he would not recognise.[laughter]
James: Because what it's doing today was completely different from what he intended it to do.
Jim: Well, the outfit that he pushed through to enactment – and one must read the preamble to the legislation, which you can find at any reputable website – but the preamble said something like, "This is an act to create an organisation to build the federal reserve banks, to institute a more thorough-going supervision of banking in the United States of America, to create a market to discount commercial bills ... and for other purposes." And we know what the operative phrase was, don't we?
James: Yes we do.
Jim: "...for other purposes." Nothing in the act about the following subjects. Nothing about zero interest rates; nothing about quantitative easing, that delicious phrase, keep reminding me about; nothing about inflation, deflation; nothing about anything current, [chuckles] hence Carter Glass' certainty that, if he were around today, he would die of shock all over again.
James: Would he die of shock?
Jim: Yeah, definitely.
James: Or is this really what he wanted to accomplish by putting that "for other purposes" there?
Jim: I think "for other purposes" you'll find is boilerplate for any number of bills. I think that he would be truly mortified. Among other things, he was a kind of a populist who had no use for Wall Street. During his life he never bought a share of common stock, at least according to his biography which, parenthetically, is the most miserable book ever written.
James: [laughs]
Jim: It came out in 1939 or something. But, on the authority of this miserable book, he never bought or sold a share of common stock. He always talked about stock gambling, never about investing. And what he wanted to do was to rejigger the country's monetary reserves such that they would not be all draining into the big money center banks in New York. So it was like kind of a populist, I think, it was a populist urge. Maybe there was some nefarious intent.
But I think what he would be mortified about, perhaps if not least, is the Feds new-found, self-appointed remit to levitate the prices of stocks and other financial assets. If there's anything that he didn't want [chuckles] out of this non-central bank – he did regard it as not a central bank at all – is I think he didn't want, it was a handmaiden to the interests of Wall Street.
James: Yes. Was he basically a sound money guy, then?
Jim: Well, he was a not especially reflective inheritor of the established norms of the day. He was for the gold standard. He defended, unto the death, the Fed against the charge that it would be the agency of the institution of fiat money. "Nothing like that at all" he said.
He was a real bills man, meaning that he believed that the commercial banking system was in business to facilitate trade and agriculture through the provision of liquidity against the collateral of self-liquidating, short-dated commercial credit. That was the sum and substance of his views, and all of that is evident in the Federal Reserve Act.
James: And that's what the Federal Reserve actually did for a few years.
Jim: Oh, for about 15 minutes.
James: [laughs] Ok. Exactly, it did.
Jim: And then along came World War I. And, instantly, it was in the business of centralising gold or discouraging the member banks from holding gold. It was in the business of facilitating Treasury issuance to finance the War and to facilitate other war-time emergency measures. So, the Fed was enacted on December 23rd, 1913, at about six in the evening. Woodrow Wilson signed with four pens. And that was the height of its orthodoxy, right there, at the moment of signing with the gold pens. That was it. It's been downhill ever since.
James: Ever since. Why have we allowed this thing to grow to the extent that it has or to evolve in the way it has? What's been the process?
Jim: I don't know. They didn't ask me.
James: [laughs] Well, you wrote a great piece in The Wall Street Journal a few years ago concluding that the Progressives had won.
Jim: Well, certainly. Let me try to answer your question, a very good question indeed. Why did it happen? Well, mission creep is simply endemic in all bureaucracies. That goes without saying.
James: Self-perpetuating, that they'll address the next issue that has come to the fore where it is to justify their jobs.
Jim: Well, also that their powers will expand, their remits will broaden and they will become as grandiose as the elected representatives allow them to be. Why Congress, which under the Constitution was given the power, to coin my regulative value there, why Congress has allowed the Fed to become this hydra-headed monster, search me.
James: It served their interests?
Jim: Well, I don't know about that. I think whose interests that it served is the interests, broadly speaking today, of our speculative classes. People who deal in wholesale sums of money find it ever so expedient to borrow at nothing.
James: Yes.
Jim: Zero percent is an excellent funding cost.
James: [laughs]
Jim: But as to the trusting souls who save dollars and who have them on deposit in what we are pleased to call banks, those trusting souls are the losers. But it's obvious...
James: Right, which is essentially the middle class and seniors who had saved up their lives in anticipation of living on their interest income.
Jim: Yeah, yeah, yeah. Yes, yes, yes. Yeah, all those. It is the fact that Wall Street doesn't mind this at all. By this I mean our present-day arrangements in which there are intermittent crises which necessarily create intermittent opportunities. There are protracted periods, and have been since about 1990, of extremely low funding costs.
The yield curve, by which I mean the alignment of interest rates through time, has been generally steep, meaning that short rates are hospitably set below long rates. So that one can earn a spread simply by borrowing money at negligible cost to buy longer-dated assets yielding something more than nothing. So Wall Street is in this business, and it has done rather well.
James: Borrowing short, lending long.
Jim: As they say.
James: But that's also the volatility or the ultimate that leads to insolvency if you have a...
Jim: Well it leads to insolvency among some, but notice how many are not broke doing this.
James: So yeah, for every layman there are a lot making a lot of money.
Jim: Yeah, yeah. Yeah.
James: But getting back to the Federal Reserve, doesn't it also serve the politicians in the sense that there's no discipline on their spending?
Jim: Yes, it does indeed.
James: They know that, whatever they want to spend, the Federal Reserve is going to step in...
Jim: You are quite right.
James: ...and do quantitative easing.
Jim: It serves the interests of those who would expand government power, and it serves the interests of those who run up great big debts. Because, note, there has been no check on our external borrowing since about Monday morning, August 16th, 1971. Even before that there was really very little check. The gold standard was so eviscerated under Bretton Woods.
James: That you can't really call it the gold standard that was in place.
Jim: No, that was a road show.
James: [chuckles]
Jim: It was the weak-water version of the preceding road show version which succeeded the real McCoy.
James: Right.
Jim: So nothing good has happened in this realm of business since about, oh, August 1914. [laughs]
James: When the Federal Reserve went into business.
Jim: Well since the gold standard, the real, true McCoy gold standard.
James: When war broke out in Europe and Britain went off the classical gold standard.
Jim: Yeah, yeah. Right.
James: And then, of course, the failed attempt by Churchill to go back to the pre-war parity, which created the tremendous deflation and problems...
Jim: Yes. Yes, yes, yes.
James: ...in the 1920s in Britain.
Jim: For 100 years it's been bad news, James. [laughs]
James: It has been bad news for people who have held money and saw their purchasing power erode or people who lived in countries where there were monetary crises. And, as we all know, there have been dozens and dozens of monetary crises around the world. Are we going to face a similar monetary crisis here in the United States?
Jim: Yes, in fact, we are up against it. I think that, the world over, monetary arrangements are visibly coming unstuck. Indeed, they are unstuck. It's only the perception that is lagging the fact. Central banks the world over are the most preposterous, jury-rigged structures. In China the central bank, the People's Bank, is leveraged 1,200 to 1. One thousand two hundred units of asset – they call them Renminbi – per one unit of capital.
James: That's even more than the Federal Reserve.
Jim: Yes. The Federal Reserve Bank of New York, this paragon of conservative incomes...
James: Compared to that.
Jim: ...is leveraged merely 102 to 1.
James: OK. Just like Long-Term Capital Management.
Jim: Yeah. And so, in the day back when you and I were in school, James, 1913, the role of central banks were then, by and large, investor-owned institutions that were, most of them, doing a conventional commercial banking business of some kind. And they presented their balance sheet that was meant to be and did, indeed, conform to the orthodox norms of the day. They had no overt state support. They were not recapitalised by the state intermittently. They were, to a great degree, private, independent institutions in fact, and they were solvent. Solvent.
James: Mm-hm.
Jim: On a mark, the People's Bank of China is certainly insolvent. The Federal Reserve Bank of New York is visibly solvent and could certainly receive succor from the Treasury would the need arise. And I don't mean to press the point that the leverage ratios are extreme. They are obviously extreme. But I think the symbolism of that extremism in leverage is important because it signifies how far off the path of gold standard orthodoxy we have veered in about 100 years. Way off the path.
James: Yeah, way off the path and ultimately that leverage has to be reduced because we've reached the level that the cash flow just doesn't sustain that level of debt anymore. Greece, perhaps...
Jim: Yeah.
James: ...is the poster child of over-leverage, but there are any other number of countries using it.
Jim: Oh, America is a pretty good poster child for over-leveraging.
James: Well I know you've been following this for a long time. I remember, was it 1992, you did the first prospectus of the US government debt?
Jim: I think even earlier.
James: Was it even earlier?
Jim: Yes. Notice how many people paid attention. [chuckles] You. You paid attention. [laughter]
James: I remembered. But a lot of people are paying attention now.
Jim: Yeah.
James: And, Ok, maybe you were a little bit early pointing out some of the problems.
Jim: [laughs] Hey gramps, 20 years is nothing. 30 years is nothing.
James: Well it takes the long view.
Jim: Yeah, it does. It does, yeah.
James: Let's talk about the US government's position. It seem basically insolvent, right?
Jim: Well, it's not insolvent. This is still the world's destination. It's a great country. Were we to mobilise our economic and financial resources, we could certainly deal with it. I think we could deal with the debts as they are now.
James: Even as big as they are, and excluding the contingent liabilities?
Jim: Yeah. Well, oh, if we dealt with those contingent liabilities, if people retired later, I think there's a way out still. I'm not such an apocalyptic observer of our fiscal affairs. However, however, our fiscal affairs are facilitated. We are addicted to our reserve currency privilege, which is in fact not a privilege but a curse.
And insofar as we persist in paying our bills with a currency that only we can produce, and insofar as our mercantilist Asian credit is return the dollars we remit to them instantly in the shape of investments in our Treasury securities. We are certainly running down the path, not merely trotting, but running down the path of national insolvency because there's no check on our incontinence.
James: Yes.
Jim: That is the rub. Paul Ryan is a well-intended man with a serious program, but he doesn't address the problem. The problem is the reserve currency aspect of our monetary affairs.
James: Which, as you say, is a curse but it's also a responsibility in a sense that, if we maintain a bad reserve currency, this has worldwide impact.
Jim: Well sure, and there's a great big discontinuity in our affairs. The dollar is the world's currency, but the Fed is America's central bank, period. Period. It pays no attention to anything outside of the 50 states and territories I'd guess. It doesn't care at all. In fact, I think it's not-so-secretly rooting for a much weaker exchange rate. But it doesn't care that $2 trillion of our assets, where the number really is, are on the balance sheet of the People's Bank of China.
They don't care that half of Asia seems papered with our green currency. The Fed's in the business of ginning up the stock market. It's in the business of sustaining full employment as defined these days, which is a very loose definition indeed. It's in the business of promoting what they are pleased to call price stability. Nothing about what you rightly called a responsibility of reserve issuing or reserve currency country.
In fact, there have only been two reserve currency issuing countries, if you don't count the intended reserve currency status of the eurozone, ourselves and Britain. And notice how little attention either one of us paid over the years since at least we went on paper to our obligations to our creditors, like zero.
James: And the dollar only became a world reserve currency because of the lengthy goal, as the saying was back then, as good as gold.
Jim: Yeah.
James: And basically Britain, when it was on the classical gold standard, the term gold and pound were synonymous with one another because of the redeemability features.
Jim: Yeah. Well I guess there was some connection as well to geopolitical power. But certainly, James, to me the remarkable thing about the dollar now is that it is still accepted as a medium of exchange and still a store of value the world over without anything behind it except the good intentions of the issuing government.
And it's truly, if you stop and think about it, to me it is one of the most remarkable achievements in the history of money. The dollar does serve this role without anything behind it except Congress and the analytical acuity of the Federal Market Committee. It's quite something.
James: But fiat currencies around the world are accepted on the same basis, until some event occurs.
Jim: Right.
James: People's eyes open up and they...
Jim: It's been 40 years. This is a pretty long run for the dollar.
James: Yeah, it is.
Jim: I'm not saying it's going to be in perpetuity. [laughter]
James: And we're not going to go another 40 years either.
Jim: No.
James: Maybe 40 days.
Jim: When you and I still had dark hair, we were talking the same stuff. I'm trying to be a little bit discreet about timing.
James: Ok, thank you.
Jim: I hope I live long enough, but let's just say I'm impressed by the staying power of this fiat currency.
James: Yeah.
Jim: I am deeply impressed by it.
James: What do you attribute that to? Just propaganda, lack of education?
Jim: No. Well, yeah, that's part of it I suppose. We take for granted the fact that the United States still has the Statue of Liberty, Disney World, the New York Public Library, the United States Marine Corps. This is a great country. It is the world's destination for people and, to a degree, still is the world's destination for wealth and for opportunity. The United States is like Major League Baseball. They try to destroy it but they can't.
James: But it's not like what I remember back in the '70s or '60s or even as a young kid in the '50s in terms of attraction for capital.
Jim: I know, I know. But I guess what I'm trying to say is there is a lot of inertial power behind this country and its magnetism for people and for enterprise.
James: Staying power. But, at the end of the day, a currency, if it ultimately...
Jim: Yes, of course, yes. Yes, yes. We agree on that.
James: Yeah.
Jim: Every paper currency has gone to zero. The dollar is down what, 99.99 per cent or something.
James: Since 1913, yeah.
Jim: Right. It is a truism to say that these paper currencies are going to zero. However, I've been around a long time watching it go to zero, and Ben S. Bernanke still gets more TV time than I do. Let me put it that way. [laughter]
James: Ok. Let's go back to Grant's Interest Rate Observer.
Jim: Yes, let's.
James: You talk a lot about interest rates, but how do you see the interest rate picture now?
Jim: I can't see them anymore.
James: I know. It isn't easy.
Jim: They're tiny. They're zero.
James: Are the bond vigilantes, are they still a big factor in the market?
Jim: No, they all retired about 1986 to Boca Raton. There is no bond vigilante movement. Bond vigilantes, of course, were the group of public-spirited chaps and ladies who, it was said, would rise up against any sign of monetary debauch or fiscal profligacy and snuff it out like a candle. Because they would not again be suckered into holding depreciating emissions of the United States Treasury. Remember that story?
James: Yeah, it was a different generation perhaps?
Jim: A different generation but also muscle memory is so important in investing. Interest rates have been falling since September 30th, 1981. 30, 3-O years of a bond bull market. And I know that analysis plays some part in investing. Some part. But muscle memory is a hugely underrated aspect of this, and people own bonds because they have been appreciating and because you can finance them at zero.
Therefore, I think that the market doesn't think one whit about the difficulties, difficulties is certainly understated, presented by our deteriorating fiscal picture. It doesn't care at all about the monetary drama unfolding. It cares about the spread between the cost of funding a portfolio of short-dated treasuries on the one hand and the yield obtainable on those securities on the other.
James: Yeah.
Jim: That's it.
James: But cash flow, I'm trained as a banker, so cash flow to me is always very important. And I just looked recently at the April US government budget deficits for the seven months of this fiscal year that we've completed so far. The debt has gone up $870 billion but, more significantly, of the $100 that are being spent by the federal government, 40 per cent of it is coming from borrowing. Sixty per cent of it is coming from revenue. That's unsustainable on a cash flow basis.
Jim: Correct. It's unsustainable, and we are doing this with interest rates at multi-generational lows.
James: Yeah, imagine if they were at a normal level, what that would do in terms of adding to the additional expenses of the government.
Jim: No question, no contest, and no disagreement with anything you've said. However, my contention is that those irrefutable facts are of no consequence to people whose time horizon is about a day, who fund at zero and who earn a spread. They do not care about the cash flow statement of the United States Treasury. What they care about is the spread between funding costs and yield earnings.
James: That's Ok. Who cares about gold? I know you've talked about gold a lot in Grant's Interest Rate Observer. Who cares about gold? Do these bond guys see gold as an opportunity to hedge their losses?
Jim: I still think it's seen as something of a renegade asset. It's certainly not yet an institutional asset. People see it as this kind of annoying thing off the side that just draws attention from really serious things, like Apple common stock and other mainline securities.
James: Was the University of Texas's announcement that they bought a billion dollars of physical gold a watershed event?
Jim: Well I'm not sure if it was watershed. I think we have seen a succession of such announcements. Don't forget now, and which I know you don't, that central banks have turned net buyers for the first time in a generation. It's not only the University of Texas's pension plan. Serious individuals with serious money that don't need a committee are allocating money to go... We know that because there turns out to be a shortage, of all things, safe deposit facilities.
James: Here in New York City?
Jim: Well, the world over, people have started business recently to... Here again. I am talking to an expert on the subject. People have started businesses for safe keeping and for transport and for storage. So there is at the margin, still only at the margin, there is a movement to accept gold, not so much as an investment asset, but as a thing that I think both of us would agree it is, money.
James: What is your view on gold? Is it money and is it going to return as a form of currency at some point of time in the future?
Jim Grant: I think that we will see a gold standard again.
James: In the United States?
Jim: Yes, I think so.
James: Do you think soon? What are the factors driving that?
Jim: Gee, I wasn't born yesterday. I'm not going to give you a date! I think that there is something in the wind. And that something, I think, is a deep, deep dissatisfaction with the monetary program in place. And a deep, deep, abiding worry about our fiscal difficulties. And a sense that what the Fed is doing is simply incomprehensible.
So, in the Financial Times of London there was a letter published about a year ago. The letter writer says, "Finally I understand, I think I know what quantitative easing is. I think I get that now. What I no longer understand is the meaning of the word "money." So that to me is the most clarifying couple of sentences of the crisis. And I think that thought, though perhaps not expressed so concisely or humorously, is in the back of the minds of the American public.
James: Well, Money of the Mind was one of your many books that you've written.
Jim: Well, thank you James. Thank you for ramming that in the conversation.
James: Well, I've read your books and that's a good one and it seems appropriate to bring it in here because we're talking about the points that you were making in that book.
Jim: Yeah, so the reason I think that there is more than a snowball's chance of a gold standard being enacted, first of all, arithmetic is working against the existing business. The banking business doesn't making any sense. It has to be recapitalized much too frequently for the financial health of the people who are capitalising it. Let's say the long-suffering taxpayers. So, the banking system itself, arithmetic is working against it. Arithmetic is working against our fiscal affairs. And arithmetic is working against the balance sheets of the world's central banks.
The leverage doesn't make any sense. The fact that the world's second largest economy has a central bank that is actually, must be actually insolvent. All these things, these certain facts, I think are congealing and I'm not sure what the catalyst is going to be. It might be some bright light of a politician finally getting it and speaking to people in such a way as to present the issues to them in a way that mobilises public opinion. But we have arithmetic on our side. Do we stand or...?
James: Do we have the political will, though? Because, back in 1869, there were similar circumstances when the greenback was circulating and it was depreciating relative to gold. The political will came together and they laid out a 10-year plan to resume backing of gold versus the paper currency. Do we have that kind of political will this time around?
Jim: Well, don't forget, resumption after the Civil War was hard fought. And the political will, I guess, was manifested finally in its act being passed, but they did put it 10 years off in the future.
James: But that was necessary to make the adjustments to go back to gold.
Jim: Yeah, but it was necessary because it was . . .
James: A good compromise?
Jim: Only marginally popular. It was very controversial. And it became more so, of course, in the 1870s and 80s as the Greenback and Populous Movements gathered. The late 19th century was a time of a subsiding price level down, maybe a percent and a half a year. Real wages were up, but prices were down and farmers couldn't stay . . . So political will, especially in retrospect, was there, but it was hard fought. And I think that what we have going for us today again is pure and simple arithmetic.
James: Does Congress realise that, do you think?
Jim: This congress doesn't realise it so much, but maybe the next one will . . .
James: This congress represents, there are a lot of Tea Party people in this one.
Jim: Yeah, there are. So, Lou Amran and I went down to testify before Ron Paul's Congressional Subcommittee on Monetary Affairs, six weeks ago. And Ron Paul, of course, is very friendly to all of us. So, Lou and I figured that this would be a fabulous opportunity. And indeed it was a very flattering one. And the Democrats boycotted it, we were told. The Democrats wouldn't show up and dignify these proceedings with their presence.
What we didn't expect was the fact of "boycott the Republicans." We were testifying in front of ourselves and our immediate families. So, it was kind of despairing in that sense. So, I'm not sure where I get off saying that there will be a gold standard, except I believe that there is some reservoir in the American electorate of good common horse sense. And when horse sense meets arithmetic, I expect good things to happen.
James: Will there be faith in the government in maintaining a gold standard if it does go back to gold standard?
Jim: Oh, I don't know. Let's cross that bridge when we come to it.
James: Is the gold standard really the only alternative in your view?
Jim: Well, unless somebody can think of something better. I mean the gold standard, to most minds, has a hopeless layering of cobwebs. It's like something... If we had the gold standard, can we bring back dysentery to as we’re nostalgic for that as well. If you talk to the average Manhattanite about this they are, what should we say, sceptical.
So, I am open to suggestions about what might be a standard such that the world's balance of payments are synchronised, rather than stymied. I am open to a standard in which the monetary medium is recognisable as money everywhere and accepted universally. I am open to a standard in which the monetary medium grows at approximately the rate of the world's population.
It seems to me that such a standard is... I can't conceive of anything even remotely resembling a gold standard. Certainly none has been tested in what my friend Lou Amran says is the laboratory of human history. So 100 years or more of, not perfect, but a remarkably successful run of a standard that managed to maintain price stability and serve as a kind of a gyroscope of economic growth, of stupendous economic growth in a time of great technological progress. So, what wrong with that?! What's wrong with that?
James: Yeah, nothing's wrong with that. But can government be trusted with the gold standard? Or should we be looking at private markets.
Jim: Well, let's have markets bring it in. I think state legislators, there must be a dozen of them that are either weighing it or have recently enacted.
James: Yeah, I have seen some of the movement, Utah, South Carolina.
Jim: So whether the movement comes from the bottom up, the bottom up is probably more likely than the top down, I'd be happy to see a competitive currency situation develop. Maybe if Congress will just stop taxing gold as a collectible that would be a good step forward. I dare say that you have better ideas in this than I do, but I do have confidence in two things. I have a kind of a dread that is a form of confidence. I have a dreadful confidence that existing arrangements will not last. In fact, I will put that down just like Bernanke did. I am 100 per cent certain of that.
James: Ok.
Jim: And also I have a confidence in the reservoir of good will and of the common sense of the American public. I think that between the two of these forces, arithmetic and American common sense, something good will come of this apparent disaster.
James: Yeah, if we could only have some common sense in Congress, I would agree with you.
Jim: Yeah.
James: Maybe that will happen?
Jim: Well, I don't know. Let's give it another 50 years. We'll get there.
James: OK, thanks very much, Jim. I have been with Jim Grant, the founder and editor of Grant's Interest Rate Observer. Thanks again, Jim.
Jim: You are entirely welcome, James.
James: It's a real pleasure.
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Transcript courtesy of Gold Money
James Turk: I'm James Turk. I'm a director of the GoldMoney Foundation, and I'm here this evening with Jim Grant, the Founder and Editor of Grant's Interest Rate Observer. Information could be found at GrantsPub.com. Jim, it's a real pleasure to speak with you.
Jim Grant: Well thank you, James. It is good to be here.
James: We're going to be speaking tonight at the Committee for Monetary Research and Education, and you've got a very provocative title for your presentation. I wonder if we could talk a little bit about that.
Jim: Yes indeed. The title, I think it's "Carter Glass, Roll Over."
James: Carter Glass being?
Jim: Carter Glass is the legislative father of the Federal Reserve System who, 102 years ago, helped to usher in an institution which today he would not recognise.[laughter]
James: Because what it's doing today was completely different from what he intended it to do.
Jim: Well, the outfit that he pushed through to enactment – and one must read the preamble to the legislation, which you can find at any reputable website – but the preamble said something like, "This is an act to create an organisation to build the federal reserve banks, to institute a more thorough-going supervision of banking in the United States of America, to create a market to discount commercial bills ... and for other purposes." And we know what the operative phrase was, don't we?
James: Yes we do.
Jim: "...for other purposes." Nothing in the act about the following subjects. Nothing about zero interest rates; nothing about quantitative easing, that delicious phrase, keep reminding me about; nothing about inflation, deflation; nothing about anything current, [chuckles] hence Carter Glass' certainty that, if he were around today, he would die of shock all over again.
James: Would he die of shock?
Jim: Yeah, definitely.
James: Or is this really what he wanted to accomplish by putting that "for other purposes" there?
Jim: I think "for other purposes" you'll find is boilerplate for any number of bills. I think that he would be truly mortified. Among other things, he was a kind of a populist who had no use for Wall Street. During his life he never bought a share of common stock, at least according to his biography which, parenthetically, is the most miserable book ever written.
James: [laughs]
Jim: It came out in 1939 or something. But, on the authority of this miserable book, he never bought or sold a share of common stock. He always talked about stock gambling, never about investing. And what he wanted to do was to rejigger the country's monetary reserves such that they would not be all draining into the big money center banks in New York. So it was like kind of a populist, I think, it was a populist urge. Maybe there was some nefarious intent.
But I think what he would be mortified about, perhaps if not least, is the Feds new-found, self-appointed remit to levitate the prices of stocks and other financial assets. If there's anything that he didn't want [chuckles] out of this non-central bank – he did regard it as not a central bank at all – is I think he didn't want, it was a handmaiden to the interests of Wall Street.
James: Yes. Was he basically a sound money guy, then?
Jim: Well, he was a not especially reflective inheritor of the established norms of the day. He was for the gold standard. He defended, unto the death, the Fed against the charge that it would be the agency of the institution of fiat money. "Nothing like that at all" he said.
He was a real bills man, meaning that he believed that the commercial banking system was in business to facilitate trade and agriculture through the provision of liquidity against the collateral of self-liquidating, short-dated commercial credit. That was the sum and substance of his views, and all of that is evident in the Federal Reserve Act.
James: And that's what the Federal Reserve actually did for a few years.
Jim: Oh, for about 15 minutes.
James: [laughs] Ok. Exactly, it did.
Jim: And then along came World War I. And, instantly, it was in the business of centralising gold or discouraging the member banks from holding gold. It was in the business of facilitating Treasury issuance to finance the War and to facilitate other war-time emergency measures. So, the Fed was enacted on December 23rd, 1913, at about six in the evening. Woodrow Wilson signed with four pens. And that was the height of its orthodoxy, right there, at the moment of signing with the gold pens. That was it. It's been downhill ever since.
James: Ever since. Why have we allowed this thing to grow to the extent that it has or to evolve in the way it has? What's been the process?
Jim: I don't know. They didn't ask me.
James: [laughs] Well, you wrote a great piece in The Wall Street Journal a few years ago concluding that the Progressives had won.
Jim: Well, certainly. Let me try to answer your question, a very good question indeed. Why did it happen? Well, mission creep is simply endemic in all bureaucracies. That goes without saying.
James: Self-perpetuating, that they'll address the next issue that has come to the fore where it is to justify their jobs.
Jim: Well, also that their powers will expand, their remits will broaden and they will become as grandiose as the elected representatives allow them to be. Why Congress, which under the Constitution was given the power, to coin my regulative value there, why Congress has allowed the Fed to become this hydra-headed monster, search me.
James: It served their interests?
Jim: Well, I don't know about that. I think whose interests that it served is the interests, broadly speaking today, of our speculative classes. People who deal in wholesale sums of money find it ever so expedient to borrow at nothing.
James: Yes.
Jim: Zero percent is an excellent funding cost.
James: [laughs]
Jim: But as to the trusting souls who save dollars and who have them on deposit in what we are pleased to call banks, those trusting souls are the losers. But it's obvious...
James: Right, which is essentially the middle class and seniors who had saved up their lives in anticipation of living on their interest income.
Jim: Yeah, yeah, yeah. Yes, yes, yes. Yeah, all those. It is the fact that Wall Street doesn't mind this at all. By this I mean our present-day arrangements in which there are intermittent crises which necessarily create intermittent opportunities. There are protracted periods, and have been since about 1990, of extremely low funding costs.
The yield curve, by which I mean the alignment of interest rates through time, has been generally steep, meaning that short rates are hospitably set below long rates. So that one can earn a spread simply by borrowing money at negligible cost to buy longer-dated assets yielding something more than nothing. So Wall Street is in this business, and it has done rather well.
James: Borrowing short, lending long.
Jim: As they say.
James: But that's also the volatility or the ultimate that leads to insolvency if you have a...
Jim: Well it leads to insolvency among some, but notice how many are not broke doing this.
James: So yeah, for every layman there are a lot making a lot of money.
Jim: Yeah, yeah. Yeah.
James: But getting back to the Federal Reserve, doesn't it also serve the politicians in the sense that there's no discipline on their spending?
Jim: Yes, it does indeed.
James: They know that, whatever they want to spend, the Federal Reserve is going to step in...
Jim: You are quite right.
James: ...and do quantitative easing.
Jim: It serves the interests of those who would expand government power, and it serves the interests of those who run up great big debts. Because, note, there has been no check on our external borrowing since about Monday morning, August 16th, 1971. Even before that there was really very little check. The gold standard was so eviscerated under Bretton Woods.
James: That you can't really call it the gold standard that was in place.
Jim: No, that was a road show.
James: [chuckles]
Jim: It was the weak-water version of the preceding road show version which succeeded the real McCoy.
James: Right.
Jim: So nothing good has happened in this realm of business since about, oh, August 1914. [laughs]
James: When the Federal Reserve went into business.
Jim: Well since the gold standard, the real, true McCoy gold standard.
James: When war broke out in Europe and Britain went off the classical gold standard.
Jim: Yeah, yeah. Right.
James: And then, of course, the failed attempt by Churchill to go back to the pre-war parity, which created the tremendous deflation and problems...
Jim: Yes. Yes, yes, yes.
James: ...in the 1920s in Britain.
Jim: For 100 years it's been bad news, James. [laughs]
James: It has been bad news for people who have held money and saw their purchasing power erode or people who lived in countries where there were monetary crises. And, as we all know, there have been dozens and dozens of monetary crises around the world. Are we going to face a similar monetary crisis here in the United States?
Jim: Yes, in fact, we are up against it. I think that, the world over, monetary arrangements are visibly coming unstuck. Indeed, they are unstuck. It's only the perception that is lagging the fact. Central banks the world over are the most preposterous, jury-rigged structures. In China the central bank, the People's Bank, is leveraged 1,200 to 1. One thousand two hundred units of asset – they call them Renminbi – per one unit of capital.
James: That's even more than the Federal Reserve.
Jim: Yes. The Federal Reserve Bank of New York, this paragon of conservative incomes...
James: Compared to that.
Jim: ...is leveraged merely 102 to 1.
James: OK. Just like Long-Term Capital Management.
Jim: Yeah. And so, in the day back when you and I were in school, James, 1913, the role of central banks were then, by and large, investor-owned institutions that were, most of them, doing a conventional commercial banking business of some kind. And they presented their balance sheet that was meant to be and did, indeed, conform to the orthodox norms of the day. They had no overt state support. They were not recapitalised by the state intermittently. They were, to a great degree, private, independent institutions in fact, and they were solvent. Solvent.
James: Mm-hm.
Jim: On a mark, the People's Bank of China is certainly insolvent. The Federal Reserve Bank of New York is visibly solvent and could certainly receive succor from the Treasury would the need arise. And I don't mean to press the point that the leverage ratios are extreme. They are obviously extreme. But I think the symbolism of that extremism in leverage is important because it signifies how far off the path of gold standard orthodoxy we have veered in about 100 years. Way off the path.
James: Yeah, way off the path and ultimately that leverage has to be reduced because we've reached the level that the cash flow just doesn't sustain that level of debt anymore. Greece, perhaps...
Jim: Yeah.
James: ...is the poster child of over-leverage, but there are any other number of countries using it.
Jim: Oh, America is a pretty good poster child for over-leveraging.
James: Well I know you've been following this for a long time. I remember, was it 1992, you did the first prospectus of the US government debt?
Jim: I think even earlier.
James: Was it even earlier?
Jim: Yes. Notice how many people paid attention. [chuckles] You. You paid attention. [laughter]
James: I remembered. But a lot of people are paying attention now.
Jim: Yeah.
James: And, Ok, maybe you were a little bit early pointing out some of the problems.
Jim: [laughs] Hey gramps, 20 years is nothing. 30 years is nothing.
James: Well it takes the long view.
Jim: Yeah, it does. It does, yeah.
James: Let's talk about the US government's position. It seem basically insolvent, right?
Jim: Well, it's not insolvent. This is still the world's destination. It's a great country. Were we to mobilise our economic and financial resources, we could certainly deal with it. I think we could deal with the debts as they are now.
James: Even as big as they are, and excluding the contingent liabilities?
Jim: Yeah. Well, oh, if we dealt with those contingent liabilities, if people retired later, I think there's a way out still. I'm not such an apocalyptic observer of our fiscal affairs. However, however, our fiscal affairs are facilitated. We are addicted to our reserve currency privilege, which is in fact not a privilege but a curse.
And insofar as we persist in paying our bills with a currency that only we can produce, and insofar as our mercantilist Asian credit is return the dollars we remit to them instantly in the shape of investments in our Treasury securities. We are certainly running down the path, not merely trotting, but running down the path of national insolvency because there's no check on our incontinence.
James: Yes.
Jim: That is the rub. Paul Ryan is a well-intended man with a serious program, but he doesn't address the problem. The problem is the reserve currency aspect of our monetary affairs.
James: Which, as you say, is a curse but it's also a responsibility in a sense that, if we maintain a bad reserve currency, this has worldwide impact.
Jim: Well sure, and there's a great big discontinuity in our affairs. The dollar is the world's currency, but the Fed is America's central bank, period. Period. It pays no attention to anything outside of the 50 states and territories I'd guess. It doesn't care at all. In fact, I think it's not-so-secretly rooting for a much weaker exchange rate. But it doesn't care that $2 trillion of our assets, where the number really is, are on the balance sheet of the People's Bank of China.
They don't care that half of Asia seems papered with our green currency. The Fed's in the business of ginning up the stock market. It's in the business of sustaining full employment as defined these days, which is a very loose definition indeed. It's in the business of promoting what they are pleased to call price stability. Nothing about what you rightly called a responsibility of reserve issuing or reserve currency country.
In fact, there have only been two reserve currency issuing countries, if you don't count the intended reserve currency status of the eurozone, ourselves and Britain. And notice how little attention either one of us paid over the years since at least we went on paper to our obligations to our creditors, like zero.
James: And the dollar only became a world reserve currency because of the lengthy goal, as the saying was back then, as good as gold.
Jim: Yeah.
James: And basically Britain, when it was on the classical gold standard, the term gold and pound were synonymous with one another because of the redeemability features.
Jim: Yeah. Well I guess there was some connection as well to geopolitical power. But certainly, James, to me the remarkable thing about the dollar now is that it is still accepted as a medium of exchange and still a store of value the world over without anything behind it except the good intentions of the issuing government.
And it's truly, if you stop and think about it, to me it is one of the most remarkable achievements in the history of money. The dollar does serve this role without anything behind it except Congress and the analytical acuity of the Federal Market Committee. It's quite something.
James: But fiat currencies around the world are accepted on the same basis, until some event occurs.
Jim: Right.
James: People's eyes open up and they...
Jim: It's been 40 years. This is a pretty long run for the dollar.
James: Yeah, it is.
Jim: I'm not saying it's going to be in perpetuity. [laughter]
James: And we're not going to go another 40 years either.
Jim: No.
James: Maybe 40 days.
Jim: When you and I still had dark hair, we were talking the same stuff. I'm trying to be a little bit discreet about timing.
James: Ok, thank you.
Jim: I hope I live long enough, but let's just say I'm impressed by the staying power of this fiat currency.
James: Yeah.
Jim: I am deeply impressed by it.
James: What do you attribute that to? Just propaganda, lack of education?
Jim: No. Well, yeah, that's part of it I suppose. We take for granted the fact that the United States still has the Statue of Liberty, Disney World, the New York Public Library, the United States Marine Corps. This is a great country. It is the world's destination for people and, to a degree, still is the world's destination for wealth and for opportunity. The United States is like Major League Baseball. They try to destroy it but they can't.
James: But it's not like what I remember back in the '70s or '60s or even as a young kid in the '50s in terms of attraction for capital.
Jim: I know, I know. But I guess what I'm trying to say is there is a lot of inertial power behind this country and its magnetism for people and for enterprise.
James: Staying power. But, at the end of the day, a currency, if it ultimately...
Jim: Yes, of course, yes. Yes, yes. We agree on that.
James: Yeah.
Jim: Every paper currency has gone to zero. The dollar is down what, 99.99 per cent or something.
James: Since 1913, yeah.
Jim: Right. It is a truism to say that these paper currencies are going to zero. However, I've been around a long time watching it go to zero, and Ben S. Bernanke still gets more TV time than I do. Let me put it that way. [laughter]
James: Ok. Let's go back to Grant's Interest Rate Observer.
Jim: Yes, let's.
James: You talk a lot about interest rates, but how do you see the interest rate picture now?
Jim: I can't see them anymore.
James: I know. It isn't easy.
Jim: They're tiny. They're zero.
James: Are the bond vigilantes, are they still a big factor in the market?
Jim: No, they all retired about 1986 to Boca Raton. There is no bond vigilante movement. Bond vigilantes, of course, were the group of public-spirited chaps and ladies who, it was said, would rise up against any sign of monetary debauch or fiscal profligacy and snuff it out like a candle. Because they would not again be suckered into holding depreciating emissions of the United States Treasury. Remember that story?
James: Yeah, it was a different generation perhaps?
Jim: A different generation but also muscle memory is so important in investing. Interest rates have been falling since September 30th, 1981. 30, 3-O years of a bond bull market. And I know that analysis plays some part in investing. Some part. But muscle memory is a hugely underrated aspect of this, and people own bonds because they have been appreciating and because you can finance them at zero.
Therefore, I think that the market doesn't think one whit about the difficulties, difficulties is certainly understated, presented by our deteriorating fiscal picture. It doesn't care at all about the monetary drama unfolding. It cares about the spread between the cost of funding a portfolio of short-dated treasuries on the one hand and the yield obtainable on those securities on the other.
James: Yeah.
Jim: That's it.
James: But cash flow, I'm trained as a banker, so cash flow to me is always very important. And I just looked recently at the April US government budget deficits for the seven months of this fiscal year that we've completed so far. The debt has gone up $870 billion but, more significantly, of the $100 that are being spent by the federal government, 40 per cent of it is coming from borrowing. Sixty per cent of it is coming from revenue. That's unsustainable on a cash flow basis.
Jim: Correct. It's unsustainable, and we are doing this with interest rates at multi-generational lows.
James: Yeah, imagine if they were at a normal level, what that would do in terms of adding to the additional expenses of the government.
Jim: No question, no contest, and no disagreement with anything you've said. However, my contention is that those irrefutable facts are of no consequence to people whose time horizon is about a day, who fund at zero and who earn a spread. They do not care about the cash flow statement of the United States Treasury. What they care about is the spread between funding costs and yield earnings.
James: That's Ok. Who cares about gold? I know you've talked about gold a lot in Grant's Interest Rate Observer. Who cares about gold? Do these bond guys see gold as an opportunity to hedge their losses?
Jim: I still think it's seen as something of a renegade asset. It's certainly not yet an institutional asset. People see it as this kind of annoying thing off the side that just draws attention from really serious things, like Apple common stock and other mainline securities.
James: Was the University of Texas's announcement that they bought a billion dollars of physical gold a watershed event?
Jim: Well I'm not sure if it was watershed. I think we have seen a succession of such announcements. Don't forget now, and which I know you don't, that central banks have turned net buyers for the first time in a generation. It's not only the University of Texas's pension plan. Serious individuals with serious money that don't need a committee are allocating money to go... We know that because there turns out to be a shortage, of all things, safe deposit facilities.
James: Here in New York City?
Jim: Well, the world over, people have started business recently to... Here again. I am talking to an expert on the subject. People have started businesses for safe keeping and for transport and for storage. So there is at the margin, still only at the margin, there is a movement to accept gold, not so much as an investment asset, but as a thing that I think both of us would agree it is, money.
James: What is your view on gold? Is it money and is it going to return as a form of currency at some point of time in the future?
Jim Grant: I think that we will see a gold standard again.
James: In the United States?
Jim: Yes, I think so.
James: Do you think soon? What are the factors driving that?
Jim: Gee, I wasn't born yesterday. I'm not going to give you a date! I think that there is something in the wind. And that something, I think, is a deep, deep dissatisfaction with the monetary program in place. And a deep, deep, abiding worry about our fiscal difficulties. And a sense that what the Fed is doing is simply incomprehensible.
So, in the Financial Times of London there was a letter published about a year ago. The letter writer says, "Finally I understand, I think I know what quantitative easing is. I think I get that now. What I no longer understand is the meaning of the word "money." So that to me is the most clarifying couple of sentences of the crisis. And I think that thought, though perhaps not expressed so concisely or humorously, is in the back of the minds of the American public.
James: Well, Money of the Mind was one of your many books that you've written.
Jim: Well, thank you James. Thank you for ramming that in the conversation.
James: Well, I've read your books and that's a good one and it seems appropriate to bring it in here because we're talking about the points that you were making in that book.
Jim: Yeah, so the reason I think that there is more than a snowball's chance of a gold standard being enacted, first of all, arithmetic is working against the existing business. The banking business doesn't making any sense. It has to be recapitalized much too frequently for the financial health of the people who are capitalising it. Let's say the long-suffering taxpayers. So, the banking system itself, arithmetic is working against it. Arithmetic is working against our fiscal affairs. And arithmetic is working against the balance sheets of the world's central banks.
The leverage doesn't make any sense. The fact that the world's second largest economy has a central bank that is actually, must be actually insolvent. All these things, these certain facts, I think are congealing and I'm not sure what the catalyst is going to be. It might be some bright light of a politician finally getting it and speaking to people in such a way as to present the issues to them in a way that mobilises public opinion. But we have arithmetic on our side. Do we stand or...?
James: Do we have the political will, though? Because, back in 1869, there were similar circumstances when the greenback was circulating and it was depreciating relative to gold. The political will came together and they laid out a 10-year plan to resume backing of gold versus the paper currency. Do we have that kind of political will this time around?
Jim: Well, don't forget, resumption after the Civil War was hard fought. And the political will, I guess, was manifested finally in its act being passed, but they did put it 10 years off in the future.
James: But that was necessary to make the adjustments to go back to gold.
Jim: Yeah, but it was necessary because it was . . .
James: A good compromise?
Jim: Only marginally popular. It was very controversial. And it became more so, of course, in the 1870s and 80s as the Greenback and Populous Movements gathered. The late 19th century was a time of a subsiding price level down, maybe a percent and a half a year. Real wages were up, but prices were down and farmers couldn't stay . . . So political will, especially in retrospect, was there, but it was hard fought. And I think that what we have going for us today again is pure and simple arithmetic.
James: Does Congress realise that, do you think?
Jim: This congress doesn't realise it so much, but maybe the next one will . . .
James: This congress represents, there are a lot of Tea Party people in this one.
Jim: Yeah, there are. So, Lou Amran and I went down to testify before Ron Paul's Congressional Subcommittee on Monetary Affairs, six weeks ago. And Ron Paul, of course, is very friendly to all of us. So, Lou and I figured that this would be a fabulous opportunity. And indeed it was a very flattering one. And the Democrats boycotted it, we were told. The Democrats wouldn't show up and dignify these proceedings with their presence.
What we didn't expect was the fact of "boycott the Republicans." We were testifying in front of ourselves and our immediate families. So, it was kind of despairing in that sense. So, I'm not sure where I get off saying that there will be a gold standard, except I believe that there is some reservoir in the American electorate of good common horse sense. And when horse sense meets arithmetic, I expect good things to happen.
James: Will there be faith in the government in maintaining a gold standard if it does go back to gold standard?
Jim: Oh, I don't know. Let's cross that bridge when we come to it.
James: Is the gold standard really the only alternative in your view?
Jim: Well, unless somebody can think of something better. I mean the gold standard, to most minds, has a hopeless layering of cobwebs. It's like something... If we had the gold standard, can we bring back dysentery to as we’re nostalgic for that as well. If you talk to the average Manhattanite about this they are, what should we say, sceptical.
So, I am open to suggestions about what might be a standard such that the world's balance of payments are synchronised, rather than stymied. I am open to a standard in which the monetary medium is recognisable as money everywhere and accepted universally. I am open to a standard in which the monetary medium grows at approximately the rate of the world's population.
It seems to me that such a standard is... I can't conceive of anything even remotely resembling a gold standard. Certainly none has been tested in what my friend Lou Amran says is the laboratory of human history. So 100 years or more of, not perfect, but a remarkably successful run of a standard that managed to maintain price stability and serve as a kind of a gyroscope of economic growth, of stupendous economic growth in a time of great technological progress. So, what wrong with that?! What's wrong with that?
James: Yeah, nothing's wrong with that. But can government be trusted with the gold standard? Or should we be looking at private markets.
Jim: Well, let's have markets bring it in. I think state legislators, there must be a dozen of them that are either weighing it or have recently enacted.
James: Yeah, I have seen some of the movement, Utah, South Carolina.
Jim: So whether the movement comes from the bottom up, the bottom up is probably more likely than the top down, I'd be happy to see a competitive currency situation develop. Maybe if Congress will just stop taxing gold as a collectible that would be a good step forward. I dare say that you have better ideas in this than I do, but I do have confidence in two things. I have a kind of a dread that is a form of confidence. I have a dreadful confidence that existing arrangements will not last. In fact, I will put that down just like Bernanke did. I am 100 per cent certain of that.
James: Ok.
Jim: And also I have a confidence in the reservoir of good will and of the common sense of the American public. I think that between the two of these forces, arithmetic and American common sense, something good will come of this apparent disaster.
James: Yeah, if we could only have some common sense in Congress, I would agree with you.
Jim: Yeah.
James: Maybe that will happen?
Jim: Well, I don't know. Let's give it another 50 years. We'll get there.
James: OK, thanks very much, Jim. I have been with Jim Grant, the founder and editor of Grant's Interest Rate Observer. Thanks again, Jim.
Jim: You are entirely welcome, James.
James: It's a real pleasure.
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