Friday, July 31, 2009

A Brief and Contemporary History of the Dollar

Most Americans are ignorant of America's financial history and how things have gotten to the way we are with last year's market crash and subsequent government intervention meant to help the economy recover. I hope to give a short primer into what has brought us to this point and to give some understanding of the complexity of our financial system.

For most of American history our currency was based on a gold and silver standard. This meant that gold and silver were monetary instruments—meaning they acted as money. Paper currency was labeled as a gold or silver certificate. This meant that you could request gold or silver in exchange for your paper currency. There are a few primary consequences of the gold standard, these include:

  • Most global currencies were also denominated in gold or silver, so there was (and still is) a limited supply of both metals. This meant that the money supply was essentially fixed and could not be inflated without the public becoming aware of it.
  • Because most national currencies were denominated in gold or silver, currency exchanges were basically fixed and easily completed.

Prior to 1913 the Federal Reserve did not exist. This meant that interest rates were controlled by commercial banks and would fluctuate based on market forces. Bankers and the public had been clamoring for a banking reform to "provide a ready reserve of liquid assets in case of financial panics and would also provide for a currency that could expand and contract as the seasonal U.S. economy dictated."

The Federal Reserve Act became "the lender of last resort," meaning that it would and did lend money to banks as they required funds. The Federal Reserve became essential to maintain the fractional reserve banking practices that had become commonplace.

Fractional reserve banking means that banks must only have cash for a set amount of their deposits, rather than having the full amount. A full reserve bank would have cash or gold in a 1:1 ratio for all deposits in the bank. Fractional reserve banking allows banks to have cash or gold for only 1/10th of the bank's deposits. This realization led to bank runs in the 1930s—banks did not have the reserves to be able to fulfill all their customer's demands for cash or gold after the market crash. This led directly to President Franklin Roosevelt declaring bank holidays and gold confiscation.

We still operate on a fractional reserve standard, though the Federal Deposit Insurance Corporation (FDIC), enacted in the Glass-Steagall Act of 1933, has guaranteed to protect all cash deposits in participating banks up to $100,000. This has led to the illusion of safety and soundness, though the FDIC has recently warned "the deposit insurance fund could become insolvent this year."

Prior to FDR's gold confiscation, one ounce of gold was worth $20.67. The Federal Reserve paid $20.67 for each ounce of gold. The gold standard was still in effect, at least internationally, as FDR re-priced gold at $35 per ounce. So while American citizens were prevented from "hoarding" gold, international governments could still receive gold for their dollars at $35 per ounce. This price was stable until 1971 when Richard Nixon "closed the gold window," terminating the exchange of dollars for gold internationally.

In the years that followed FDR's gold confiscation the world changed dramatically in a very short period of time. While FDR was spinning his New Deal in America, Adolf Hitler was consolidating power in Germany and reclaiming lands lost through peace negotiations after World War I. World War II led to even greater debt across the globe.

Britain abandoned the gold standard after World War I and, "was soon followed by the other countries of Europe." (Rothbard, Murray. What Has Government Done to Our Money, p. 92) This left America as the dominant financial power of the time. However, World War II and the debts incurred from it led to The United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire in 1944. The Bretton Woods meeting resulted in the creation of the International Monetary Fund and ultimately led to the U.S. dollar becoming the world's reserve currency. I will believe this confluence of events has accelerated the undoing of America and will lead to its ruin.

Murray Rothbard writes, "the system could "work" for a while because all the world's currencies returned to the new system at their pre-World War II pars, most of which were highly overvalued in terms of their inflated and depreciated currencies... Since the dollar was artificially undervalued and most other currencies overvalued in 1945, the dollar was made scarce, and the world suffered from a so-called dollar shortage, which the American taxpayer was supposed to be obligated to make up by foreign aid. In short, the export surplus enjoyed by the undervalued American dollar was to be partly financed by the hapless American taxpayer in the form of foreign aid."

He goes on to argue that due to this imbalance, we took advantage of the situation pursuing inflationary policies—fueled by trade deficits with most European nations which had returned to hard money policies, forced European nations into, "keep piling up their reserve, and even use these dollars as a base to inflate their own currency and credit." (Rothbard, Murray. What Has Government Done to Our Money, p. 96-97)

Rothbard, of course, is worth following here:

But as the 1950s and 1960s continued, the harder money countries of West Europe (and Japan) became restless at being forced to pile up dollars that were now increasingly overvalued instead of undervalued. As the purchasing power and hence the true value of dollars fell, they became increasingly unwanted by foreign governments. But they were locked into a system that was more and more of a nightmare… American politicians and economists simply declared that Europe was forced to use the dollar as its currency, that it could do nothing about its growing problems, and therefore the United States could keep blithely inflating while pursuing a policy of "benign neglect" toward the international monetary consequences of its own actions.

But America's trading partners had not forgotten that their dollars were convertible into gold at $35 per ounce, which is what more and more countries began to do. As a result, "the United States gold stock dwindled over this period from over $20 billion to $9 billion." (Rothbard, Murray. What Has Government Done to Our Money, p. 97) Naturally this led to a dollar crisis and finally in 1971 President Nixon closed the gold window—the dollar was no longer tied to gold at all. The U.S. dollar became a fiat currency. But the dollar remained the world's de facto reserve currency—America's trade deficit continued to be funded by foreign investment—creating a massive distortion in the world markets.

As America continued to inflate the dollar, America continued to prosper. Foreign capital continued to pour into the country, and the distortion continued to grow. America ran a trade deficit every year from 1976 on. Normally this should not occur since dollars paid abroad should all be returned in imports. But due to the dollar's reserve currency status, we allowed foreigners to hold dollars in cash and in bonds. The arrangement generally worked, as America's credit was strong and we were viewed as the engine for growth. The Federal Reserve continued to expand the money supply fueled in large part by foreign investment in U.S. bonds and cash reserves. The imbalance became distorted further, as the Federal government was being given access to the credit of the world to fund its massive growth, not to mention the private sector's easy access to foreign investment.

The graph below shows the trade deficit from 1991-2005. Notice how it becomes grossly distorted in the late 1990s and continues unabated through the early years of this decade. Anecdotally, I can't help be wonder if there is a correlation to the tech bubble and later the housing bubble.


Whether there is a correlation or not, the consequences of this enlarging trade deficit reduced incentives toward manufacturing and capital production. It became significantly cheaper for manufacturing to be done in foreign markets and the money followed the trail. After all, the economy seemed to be booming despite a shrinking manufacturing base. This was heralded as a new era—a service economy as opposed to a manufacturing one. The general view became that a manufacturing economy is a third world economy. The longer this distortion continued, the deeper it became ingrained in our sensibilities and the deeper in debt we became.

The fact that this distorted system lasted as long as it did means that the correction will take a long time to unwind. America grossly abused its privilege as the world reserve currency, and that status will be lost at some point. America is on an unsustainable path of fiscal insolvency.

In conclusion, our national financial system has been on a crash course since 1913 as the Federal Reserve Act set this series of events, interventions, and reactions in place. Of course it would have been a different story had not money been within the monopoly power of the federal government, but that is a tangent for another time.

The U.S. dollar which at one time had inherent value because it was redeemable for silver or gold became a debt instrument—paper worth only as much as the promise of the federal government to repay its massive debt. The dollar's prestigious position as world reserve currency allowed America to fuel an inflationary boom bigger than the world has ever seen. Of course now we're in the middle of the biggest boom the world has ever seen. Do not be fooled into believing that a crisis of this magnitude can be resolved in the matter of months. Empire America is crumbling and life in America will not ever return to what it was like for the last decade.

Wednesday, July 29, 2009

Presumption

MGM produced this video in 1933 to "educate" the U.S. citizens on the benefits of inflation and how it would solve the economic problems of the day. The end of the video defies belief, "Happy days are here again!" it exclaims as it lauds President Roosevelt's leadership.

Before you laugh at MGM for putting this garbage out, reflect upon what the media of our day is doing. This propaganda is analagous to the "green shoots" theories bantered about in our day.

This video demonstrates the sort of economic fallacies popular in our own day, while exploiting the economic ignorance of its own times, that is likely worse now than in 1933. Read Henry Hazlitt's Economics in One Lesson to show how these cockamamie ideas are easily refuted.

In case you'd forgotten your history, the Great Depression was in its infancy in 1933 and would persist for well over a decade after this video was produced. So much for credibility. And somehow we all still listen to these idiots.

Tuesday, July 28, 2009

What a Maroon!

Yesterday, Michigan Congressman John Conyers said, “I love these members, they get up and say, ‘Read the bill.' What good is reading the bill if it’s a thousand pages and you don’t have two days and two lawyers to find out what it means after you read the bill?”

I have two things to say to this kind of illogic. Firstly, Congress has no business writing 1,000 page bills. Nothing in the Constitution gives Congress the kind of authority that would ever warrant their need for a 1,000 page bill.

Secondly, if Congress is voting on 1,000 page bills--the question must be asked, who is actually writing these bills? And if the bill is before you to vote on, and you intend to actually vote in favor of it, oughtn't you actually read it first?

Congressman Conyers is a pathetic man and has no place in government or leadership. Voters ought to kick his sorry butt out of office. What a jerk!



Monday, July 27, 2009

A Good Discussion on The Fed

Dylan Ratigan is doing some great work on the Fed at MSNBC. This video is the latest of his that I've seen where he has expressed outrage at what the Fed and the cronyistic banks are getting away with. Also of note, is former New York Governor Eliot Spitzer who is also ganging up on the Fed. I can't agree with everything they argue, but the criticisms of the Fed and the banking system are spot on.

Thursday, July 23, 2009

Matt Taibbi on Goldman Sachs

Matt Taibbi has written a couple excellent articles on Goldman Sachs' cronyistic relationship with the federal government. Rollingstone has just posted a video of Taibbi giving some specific examples of how Goldman has gotten in bed with the feds and how it has worked to their advantage. This is outrageous and must end.

Tuesday, July 21, 2009

Jesus Is Not a Republican

We've all seen the bumper stickers that say Jesus is not a Republican, and I suppose there are "Jesus is not a Democrat" bumper stickers, though I don't think I've seen one. These statements are meant to deny any political party moral superiority, of course, and obfuscate matters of morality rather than allow one political party the moral high ground.

But as Doug Wilson argues on his blog, there is such a thing as a moral, or Christian perspective on politics. Wilson recently responded to the question, "Why is it that I consistently use green as a term of contempt?" His answer demonstrates his belief that there is a Christian political ethic, and those that are outside of this ethic are not taking their baptismal vows, "which renounce the devil and all his works" seriously.

In another recent post Wilson argues that those that, "Idolaters always want to get a bit and bridle on the economy so that they can have additional leverage to compel their idolatries. In a free economy, the idols have to use persuasion only (which some of them do quite well), but idols always prefer persuasion and coercion. They like having a full tool box."

There is a Christian way to think about law and government, and there is a pagan way. It is not a matter of Republican or Democrat, but of truth or error, righteousness or unrighteousness. What this means is that we must not be beholden to anyone or anything but the Lordship of Jesus Christ, and the truth that is made manifest to us by his Holy Spirit.

Christians are too eager to defend un-Christian men and practices, in the name of God and country. I was once, and not too long ago guilty of these same things. The manner in which Christians allied themselves with George W. Bush in the past decade is perhaps the most egregious example of what I mean by this. I was among this number myself, only recently having realized my terrible error in judgment.

Bernanke: Incompetent, Liar, or Both

Ben Bernanke is either a thoroughly incompetent economist, a liar, or both. This video makes clear that he was either lying in Congressional testimony or a complete boob, having no economic sense about him whatsoever. You be the judge.

Monday, July 20, 2009

More Crony Capitalism

Matt Taibbi has written another article concerning Goldman Sachs, who recently reported a record quarterly profit of $3.44 billion. Where did this huge profit come from, you may ask? He writes, "this is not free market earnings but an almost pure state subsidy."

Wednesday, July 15, 2009

Stewardship

Doug Wilson is one of the clearest economic and political thinkers you'll encounter. Don't miss his latest blog on stewardship.

Tuesday, July 14, 2009

Kill the Monster!

Thomas Woods has written a concise article arguing for the end of the Federal Reserve. I highly recommend it.

"A lot of people seem to believe that although the market economy is a swell system, it requires the equivalent of a Soviet commissar to be in charge of money and interest rates. This belief is altogether misplaced. The Federal Reserve System, or simply "the Fed," is both harmful and unnecessary.

Since the Fed was created in 1913 the dollar has lost at least 95 percent of its value. If the much-maligned gold standard had produced such a result we’d never hear the end of it, but in our system the Fed is, for whatever reason, curiously exempt from criticism. Under the Fed, therefore, people have lost an option they once had: accumulating savings in cash. Under a commodity standard, people could save for the future simply by accumulating precious-metal coins – which, back when they functioned as money, held or even increased their value. No one has that option any longer. In other words, only a fool would try to save by piling up dollar bills. Instead, everyone is forced to become a speculator, and to invest in securities markets they know little about and that can wipe them out entirely if times turn bad."

Read the rest of the article.

The Worst is Yet to Come

Chris Martensen linked to this presentation today. He they're about the best collection of housing charts he's seen, and I concur. If you take the time to look through them all you'll see that there are millions of foreclosures yet to occur. As the presentation states, we're still in the "middle innings of the bursting of the great housing bubble."

We have yet to see a huge wave of option-A foreclosures likely to begin in the last quarter of this year continuing through much of 2010. We will also see a large commercial real estate collapse in the eighteen months.

We are not going to see the end of this economic turmoil for another year at the minimum.

T2 July 3

Monday, July 13, 2009

Reputable Metals Dealers

I've been urging my readers to put their money into metals for months now. Here are six companies that I've dealt with either personally or friends have used. I recommend using them for the standard gold and silver bullion purchases. (Don't let any of them talk you into numismatic coins. Email if you're looking for more information on buying bullion.)

GoldMoney - This is an easy way to put money into metals and have easy access to it. The metals are stored either in London or Zurich and you pay a small percentage each month for storage and insurance. I highly recommend using this for liquidity purposes.

BullionVault - This is another company similar to GoldMoney, though it is not as liquid.

Lear Capital - Lear's prices are very competetive and you can order online. If you want to try them, get a coupon here for free shipping on your first order.

The Money Changer - Here's a good honest metals dealer that has been in the business for a long time.

Northwest Territorial Mint - If you're willing to wait for your metals, their sometimes cheaper prices are worth it.

Gainesville Coin - A friend from church put me onto them. This is the rare company that allows you to pay with a credit card and even order online. Their prices are competitive and they ship quickly.

The Big Old Federal Government

Friday, July 10, 2009

Don't Trust 'Em!

Nick Barisheff has put together a nice timeline revisiting the "pompous prognostications" as he calls them of the bums that kept telling us that this time it's different, our economy is sound, we've reached the bottom, and so on. I encourage you to take a look. If you think any of these individuals are qualified to fix the mess they didn't foresee, or to even tell us if things are truly better--well, I'll let you live that delusion.

Inflation or Deflation

Trace Mayer, of RuntoGold.com, has written an article looking at the inflationary argument of Gary North and the deflationary argument of Mike Shedlock.

Mayer is a deflationist, but he stresses, "the critical question is not whether there will be inflation or deflation. The vital questions for your portfolio is whether and when will there be a currency collapse and how to best prepare yourself."

He writes, "Political currency always fails in either a deflationary depression or a hyperinflationary explosion. Ultimately, investors ensconce themselves at the tip of the liquidity pyramid within an invincible and immoveable golden forcefield which is immune to both. Those who fail to move their wealth may see entire fortunes rapidly evaporated. Some already have. Indeed, The Great Credit Contraction has only begun."

I must reiterate, if you don't believe the dollar can collapse, you must look back at history. Read the recent post A Short History of International Currencies, it is obvious that all currencies eventually collapse because governments always debase them. Our government is doing everything it can possibly do to bring about a dollar collapse.

Manhood

Guys, do you still have the feeling that you're just a boy in a man's body? Do you just want life to continue as it did when you were a kid? I confess that I have these kinds of feelings myself. I doubt I'm alone in this. The evidence is all around us that these kinds of feelings are ubiquitous in men. Here is a glaring example--The Man Wall.

I don't think there is anything wrong with the occasional indulgence in boyish fantasies. Such fantasies are some of life's greatest joys--particularly when you can share them with your own children, nieces, nephews, or grandchildren. But these things should never be the center of one's adult life. The Man Wall, and other such things are clear demonstrations that pleasure, leisure, and diversion are the gods of our age.

Suppressing boyishness and embracing manhood has become one of the greatest challenges of our time. Never before have men been presented the opportunity for such indulgence. Men, suppress the desire for eternal boyhood and take up the mantle of manhood!

Tuesday, July 07, 2009

Rethinking War

Lew Rockwell posted a link to an article by Howard Zinn, a leftist historian, on rethinking war. I'm only loosely familiar with Zinn, and don't endorse everything he says in the article, but it does make one reconsider the morality of war.

I'm currently reading the third volume of John Dos Passos' masterpiece The U.S.A Trilogy. The first volume, The 42nd Parallel, involves the leadup to the first World War, and the second volume, 1919, deals with the war itself. The third volume, The Big Money, is the aftermath of the war and the roaring '20s. (By the way, I highly recommend this trilogy.)

I bring this up because Dos Passos exposes America's involvement in World War I as a boondoggle for large corporations and banks and launched the Military-Industrial complex mindset in America which has led to massive indebtedness, nationalism, death, destruction, and oligarchy. America had no place in World War I, and likely did more harm than good in giving the Allies the victory over the Axis powers which ultimately set the stage for German nationalism and the rise of Hitler.

As Zinn writes in the article:

"
We've got to rethink this question of war and come to the conclusion that war cannot be accepted, no matter what the reasons given, or the excuse: liberty, democracy; this, that. War is by definition the indiscriminate killing of huge numbers of people for ends that are uncertain. Think about means and ends, and apply it to war. The means are horrible, certainly. The ends, uncertain. That alone should make you hesitate."

Zinn has an excellent point, that the consequences of war are entirely uncertain. Just think about the consequences of the most popularly known wars in history. The Civil War destroyed Federalism and legitimzed nationalism in America, World War I laid the foundation for World War II, and World War II increased the Soviet's power and influence and launched the Cold War. The Iraq War may be America's undoing by over reaching and massive indebtedness that may lead to the destruction of America's military and political might.

These are things we need to reflect upon more than we have. We (certainly I) have too readily accepted the conventional dogma that war actually serves a moral purpose when in reality the unintended causes, or unspoken motivations of war are wholly immoral.

I am not a pacifist, but I am becoming increasingly convinced that war is something that is almost never useful and should be avoided at almost all costs. To quote Zinn again, "Who gets what?" Who does war benefit? Does it benefit the banks loaning the government funds for war? Does it benefit corporations who supply materials for war? Does it benefit corporations who win contracts for post war reconstruction? Does it benefit you and I?

I don't like how Zinn frames this question in terms of class, as the term is loaded with socialism, but he does make a good point, that war is championed by those that benefit the most from war at the expense of those set to lose the most.

Wednesday, July 01, 2009

A Short History of International Currencies

I encourage you to read A Short History of International Currencies by Christopher Weber. [PDF]

The Inconsistencies of Contemporary Conservatism

Conservatives famously argue that government is "the problem, not the solution." This is the standard argument made by contemporary conservatives such as Rush Limbaugh, the writers of National Review, and their followers. Yet conservatives are eager to defend the government in ways that baffle the outside observer and exhibit some of the logical inconsistencies in the movement. Here is a brief list I've put together that I may expand upon in the future. It is these kinds of inconsistencies which have driven me from the Republican Party and made me realize that the two party system is fundamentally flawed and will lead only to totalitarianism.

  • Conservatives idolize Abraham Lincoln, a man who trampled Constitutional rights during the Civil War. Yet they believe this was a good thing, not a bad thing. Remarkable. Lincoln may be the key to much of what has gone wrong with the Republican Party, and indirectly conservatism, as he nationalized the country and destroyed the notion of state sovereignty.
  • Conservatives idolize the military—the most violent of all government institutions.
  • Conservatives have no difficulty allowing the government to educate our children, yet they complain bitterly about how poorly they do it.
  • Conservatives cannot separate the American people from the American government—the two are indistinguishable for them. Criticisms of the American government (civilian and military) are perceived by conservatives as an assault on the American people—except when it is they that criticize the government.
    • Conservatives readily engage in criticism of civilian government but will not tolerate criticism of the military wing of government. The military can do practically nothing wrong collectively—it is only individuals that don't tow the company line that are open to criticism.
  • Conservatives are vigorous defenders of the Bill of Rights unless police powers are unconstitutionally brought to bear upon obvious criminals. Conservatives will defend abuse by police when the suspect "deserves it."
  • Conservatives are loud defenders of the "free market" yet never criticize the existence of the Federal Reserve. Nor do they recognize that the existence of the Federal Reserve along with the rampant government intervention in the marketplace make the market free only in reputation.
  • To the conservative, government at home does not uphold American values well, yet government abroad does uphold American values well.
    • Conservatives are quick to defend against foreign influence, yet are eager defenders of American influence abroad. The C.I.A. is immune from criticism unless a rogue individual within the C.I.A. is giving conservatives a hard time.
    • Conservatives place little trust in the government at home, but place a great deal of trust in the American government's foreign policy abroad. It is never acceptable for foreign governments to meddle in American affairs, but it is always acceptable for America to meddle in the affairs of other nations.