By John Riley
Chief Strategist
01/18/08

For the past year or so, the investment world has been wrapped up in their version of a steroid scandal – the sub-prime mortgage mess. Banks are taking write-offs in the tens of billions and estimates are that write-offs will reach as high as $100 billion before long. CEO’s are losing their jobs and having to settle for multi-million dollar pensions. (Don’t you feel bad for them?)

Who to blame for this mess will be the subject of a myriad of Congressional hearings in the future. After spending millions investigating the whole sub-prime disaster, they will come to this simple conclusion: lenders got too aggressive and borrowers got in over their heads. In other words, risky loans ended up being risky. What a surprise!

But there is a secret right in front of everybody that the Fed, Wall Street and the banking industry wants to make sure investors don’t notice. It is the incredible growth in derivatives. If you think the sub-prime problem is big, you ain’t seen nothing yet.

According to the Comptroller of the Currency, total Derivatives in the top 25 banks in the US amount to about 180 Trillion dollars. Not billion, trillion. 1000 times a billion.

Source: Comptroller of the Currency, 3rd Quarter 2007 Format: CIS

To put this in perspective, the US GDP for the 3rd quarter of 2007 was about 11 Trillion dollars. So they are playing a game with a pool of fictional money that is 16 times bigger than our economy.

Let that sink in.

Now that you are interested, here’s some background info so you can get a grasp on what is going on.

What are Derivatives?
Derivatives are private contracts (bets) between financial institutions. They can be on the direction of commodities, the stock markets or currencies, but the banks’ favorites are interest rates. (You can go to the Comptroller of the Currency website to get their quarterly reports and see for yourself what Wall Street hopes you never see.)

(For those of you that are derivative experts, I am not going to go into an in-depth discussion of derivatives and all of their various types and uses. Nor am I going to get into the specific mechanisms of how they trade, how they are leveraged up to astronomical amounts and what notional means. This report is for investors, not derivative experts. It will be equivalent to explaining how a car works by saying your car goes when you hit the gas and stops when you hit the brakes. The details of how the gas pedal is attached to the linkage that controls the carburetor or how the brakes slow the car are left out and we completely ignored the transmission. If you want to learn the specifics of derivatives, the Comptroller of the Currency’s website is a good place to start.)

The scariest part of derivatives is their leverage. Like exchange traded options, derivative contracts can control assets for only a fraction of the contract value. The banks take the leverage to an extreme and have very little in assets backing up their derivative portfolios. According to the Comptroller, the top 25 banks have assets that only amount to about 6% of the Notional Value of their derivatives. JP Morgan, the biggest player in derivatives, has assets backing up its portfolio of only 1.60%.

What happens if the value of the portfolio were to change by 2%, what happens to the banks’ assets? And with all of the recent scandals in Real Estate and other “creative strategies” the banks have been employing recently, how do we even know if their asset numbers are correct? Is it possible that the $1.40 Trillion in assets JP Morgan claims is somewhat less, thanks to writeoffs and bad real estate?

Derivatives have barely any regulation on them. For years, Congress tried and Greenspan stood in the way. Banks barely mention them in the annual reports except for a footnote.

Thanks to the lack of regulation, derivatives have grown dramatically. There has been a 473% increase in the Notional Value of derivatives at the top 25 banks since 1999.

And why not? They can produce billions in almost free revenues to the banks. Free revenues? Yes.

Source: Comptroller of the Currency, 3rd Quarter 2007 Format: CIS
JP Morgan is the biggest player in derivatives in the US.
They have only 1.60% of the derivatives backed by the bank’s assets.

Why do Banks use Derivatives?
Here’s how they work. According to some sophisticated formulas and theories, if you make opposite bets with 2 different trading partners, you can capture the difference in the middle and get virtually risk free profits. If your 2 bets cancel each other out, then whatever is left over in the middle is profit, with zero risk.

Let’s say I bet with bank A that interest rates are going to go up. And I bet with bank B that they are going to go down. Both cancel each other out. But thanks to various strike prices and durations, we can get a small amount of difference in what I sell one contract for and what I buy the first one for. That difference is the whole game. The pennies I make in the middle are free. So I can keep them and make lots of money if I do it big enough.

According to the Comptroller, about 85% of all banks derivatives are this type. Which leaves 15% not. 15%, is not a lot, right. Not until you figure 15% of the 179 Trillion is $26.85 Trillion, still more than double the US economy! And more than double the amount of all the banks’ assets put together.

Here’s where the fun begins. Remember the example above? Well that is not really what they do. Some derivatives do not offset each other directly because the computer models tell them they may have some over correlations in other areas.

Let’s say that the bank wants to hedge the Yen against the Dollar. With one bank, they may sell the Dollar versus the Yen and with the other, buy the Dollar versus the… Euro. Euro? Maybe their computer Model has told them that buying the Euro might give them a small advantage, hedging the yen bet actually better than the yen itself.

Well you and I both know that this is foolish. The only thing that could possibly hedge the Yen bet would be the Yen. But their computer models are very sophisticated, working with all sorts of data input and constructing all sorts of scenarios to determine the least risky way to go.

Source: Comptroller of the Currency, 3rd Quarter 2007 Format: CIS
Since the end of 1999, the assets backing derivatives at the major banks has dropped from a shockingly low 11% to just about 6%. And the question you have to ask yourself – How much of those assets are real? How much of those assets are inflated real estate in New England or California? How much less is actually backing these derivatives?

What Could Go Wrong?
This is just what Long Term Capital (LTC) did back in the late 90’s. Remember them? They were the hedge fund that utilized the Black Scholes options model to run its derivative hedge fund to the point of bankruptcy. The fellas that ran LTC were only Nobel Prize winners (in economics) and the Black Scholes model was heralded as “the answer”. It is still used today.

What they failed to do was to have all of the bases covered. A funny thing happened – a sovereign nation wasn’t supposed to default on it debt. But Russia didn’t know the rules and so when they defaulted in the late 90’s, LTC went in the dumper.

These rules are going to become more important later on.

The Fed to the Rescue
So along came Alan Greenspan on his white horse to the rescue. He assembled a group of Wall Street bankers in a room and blessed the billions of dollars they each anteed up to help bail out LTC. It was about $100 billion total.

As Alan Greenspan told Congress months later in explaining why the Fed bailed out a private hedge fund, he told Congress that if he hadn’t, the entire financial structure of the US would have been in jeopardy. And this was just one little hedge fund with only about $100 billion. Imagine what damage JPMorgan could do with 92 trillion of derivatives.

So that brings us back to the rules and what is going on today.

Choice Between Two Bad Options
Without going into details, the US Dollar is toast. (Too much debt, out of control trade deficit, too much currency creation…) The housing market isn’t getting any better any time soon and the consumer is keeping his hands in his pockets. Along with that, overseas consumption is driving up inflation over here.

So with the sharp declines in the market and the obviously slowing economy, the Feds are looking to give us a present, a stimulus package. (read more about it in Irish Coffee)

The stimulus package is inflationary. It will kick the Dollar even further down. It will lower rates and everybody knows that is good for the economy and will save the day. (Not really, read article mentioned above)

But the Fed has to make a decision, lower rates and save the banks, but ignite inflation and kill the Dollar, or let the banks cave in under the weight of some bad derivatives but stave off inflation for a bit and protect the Dollar.

I think the Fed has determined that a bank failure would cause more damage to the economy than the collapse of the Dollar and higher inflation. I think they look at the decline of the Dollar so far and tell themselves, it hasn’t killed us yet.

Monetary World View
We’ve discussed this before (Money, Money) and its importance comes clear now. There are a number of economic theories that economists espouse. One that most of Wall Street and the Fed shares is their Monetary World View. Regardless of what you call it, it is the belief that interest rates control all things economic. Raise rates and the economy slows. Lower rates and the economy revives.

Without getting into the pro’s and cons, this is the basis for much of what they believe. And because of this, banks are comfortable putting trillions of dollars into interest rate strategies and derivatives that rely on this theory.

It is vitally important that the Fed continues to play the game as laid out by the Monetary World View. If they were to deviate, say raising rates to protect the Dollar at a time when the economy was slowing, it could be disastrous, since the banks would have been betting trillions on lower rates to rev up the economy. This then could put certain banks in jeopardy of failure as some have a little as 3% of their assets backing up the mountain of derivatives.

And forget about surprise moves. The Fed signals well in advance any expected turn in policy. A sudden shift could cause a bank to be left out on the wrong side of a $100 billion derivative. Big oops.

Conclusion
When thinking about the next Fed move, consider the implications of a 180 trillion dollar mistake. And even if you eliminate the derivatives that are netted out, that still leaves a pool more than double the size of the US economy.

Who is the Fed working for? Who is the Fed most concerned about? Who is the Fed likely to consider before making any moves. Given the choice between a Dollar crash or a major bank failure and closure, which do you think the Fed fears most? If you think the Fed doesn’t take the bank’s derivatives holdings into consideration, you have not been paying attention. It seems everything the Fed has been proposing since the summer is designed to throw the Dollar under the bus and let inflation run. All to protect the banks.

The sub-prime disaster is a drop in the bucket compared to the massive derivative monster in the banks. Don’t think the Fed doesn’t know this.

Investment Implications
Investors need to have exposure to investments that can benefit from higher inflation. These would include gold and commodities. TIPs could also benefit from higher inflation.

They also should hedge their Dollar positions with strategies to benefit from a declining Dollar.

Lastly, a big problem at a major bank could happen at anytime, but I highly doubt it will. Still, having a hedge position on the US markets is advisable. I think it will take a long time to unwind any problems at the banks and the unwinding could put a long term strain on the US stock markets. Longer term hedges like bear market funds should be a better long term choice to profit from the market decline

Buy Gold and Silver Bullion

by Bill Bonner

Is the United States of America, asks Laurence J. Kotlikoff, professor of economics at Boston University, “at the end of its resources, exhausted, stripped bare, destitute, bereft, wanting in property, or wrecked in consequence of failure to pay its creditors?”

Or, abandoning the Oxford English Dictionary for Ray Charles, are Americans “busted, broke…no bread…I mean like nuthin’?”

Answering his own question in the affirmative, Professor Kotlikoff explains: “This partial equilibrium analysis strongly suggests that the U.S. government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds.”

We don’t know what a partial equilibrium analysis is. But since it supports our general view, we ask no questions. Instead, we merely probe more deeply into the report for elaboration and amusement.

“Unless the United State moves quickly to fundamentally change and restrain its fiscal behavior,” Kotlikoff continues, “bankruptcy will become a foregone conclusion.”

This does not particularly help us. We have no doubt that the nation will be bankrupt. What caught our eye was the assertion that it is already broke. But that, it turns out, depends on what you mean by the word ‘broke.’

“The proper way to consider a country’s solvency,” goes on the professor, “is to examine the life-time fiscal burdens facing current and future generations. If these burdens exceed the resources of those generations, get close to doing so, or simply get so high as to preclude their full collection, the country’s policy will be unsustainable and can constitute or lead to national bankruptcy.

“Does the United States fit this bill? No one knows for sure, but there are strong reasons to believe the United States may be going broke.”

Among the strongest reasons is a study of the total net “fiscal gap” that the country faces. This is the present value of the difference between the government’s future income and expenses – calculated using optimistic assumptions and not including any contingent liabilities, such as those that rise with the water level in New Orleans, or with insurgent activity in Iraq. No, these are the basics: interest payments, government operations, social security, and drug money. The figure, as negative and depressing as our Daily Reckonings occasionally are, is $65.9 trillion – or about 500% of the nation’s GDP.

We have reported this number before, more in mischief than despair. Somehow, that gap has to be closed. Otherwise, the feds will have to stop sending out checks. But what do we care; the government already sends out too many checks to too many people, in our opinion. Then again, we don’t depend on Social Security or have a safe full of T-bonds.

Besides, there is no chance that the gap will be closed, anyway. Kotlikoff has a sense of humor on this point. He notes that the government would have to cut discretionary expenses by 143%. Or, personal and corporate income taxes could be doubled. Just in case the reader missed the joke, he includes a chart that tells us that people at the upper end of the income scale already pay more than 50% of their incomes in taxes.

Now, a question: Which country do you think expanded its health care benefits most over the 32 year period – 1970 to 2002? Sweden, Japan or the United States? You probably can guess – America, the land of the free stuff. In fact, in the U.S. public health care benefits grew twice as fast as in Sweden during that period, which is a big part of the reason the United States is going broke.

With a problem this big staring them in the face, you might think the custodians of the nation’s financial health would be staying up late at night trying to come up with solutions. If you thought that, you would be an idiot. It is late in the cycle, dear reader. Patriots can no longer save the republic; it no longer exists. Instead, they spend their time trying to get what they can out of a decaying empire. Paul O’Neill was the first U.S. Treasury secretary to bother to calculate the “fiscal gap.” George W. Bush fired him for it and proceeded to sign every spending bill – no matter how preposterous – to come his way. For its part, Congress continues to add to the fiscal gap every day it is in session, which leads Kotlikoff to conclude:

“The most likely scenario is that the government will start printing money to pay its bills. This could lead to spiraling expectations of higher inflation, with the process eventuating in hyperinflation.”

This is not the only reason to buy gold, dear reader, but it is one of them.

• Meanwhile, as goes the U.S. government…so go its citizens and taxpayers. From Business Week July 12, 2006:

“The U.S. Labor Dept.’s job report on July 7 showed that retailers had shed 7,000 jobs in June, after a loss of 71,000 jobs in the previous two months combined (see BusinessWeek.com, 6/9/06, “Behind The Retail Jobs Numbers”).

“Strange Trend. It’s unusual that retailers are trimming their workforces when the rest of the economy is growing. For years, retailers have been the source of significant job creation in the U.S. During the 1990s, department stores, groceries, and other retailers added 2.3 million jobs, or an average of almost 20,000 a month, according to the Bureau of Labor Statistics.

“Now, the concern is that retailers, who are positioned to detect the pulse of consumers more quickly than many other types of companies, are sensing trouble ahead. ‘Something is screamingly wrong with consumers, and retailers are reacting,’ says Richard Hastings, economic advisor to the Federation of Credit and Financial Professionals and a senior retail analyst at Bernard Sands, a retail credit rating firm.”

What is screamingly wrong is the Great Dollar Paradox of the early 21st century is that Americans have too few dollars and foreigners have too many. Global prices increase – gold is back near $670. Gold may be getting ahead of itself, but it shows clearly what direction it wants to go. Oil is setting new records. Nickel has gone up 50% in the last month.

Meanwhile, domestic U.S. prices slump (see below).

This puts the United States in a bind. When it wants to go to war with someone – or offer free drugs to old people – it has to borrow the dollars from the people who have them: foreigners. If we remember the figure correctly, 75% of all new U.S. government borrowing this century has been financed from overseas.

Back at home, Americans are running out of money. The homebuilding stocks are falling apart. So, believe it or not, is that middle-class shopping mecca, Wal-Mart.

Rich Americans are still building houses in Greenwich and Palm Beach. They’re still buying art at auction and adding to their positions in hedge funds. But the middle and lower classes are having a hard time making ends meet. They are forced to use their few dollars to buy the most expensive gasoline they ever saw. Those dollars get out their passports, breeze through the metal detectors (there is no metal in them), and leave home. They go overseas, take up residence in one of the oil or trinket-exporting nations, and get ready for their next move.

No wonder the home folks are feeling a little lonely. “Consumer morale dips,” says a Reuters headline. Yes, it dips because people don’t have enough dollars to consume with. Many of them haven’t had a real pay increase since 1973. They need dollars to help make ends meet. And now, with rising energy prices and resetting mortgages, those footloose, fancy-free, globe-trotting dollars are sorely missed. Foreclosures are up 26% in the Dallas area. June retails sales were off nationwide.

• You can still exchange your paper money for the real thing. The U.S. government is selling gold – in the form of a pure Buffalo coin. The price of the metal will probably correct before going much higher. But with civil war at hand in Iraq, regular old-fashioned war in Israel, brand new war on terrorism worldwide, a few buffalos and bankruptcy ahead for the world’s only remaining superpower…a few buffalos might give you a comfortable feeling.

• “Did you know that there have been big improvements in working with genes?” said Henry at the dinner table last night. “Now, they can implant genes from one species to another…and the gene will be fully expressed.”

“What does that mean?” his father wondered.

“Oh, I know,” said Elizabeth, quick on the up-take, “they can take a gene from Eric Clapton and put it in a new variety of corn…so it will have a good ear for music. Or how about getting a gene from Warren Buffett and putting it in lettuce so the new strain will have a good head for figures?”

“Very funny, Mom,” said Henry.

But what happens if you accidentally put a gene from lettuce into Warren Buffet?

July 18, 2006

Buy Gold and Silver Bullion

by Prof. Rodrigue Tremblay
Global Research, November 15, 2007

“If these items [promised benefits in Social Security, Medicare, Veterans Administration and other entitlement programs] are factored in, the total [debt] burden in present value dollars is estimated to be about $53 trillion. Stated differently, the estimated current total burden for every American is nearly $175,000; and every day that burden becomes larger.”
–David Walker, comptroller general of the United States

“The economic forces driving the global saving-investment balance have been unfolding over the course of the past decade, so the steepness of the recent decline in long-term dollar yields and the associated distant forward rates suggests that something more may have been at work.”
–Alan Greenspan, former Fed Chairman, July 20, 2005

“The subprime black hole is appearing deeper, darker and scarier than they [the banks] thought. They’ve worked through … about 40 percent of the backlog of the leveraged loan side, and there’s definitely some signs of thaw there.”
–Tony James, president and CEO of Blackstone Group LP

The global dollar-based financial system is in crisis and is threatening the prosperity and stability of many economies. Financial excesses of all kinds have undermined its legitimacy and its efficiency. The U.S. dollar is losing its preeminence as the main international reserve currency while many banks are caught in the turmoil of the subprime credit crisis.

The overall background is the unprecedented real estate bubble that took place worldwide, from 1995 to 2005. In the United States, for example, owner-occupied home prices increased annually by an average of about 9 percent. The market value of the stock of owner-occupied homes in the U.S. rose from slightly less than $8 trillion in 1995 to slightly more than $18 trillion in 2005. It has been contracting ever since, confirming the working of the 18-year Kuznets realestate cycle, which has gone from the top of 1987 to the 2005 top.

What makes this period especially dangerous is the fact that the average 54-year long inflation-disinflation-deflation Kondratieff cycle is also at play, having begun in 1949 after prices were unfrozen. World inflation then rose for twenty years, until 1980, which was followed by a period of disinflation under the Volcker Fed. The entry of China into the World Trade Organization (WTO) on December 11, 2001, with its abundant labor and low wages, unleashed strong deflationary forces worldwide. This in turn led to lower inflation expectations paving the way for the Greenspan Fed to keep interest rates abnormally low.

Persistent low interest rates and low inflation expectations led to a binge in borrowing and to a vast increase in market valuation, not only in real estate but also in stocks and bonds. Banks and other mortgage lending institutions took advantage of the opportunity to introduce some financial innovations in order to finance the exploding mortgage market. These innovations resulted in the severing of the traditional direct link between borrower and lender and the reduction in the lending risk normally associated with mortgage loans.

Thus, with the connivance of the rating agencies and of the Federal Reserve System, large banks invented new financial products under various names such as “Collateralized Bond Obligations” (CBOs), “Collateralized Debt Obligations” (CDOs), also called “Structured Investment Vehicles” (SIVs), which had the characteristics of unfunded short term commercial paper. In the residential mortgage market, for example, mortgage brokers and retail lenders would sell their mortgage loans to banks, which in turn would package them together and slice them into different classes of mortgage-backed securities (RMBS), carrying different levels of risk and return, before selling them to investors.

Indeed, these new financial instruments were the end result of a process of “asset securitization” and were slices of bundles of loans, not only of mortgage loans but also of credit cards debts, car loans, student loans and other receivables. Each slice carried a different risk load and a different yield. With the blessing of rating agencies, banks went even one step further, and they began pooling the more risky financial slices into more risky bundles and divided them again to be sold to investors in search of high yields.

By selling these new debt instruments to investors in search of high yields and higher yields, including hedged funds and pension funds, banks were doubly rewarded. First, they collected handsome managing fees for their efforts. But second, and more importantly, they unloaded the risk of lending to the unsuspected buyer of such securities, because in case of default on the original loans, the banks would be scot-free. They had already been paid and had been released from the risk of default and foreclosure on the original loans.

The banks’ residual role was to collect and distribute interest, as long as borrowers made their interest payments. But if payments stopped, the capital losses incurred because of the decline in the value of unperforming loans would instead be carried by the investors in CBOs and CDOs. The banks themselves would suffer no losses and would be free to use their capital bases to engage in additional profitable lending. In fact, the end of the line investors became the real mortgage lenders (without reaping all the rewards of such risky loans) and the banks could reuse their capital to pyramid upward their loan operations. These were the best of times for banks and they gorged themselves without restraint. Some of them paid their employees tens of billions of dollars in year-end bonuses.

Indeed, and it is here that the Fed and other regulatory agencies failed, first line mortgage lenders became more and more aggressive in their lending, with the full knowledge that they could profitably unload the risk downstream. This explains the expansion of the “subprime” mortgage market where borrowing was done with no down payment, no interest payments for a while and no questions asked as to the income and creditworthiness of the borrower. These were not normal lending practices. Such Ponzi schemes could not last forever. And when housing prices started to decline, foreclosures also increased, thus shaking the new financial house of cards to its foundations. Banks became the reluctant owners of some of the foreclosed properties at very discounted values.

Why then are so many banks in financial difficulties, if the lending risk was transferred to unsuspecting investors? Essentially, because when the housing boom burst, the banks’ inventory of unsold “asset-backed securities” was unusually high. When the piper stopped playing and investors stopped buying the newly created risky investments, their value plummeted overnight and banks were left with huge losses still not fully reflected in their financial balance sheets. Indeed, banks that did not unload their stocks of packaged mortgages were forced to accept ownership of foreclose properties at very discounted values. With little or no collateral behind the loans, bad-debt losses became unavoidable.

Since noboby knows for sure the value of something which is not traded, it will take months before banks come to terms with the total losses they have suffered in their stocks of unsold pre-packaged “asset-based securities”. It is more than a normal “liquidity crisis” or “credit crunch” (which results when banks borrow short term and invest in illiquid long term assets); it is more like a “solvency crisis” if the banks’ capital base is overtaken by the disclosure of huge financial losses incurred when the banks are forced to sell mortgaged assets in a depressed real estate market.

This is this financial and banking mess which is unfolding under our very eyes and which is threatening the American and international financial system. There are four classes of losers. First, the homebuyers who bought properties at inflated prices with little or no down payment and who now face foreclosure. Second, the investors who bought illiquid mortgage-backed commercial paper and who stand to lose part or all of their investments. Third, the holders of bank stocks who profited when the system worked smoothly but who now face declining stock values. And, finally, anybody who stands to fall victim, directly or indirectly, to the coming economic slowdown.

Rodrigue Tremblay is a Canadian economist who lives in Montreal; he can be reached at rodrigue.tremblay@yahoo.com

Visit his blog site at: www.thenewamericanempire.com/blog

Author’s Website: www.thenewamericanempire.com/

http://www.globalresearch.ca/index.php?context=va&aid=7333

Buy Gold and Silver Bullion

by Robert McHugh

Because the U.S. Dollar Has Just Been Devalued by a Third Over the Past Five Years.

And more devaluation is coming. Perhaps another 50 percent. The markets are convinced that the Fed is going to drop rates again on Halloween by another half percentage point. This means hyperinflation, and all markets moved accordingly Friday. The Dollar hit a new low, at 77.00, and is worth 53 percent of what a Euro is worth. This is a massive currency devaluation right before our eyes. It means the cost of everything is going up, which the Master Planners figure will diminish the debt load as debt contracts are expressed in Dollars from the past that were worth more than they are now. Those debts can be paid back in the future with dollars that are worth less. But this thinking requires folks to get their hands on a greater quantity of these devauled dollars. This thinking is ludicrous, but reality.

When the Master Planners devalued the dollar over the past five years, they raised the cost of living for everyone. The Middle Class is getting annihilated from this silent event. Incomes are not keeping up. This was done because this administration “equates stock market success with economic success and has directed their efforts to drive up equities at literally any cost,” to quote one of our subscribers. This is pure fallacy as market declines are proven to be beneficial to Middle Class investors who use the safe, time-tested investing strategy of Dollar Cost Averaging (occurring in 401(k)’s for example), where stock market declines can actually accelerate wealth generation. All this administration has accomplished is to ensure that Wall Street Banking Firms continue to make huge profits. This is not to bash Republicans, as this was not the case under Republican Ronald Reagan.

M-3 remains hidden by the Fed, so that We the People can’t know what the Federal Reserve is up to, like supplying the PPT with money to buy markets. Where’s the transparency Ben? We continue to monitor the monster charted below — it tells you all you need to know about what the Fed has been doing with M-3:

The situation has deteriorated as we see a decisive break below the neckline. The Dollar could drop faster than perhaps anyone thought. The pattern is a Head and Shoulders top. These patterns are highly reliable. It is now a “confirmed” pattern, meaning prices dropped decisively below the neckline, below 80.00 to 77.00ish. This means the probability of the minimum target of 40.00ish being hit is great. Now that the Dollar dropped down to 77.00, we are in a high risk situation of a devaluation of the dollar all the way down to 40.00. Remember, this mess started with the Dollar at 120.00 five years ago. 40.00? Not all at once, but over the course of several years. Perhaps all at once, should the government elect to flat-out issue an edict that a dollar is now worth 50 cents. Would they? Maybe. Why? It is a way to repudiate half of all the debt in the United States. Why would they want to do that? Perhaps if a recession became a depression, or the risk thereof. Perhaps if Housing was to absolutely dive into the tank. It would be a way to relieve mortgage holders of a huge chunk of their obligations in lieu of mass foreclosures, and bailout financial institutions holding substantial portfolios of mortgage backed securities – IF households can get their hands on enough of these hyperinflated dollars.

However, the problem for the middle class, is will any of this monetary hyperinflation find its way into their checking or savings accounts? Will their incomes rise from this artificial economics policy? We don’t think much of it will. The Master Planners figure if they give the money to Wall Street, enough of it will trickle down to enough of the small folks on Main Street to alleviate widespread economic distress. But how can this happen if folks do not own the equities that this master plan requires folks to own? No, Wall Street will get richer and that is about it.

If the plan is to monetize our nation’s debt through extraordinary injections of money supply in exchange for Treasuries, if the plan is to support equities through injections of money into Plunge Portection Team Wall Street surrogates who then support stock prices, how does that help mom and pop with their debts? How does that help them pay for rising insurance premiums, and real estate taxes, and tuitions, and home repairs, and on and on? It won’t.

If the Master Planners are going to devalue the Dollar another third or by even half, they better figure out a way to get all those freshly printed dollars directly into the hands of households.

This is all extraordinarly good for precious metals, the HUI Gold Bugs index, and other inflation defensive assets. But will Main Street be holding enough of them to keep breath above water?

http://www.safehaven.com/article-8711.htm

Buy Gold and Silver Bullion

Sep 20, 2007 — Private debt is much higher now than during the Great Depression, and has been allowed to grow as if there were no consequences to borrowing, and no limit to what can be paid back in the future.

Rising Debt to Income Ratios

Year Debt to Income Ratio
1952 40%
2006 126%

Source: Center for American Progress (CAP) Report

America is frequently called the ‘richest nation on earth’, but the reality is that the American people are living on borrowed money.

There is not one sector in the U.S. that has shown any measure of refrain. Government, corporate, and consumer debt are all at record levels. Private debt, which is debt from a private entity, such as a bank, has skyrocketed in the last three decades alone.

Our country is more leveraged by private debt than ever before. Families have the lowest rate of saving since 1929 and historic debt ratios according to the Family Income Report.

A Coming Depression

The staggering amount of private debt in the U.S. is frightening. The same debt problems that led to the Great Depression are currently present within our system:

The purchase of homes, automobiles, stocks, and other consumer goods on credit increased consumer spending, but compounded debt.
When price deflation occurred (similar to the home price depreciation now), people who were in debt fell into serious trouble.
Construction work plummeted. Homes were no longer being built in large numbers because they were no longer affordable.
Banks began to fail as debtors defaulted in large numbers.
Lenders tightened credit regulations, and began to limit loans.

The one main difference between credit conditions during the Great Depression and credit conditions now is that private debt is much higher today. When the recession begins, it will be more difficult for households to come out unscathed, and much more difficult for people to recover.

The Problem with Private Debt

The problem with private debt has not gone unseen by our nation’s leaders. Many years ago, Thomas Jefferson issued a dire warning about banks and debt:

‘If the American people ever allow the banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless. I sincerely believe the banking institutions (having the issuing power of money) are more dangerous to liberty than standing armies. My zeal against these institutions was so warm and open at the establishment of the Bank of the United States (Hamilton’s foreign system), that I was derided as a maniac by the tribe of bank mongers who were seeking to filch from the public.’

Of course, the warning was ignored. The Federal Reserve System controls our currency, inflation, and deflation at the price of the American people. What most citizens don’t realize is that the Federal Reserve is a private corporation that makes decisions based on the profits required by stockholders. The fact that Americans hold a great deal of private debt isn’t troublesome to them, merely profitable.

What is a fiat currency?
Why do fiat currencies always fail?
Why will the dollar be the first of today’s fiat currencies to collapse?
What happens when the dollar collapses?
Why will gold go up when the dollar goes down?
Why will gold soar NOW?

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What is a fiat currency?

A currency that’s created and controlled by a government. In other words, it exists by government “fiat.” Using the dollar as an example, the U.S. Federal Reserve creates new dollars simply by printing them or injecting electronic “reserves” into the banking system. The supply of dollars thus depends on the decisions of our elected officials and their appointed administrators like the governors of the Fed.

An example of a non-fiat currency would be the gold and silver coins that used to circulate in much of the world. There was only so much of each metal, and the supply only increased when some enterprising miner discovered and dug up more. Governments were unable to create this kind of money out of thin air.

Like the dollar, today’s euro, Japanese yen, and British pound are all fiat currencies. And—here’s the crucial point—every single fiat currency that has existed prior to the current batch was eventually destroyed by its government.

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Why do fiat currencies always fail?

Put simply, governments are fundamentally incapable of maintaining the value of their currencies. Every leader, whether king, president or prime minister, serves at the pleasure of two powerful constituencies: Taxpayers irate about what they currently pay and violently opposed to paying more, and recipients of government help who demand vastly greater levels of spending on everything from defense, to roads, to old age pensions. Alienate either group, and the result can be an abrupt career change.

So our hypothetical leader finds himself with two choices, the most obvious of which is to level with his constituents and explain that there’s no such thing as a free lunch. Taxes are the price of civilization, but government largess can consume only so much of a healthy economy’s output, so no one person or group can have all they want. This looks simple on paper, but in the real world it opens the door to challenge from rivals who have no qualms about promising whatever is necessary to gain power.

Not liking this prospect at all, our leader then turns to his remaining option: Borrow to finance some new spending without raising taxes. Then create enough new currency to cover the resulting deficit. The anti-tax and pro-spending folks each get what they want, and no one notices, for a while at least, the slight decline in the value of each individual piece of currency caused by the rising supply. Human nature being what it is, every government eventually chooses this second course. And the result, almost without exception, is a gradual loss of confidence in the value of each national currency, which we now know as inflation.

But a little inflation, like a little heroin, is seldom the end of the story. Over time, the gap between tax revenue and the demands placed on government tends to grow, and spending, borrowing and currency creation begin to expand at increasing rates. Inflation accelerates, and the populace comes to see the process of “debasement” for what it is: the destruction of their savings. They abandon the currency en mass, spending it or converting it to more stable forms of money as fast as possible. The currency’s value plunges (another way of saying prices soar), wiping out the accumulated savings of a whole generation. Such is the eventual fate of every fiat currency. “The Coming Collapse of the Dollar” tells the stories of five of the more spectacular currency crises, but like I said, they all go this way eventually.

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Why will the dollar be the first of today’s fiat currencies to collapse?

For the past few decades, the U.S. has enjoyed an historically unique position. As the most powerful nation in an increasingly globalized world, its currency, the dollar, is in demand as a store of value. That is, investors and central banks in other countries want to hold dollars as alternatives to their own, presumably less stable currencies. This insatiable demand for dollars has handed U.S. consumers and governments a virtually unlimited credit card. And we’ve spent the past two decades maxing it out.

The U.S. is now the world’s biggest debtor nation, and our current economic expansion is only possible because Japan, China, and Europe are willing to finance our trade deficit by, in effect, lending us $500 billion a year. They do this by taking the dollars we pay for their Toyotas, French wine and Chinese electronics, and using them to buy U.S. bonds and other financial assets.

Add it all up, and U.S. debt now comes to about $40 trillion, or $600,000 per family of four, a clearly unsustainable burden. When our trading partners figure out that we’re no longer solvent, they’ll stop lending us money (that is, they’ll use their dollars to buy euros or yen or gold rather than U.S. bonds), and the value of the dollar will plunge. The process has already begun, with decreasing demand for dollars sending the value of the dollar down by about a third in the past three years. But this is just the beginning.

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What happens when the dollar collapses?

Many things, most of them bad. When foreign investors and central banks stop demanding dollars, U.S. bond prices will fall, which is another way of saying that U.S. interest rates will rise. Mortgage and credit card rates will soar, bursting the housing bubble. Home prices in hot markets like California and New York will fall by 50% or more in a matter of months, bankrupting millions of over-extended homeowners. The U.S. government will respond by opening the monetary floodgates, printing as many paper dollars as necessary to keep the economy from collapsing. This surge in supply will send the value of the dollar through the floor. Prices for most things will skyrocket, and people whose life savings are in cash, bank CDs or dollar-denominated bonds, will be wiped out. Most U.S. consumer finance companies will be ruined, along with their stockholders.

THEN the Dollar Disease will go global. The only reason Japan or Europe have been able to generate their current meager rates of growth is the willingness of U.S. consumers to buy their Hondas and BMWs. As the dollar plunges, Asian and European goods, priced in suddenly-appreciating currencies, will become prohibitively expensive for U.S. consumers, who will respond by buying U.S.-made alternatives or nothing at all. Correctly interpreting this change in buying patterns as a threat to their vital export sectors, European and Asian leaders will respond with the only weapon they have left: monetary inflation. They’ll cut interest rates and buy dollars with their currencies, flooding the world with euros and yen the way the U.S. now floods the world with dollars. The result of these “competitive devaluations” will be a death spiral for all major fiat currencies, in which European and Japanese bonds will, eventually, fare as badly as their U.S. cousins.

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Why will gold go up when the dollar goes down?

Until very recently, gold was humanity’s money of choice, for one very good reason: It exists in limited supply, and governments can’t make more of it, so its value tends to be stable. As paper currencies collapse, the world will look for alternatives, one of which is sure to be gold. Massive amounts of global capital will start chasing a very limited supply of gold, sending its value through the roof.

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Why will gold soar NOW?

Three reasons:

* Gold’s fundamentals are very positive. The world’s mines produce about 2,500 tonnes of gold a year, while demand for gold is currently running about 4,000 tonnes. And new demand from emerging countries like China and India is soaring.

* The Fear Index is flashing a buy signal. This index measures the financial markets’ anxiety about the dollar and the U.S. monetary and banking system, and in the twenty years since GoldMoney’s James Turk invented it, each of its “buy” signals has been followed by a marked, sometimes spectacular, increase in gold’s exchange rate. Chapter 11 of “The Coming Collapse of the Dollar” explains the Fear Index in detail, but for now suffice it to say that it’s flashing a screaming “buy.” Click on “Latest Charts” for the most recent Fear Index chart.

* Central bank manipulation is about to backfire. The world’s central banks, led by the U.S. Federal Reserve, have been making up the difference between mine production and gold demand by secretly dumping their gold on the market. They do this by lending their gold for a nominal interest rate to “bullion banks” like JP Morgan Chase and Citigroup, which then sell it and invest the proceeds at higher rates. Because the banks are obligated to return this gold to the central banks, they’re “short” the metal. At some point in the future they have to buy this gold back on the open market. If gold’s price is low, they make money, and if it’s high, they lose. Since it’s currently high and rising, these banks are looking at multi-billion dollar losses. And as these losses mount, the pressure grows to bite the bullet and close out their short positions by buying back their gold. When one bullion bank does this, the others will be forced to follow, producing a classic “short squeeze,” in which all the major bullion banks try to buy at once, sending gold through the roof. Chapter 12 of “The Coming Collapse” offers an overview of the central banks’ machinations. For a far more detailed treatment, see Sprott Asset Management’s 70-page report, “Not Free, Not Fair: The Long Term Manipulation of the Gold Price,” available at www.sprott.com.

Add it all up–favorable demand trends, a Fear Index buy signal, and the coming central bank short squeeze–and the year ahead should be a spectacular one for gold.

By Chris Laird
Sep 6 2007 10:26AM

Over the last several years, there has been a lot of discussion about the size of the derivatives market, and how much it has grown since 1990. That market was around $20 trillion in size in ‘90, and now is estimated by the BIS to exceed $600 trillion world wide.

Given that amount is 10 or 12 times the entire world GDP of roughly $50 trillion a year, this amount of derivatives is just astounding. The fact is that world currencies are threatened if these go sour. We will get into this in a moment. First, let us discuss some derivative basics.

Derivatives proponents (brokers and bankers) have previously stated that the actual value of derivatives is a fraction of the actual total size, and that all the worry is overblown. The total size is called the ‘notional amount’. For example, if we decided to make a contract on the price of gold for 100 ounces, (a private futures contract between us) the notional amount would be 100 times the price of gold. If the price of gold rose $1, the value of that contract would be $100, but the notional amount is $68,000 (680*100). Derivatives proponents state the cry about the incredible notional amounts is over done, and try to get us to focus on the smaller ‘value’ amounts and not to worry.

Oh yes, we should worry!

Well, the fact is, when we hear of derivatives in $600 trillion amounts, the TRUTH is that this is the actual leverage out, and when values change, the value of the contract varies greatly – according to all that leverage. Notional amount is the actual amount being bet on, pure and simple. The de emphasis of gigantic notional amounts is mere smoke screen.

We have already seen what happened with the US mortgage derivatives, and how trouble in the subprime CDOs, SIVs, etc, spilled into other credit markets and caused panic and threatened systemic banking crises in the EU, US, and Canada. Right now, those central banks are vigorously trying to stem a meltdown in the money markets, as corporate paper (short term money for banks and companies) has pretty much stopped rolling over. The lenders in that market are afraid if they roll the paper over, they will be stuck with loans to companies banks and institutions who are hiding huge derivatives losses. If they roll over the paper (extend) then, if these borrowers go bankrupt, their CP becomes endangered.

This is why the Central banks are having a hard time convincing the CP markets to take advantage of their short term stop gap loans (via the discount window for example), and the central banks efforts to stem the credit meltdown is not working. In the EU for example, Libor (London interbank rates – short term money) rates have hit 9 year highs Tuesday – and bankers are saying that indicates the central bank efforts to revive the CP markets is not working. Bankers set rates among themselves – central banks can only offer their own money at CB rates, but they cannot force banks to loan it out. This is why the CP markets are still in severe trouble.

Bail outs?

We have heard the justified cries that central banks should not bail out all those reckless investors in derivatives, and their bankers and brokers. The trouble is, central banks may not have a choice, right or wrong. If derivative losses spread enough to paralyze the credit markets, then economies will grind to a halt. So, right or wrong, central banks probably have no choice but to try and stem the ongoing losses and credit crisis with bailouts.

Central banks will have to take on the huge losses

Now, we get to the heart of the matter. One of the ways the Fed was able to initially stem the most threatening problems from the mortgage derivatives mess was to buy the troubled stuff that no one wanted at book value. Eventually, central banks may find that is the only way they can stem the credit freeze. Just offering to loan central bank money to the system does not take the losses off peoples book’s.

Even if some short term action pushes some central bank money into the system, the losses stay and will have to be recognized at some point. So, this strategy by central banks of just loaning money will not work, and is only a very temporary stop gap measure. The existence of losses in people’s portfolios is what is stopping lenders from participating in the essential CP markets. If they even suspect someone has mortgage derivatives losses – they will not roll over the CP. The only solution? Central banks have to buy the bad assets (losing derivatives) at book value and take them off people’s hands outright. The Fed has been doing this, offering to take MBS and other non standard collateral for their money. Then, the troubled assets become the Central Bank’s problem.

Now, that amounts to monetization of losses. (Monetization is central banks buying out losses by printing the money for it.) This leads to serious trouble. A central bank can monetize some things, but it surely cannot monetize trillions and trillions of them over and over. If they do that, then the value of their own bonds collapses, and the currency devalues.

Now we get to some numbers. So far, the Fed, ECB, BOJ, and other central banks are all madly trying to flood money into the credit markets so CP will roll over. The trouble is, the CP markets are not normalizing, and eventually, these central banks will realize the only solution will be outright bail outs in gigantic amounts.

So far, CBs have already put out well over half a $trillion so far. We are probably going to see over a $trillion soon. With the notional amounts of derivatives in general exceeding $600 trillion world wide, we see a serious problem arising. You know, I would not expect the entire $600 trillion universe of derivatives to go bad, but, if even a fraction do, (they already are) then CBs end up being on the hook for trillions.

The problem is not made any easier by the fact that over 70% of all derivatives are OTC (over the counter – private one on one contracts). This is why the MBS and mortgage derivatives mess collapsed so fast, because there was no market for them. As losses spiraled out of control, no one wanted to touch them even at something like 5 cents on the dollar. The only solution? Central banks having to be buyers of last resort. The holders of these bad derivatives were forced to keep them on book – and then lost their own credit worthiness.

Another problem is that trouble in one sector of derivatives is like a loose cannon crashing around on the deck of ship in a storm. It spreads damage to other parts of the ship. Hopefully, the loose cannon crashes through the thwarts and falls into the sea….The sea in this case is all the nations’ central banks.

The derivatives ship

The derivatives ship is a multi deck aircraft carrier. Each deck is a sector of derivatives. Now, lets say, one sector of trillions of derivatives goes bad, and no one wants them. The holders (counterparties) then cannot offload them. Soon, the weight of mounting losses causes them to be unable to cover other derivatives they hold, and all of a sudden, the entire web of derivatives becomes in danger because the counterparties cannot now count on each other to cover their bets…The damage spreads from sector to sector, or to different decks.

All of a sudden, a systemic collapse emerges, and even if one institution has counterparties covering their losses (hedges) they find their hedges fail as the other party falls into insolvency.

Thus, the illiquid nature of OTC derivatives causes a gigantic systemic collapse. Right now, central banks are really afraid of this possibility. So far, central banks have NOT stemmed the crisis in CP markets. Libor rates prove that. Now, the CP market is the most vulnerable sector because it is money that has to roll over every 270 days or less. Considering that that market is 2.2 trillion in the US alone, and that it affects all aspects of commerce, we see we have a major problem on our hands. As of last week, about $250 billion of CP in the US has not rolled over (put another way, outstanding CP in the US has dropped by $250 billion, or over 10% of all of it!) in only 3 weeks!

Gold and the USD here

A couple of weeks ago, there was a stamped into US treasuries, and 3 month Treasury yields dropped up to 2% in one day. Eventually, those rates stabilized, but it showed flight into safety and into the USD. Another factor in play is that, as credit markets become illiquid, banks, institutions and companies hoard cash to operate. If they cannot roll over short term paper, they need cash. So, they hoard cash. This is happening right now in the European financial sector right now.

Gold is also benefiting from flight to safety. The advantage gold has in this situation is that, once people realize that Central banks will have to become buyers of last resort for $trillions of bad derivatives, they will prefer gold to actual currencies.

Gold is being whipsawed in two ways. One is flight into gold ultimately. The other is selling of gold during stock sell offs. Every time gold rallies right now, it is subject to panicky selling when investors need cash. And right now, everybody seems to need a lot of cash.

This story is only beginning, and I heard one good comment about this present derivatives / credit crisis that ‘the unwinding of credit and leverage will not be denied’. That means that all the leverage out there right now is subject to waves of unwinding. Considering all the leverage in the stock world, that does not bode well at all.

Will derivatives ultimately kill some currencies?

Now, given the fact that I don’t think Central banks can escape having to monetize more and more trillions worth of derivatives, the question arises ‘what will be the fate of major currencies?’

Central banks have a serious dilemma. If they let the financial system ‘take’ the losses, the credit markets freeze. That will just hammer world economic activity. If central banks do monetize all these growing losses (likely to snowball) then they threaten their own currencies. Both choices are quite bad. Can they work out of this mess? I don’t know. One thing for certain is they will have to act very soon. I think a consensus is building, that, as people begin to understand what is happening, they are going to start dumping some of the major currencies where the derivative losses are centered.

Ultimately, gold should benefit greatly in this situation, although it is subject to some panic selling when institutions need cash during equity crashes.

Also, considering the weakening US, Japanese, and EU economy due to credit contraction, we have one hell of a financial storm building on the horizon. It is a huge black cloud looming on the horizon in front of us. I can see no good reason to be staying in equity markets right now. Cash is definitely king at this time. (gold and precious metals are likely the best cash).

One final note, there has been some talk going around that commodities in general should benefit significantly as these currencies start to have trouble. One major reservation I have about that is that commodities are so sensitive to economic activity. If things really get out of hand in the financial world, I expect some significant economic slowing and falling demand for all the major commodities, and even possibly oil. The world equity bubbles are the only thing still keeping people spending. If those tank, the last standing source of profits for people is likely to start to evaporate. This is not going to be good for commodities.

‘How misconstruction of the monetary powers
and disabilities subverted the
Founding Fathers’ intent

Presented by

Dr. Edwin Vieira, Jr., Esq.,
FAME Foundation Scholar

To

The Rotary Club of New York
March 25th, 2003 at the
Princeton Club, New York, NY

Introduction by
Dr. Lawrence Parks, Executive Director, FAME
(Slightly edited for clarity)

Dr. Lawrence Parks:
Before I introduce Dr. Vieira, I want to spend less than two minutes positioning his topic. Our monetary system is an abomination. It violates almost all of the principles that civilized people hold dear:

• From the Biblical point of view, our monetary system violates the admonitions in Deuteronomy not to tamper with weights and measures, and, as clergymen pointed out after the Civil War, it violates the Eighth Commandment not to steal.

• Under Jewish Law, it violates the gnivas das commandment not to misrepresent.

• From a moral point of view, mindful that our money is legal tender, Salmon Chase, when he was Chief Justice of the Supreme Court in 1869, wrote that the legal tender quality of money is only needed for the purposes of dishonesty.

• Economically, fiat monetary systems such as ours have been collapsing for nearly 1,200 years wiping out savings and promises of future payments, such as pensions and annuities. There have been no successes.

• From a scientific viewpoint, Isaac Newton put the kabaach on fiat money at the end of the 17th century when he declared that such money would have no defined unit of measure. That is, our money has nothing to tie it to reality. It is part of the spiritual world. Today, economists describe money as an “illusion.”

• In terms of personal relationships, our monetary system violates the sanctity of contracts, because one does not know what will be the value of future payments. That is, it violates the notion of keeping promises, which is the glue that holds civilization together.

• Now comes Dr. Edwin Vieira who teaches that our monetary system violates the Rule of Law, something that we all hold dear and that our politicians give lip service to. Particularly, he teaches that it violates the supreme law of our land: the Constitution.

There is no one better qualified to talk to us about this issue than Ed Vieira. A Harvard trained attorney with a doctorate in chemistry, also from Harvard, Ed is the world’s most foremost authority about the role of our Constitution as it relates to money.

He is also one of our country’s most eminent constitutional attorneys, having brought four cases that were accepted by the Supreme Court and having won three of them. Those of you who are practicing attorneys know what an extraordinary record this is.

Ed’s work came to my attention by accident in the early 1980s. I was at a dinner party sitting next to one Richard Solyom, who at that time was one of Ed’s legal clients. It was Dick Solyom who first gave me a copy of Pieces of Eight: The Monetary Powers and Disabilities of the United States Constitution, which was the outgrowth of a case that Ed had argued on Solyom’s behalf. That book was 300 pages and made a very tight case, I thought at the time.

During the last six years, Ed has rewritten Pieces of Eight. Now it is 1,700 pages with 6,000 citations. When he sent me an early bound draft, which was then just one volume, Ed asked me if I thought many people would read it. I told him that I didn’t think many people would lift it.

While reading such a large specialized book may seem like a daunting task, please know that Ed is a very talented writer. There are large sections that read like an adventure story. Pieces of Eight is beautifully written and impeccably researched. It is a true masterpiece.

To get a taste for Ed’s writings, I have brought a few complimentary copies of his essay “The Forgotten Role of the Constitution in Monetary Law,” which appeared in the Texas Review of Law & Politics. There are also several of his essays on the FAME.org website. We are most grateful that Ed has taken time from his busy schedule to travel up from Manassas to speak to us.

Will you please join me, and give a very warm Rotary Welcome to Dr. Edwin Vieira.

Dr. Edwin Vieira:

Thank you ladies and gentlemen. It’s my pleasure to be here all the way from Manassas, Virginia, the very backwater of civilization. It’s outside of Washington. My topic is the monetary powers and disabilities of our Constitution; what the government may do, and what it may not do with respect to coinage, currency, credit, and banking.

Now these, to put it bluntly, are not common knowledge. They’re not common knowledge among lay people, and they’re not common knowledge among lawyers. Indeed, in my experience, very few people can talk intelligently about this subject.

You may ask, “So what? Isn’t this a matter that’s really best left to Congress, and the Treasury, and the Federal Reserve, and the Supreme Court, and so forth; the legal and political elite?” Well, I could give you a number of very important reasons why that is not the case, why this is a vitally important subject to you. I could talk about economic reasons, the fundamental one being that a free market functions most efficiently and most fairly when the market determines the quality and the quantity of money that’s being used.

I could talk about political reasons: that throughout history we have seen again and again the instability, the turbulence, in fact the self-destructive tendencies of political systems in which politicians and special-interest groups exercise the power to control or manipulate the purchasing power of money.

Today I could give you geostrategic reasons, because one could easily work out a theory whereby Islamic Fundamentalists, if they understood what they were doing, could strike at the Great Satan by attacking the fragile foundations of our monetary and banking system. I’m not going to tell you about that, because I don’t want to give aid and comfort to the enemy.

I shall touch only on the legal reasons why monetary powers and disabilities are of vital importance. I want to emphasize at the outset that this is not a matter of my opinion or my views. This has nothing to do with personalities or subjective ideas. It’s a matter of what the Constitution provides. That is a matter of historical investigation and understanding from which objective results can be obtained.

I know it’s a little hard work, as Larry pointed out, to read Pieces of Eight. I had to be purer than Caesar’s wife. Everything has been documented. The reason I did that was to show people that everything can be documented. There is nothing in the book that comes from my pen. It comes from the pen of the Founding Fathers. It comes from the pen of the Supreme Court. It comes from the pen of the people that keep the Congressional records. This is all a historical matter.

My reason for getting into this subject is that I’ve always viewed the legal perspective as being the most important aspect of the problem. Why? Because the legal framework in any society is going to have a controlling, a directive, at least an important influence on what happens economically. A society that is based upon freedom of contract and private property is going to have a different set of economic outcomes than a society that is based on a Stalinesque model of central planning. The legal system has a tremendous effect on the economy.

I’d like to make a point here. The government of the United States has never violated anyone’s constitutional rights. Did you know that? The government of the United States will never violate anyone constitutional rights, because it cannot violate anyone’s constitutional rights. The reason for that is: The government of the United States is that set of actions by public officials that are consistent with the Constitution. Outside of its constitutional powers, the government of the United States has no legitimacy. It has no authority; and, it really even has no existence. It is what lawyers call a legal fiction. I give you the famous case Norton v. Shelby County, when they were thinking straight about these issues: 1886. The Court said: “An unconstitutional act is not a law; it confers no rights; it imposes no duties. It is, in legal contemplation, as inoperative as though it had never been passed.” And that applies to any governmental action outside of the Constitution.

Our present constitutional system, with respect to money and banking, is oxymoronic, because in fact, for a very long time, with respect to coinage, currency, credit, and banking, the political class and the judicial class have not conformed to the Constitution. In the grand scheme of things, there are legal consequences that follow from not adhering to constitutional powers and disabilities, especially constitutional disabilities.

What is the genius of, the condition sine qua non, for a free society? It’s limited government, right? A totalitarian society is one in which the government claims all power; there is no freedom that the government doesn’t allow. There’s always a certain interstitial amount of freedom even in totalitarian society. Remember 1984, Winston Smith? There was a little place in his apartment where he could hide from the telescreen, right? And write his memoirs.

So interstitially, even a totalitarian society can’t control everything; but it states, in principle, its right to do so. What are the defining characteristics of a limited government? They are its disabilities; what it does not have legal authority to do. Look at the First Amendment. Everyone’s familiar with the First Amendment. What does it do? It guarantees freedom of speech, freedom of press, freedom of religion.

But how does it do that? I quote: “Congress shall make no law abridging the freedom of speech or of the press” et cetera. “Congress shall make no law;” that’s a statement of an absence of power. That’s a statement of a disability. The problem we’ve had in the monetary system is there has been an increasing misuse of Congress’ monetary powers, and an increasing disregard of Congress’ monetary disabilities; and not only in this particular field, of course, in many other fields. But what’s happened in the area of money and banking exemplifies, and in many instances, is the source of what’s happened in other areas.

I can divide this degeneration essentially into two categories. One is the application of the so-called “theory of the Living Constitution.” The other is the overextension of Congressional powers, or the assertion of powers the Congress doesn’t have. Many people may be familiar with the “Living Constitution.” This is the idea that the meaning of the Constitution has to change with the times. The Founding Fathers lived in the horse-and-buggy era. We live in the spaceship era. Obviously, the Constitution has to somehow evolve intellectually to deal with those changes. In effect, this reduces the Constitution to whatever the politically powerful find it expedient to mean from time to time. You could call that “situation law.” I call it “Sante Fe law.” They railroad their ideas through, and they expect us to accept it on faith.

Let me give you an example, the key example in the monetary field. Basic question: “What is a dollar?” Interesting question: “What is a dollar?” That’s the unit of our currency. What is it? Well, if you ask most people, some of them would pull one out these things, a little Sacagawea coin. “This is a dollar.” Or more likely they would probably pull out one of these, a George Washington Federal Reserve Note, and say, “This is a dollar.” And if you asked that person, “Well, why is this thing a dollar?” he or she would probably say, “Well, it’s because Congress says so,” or “the Treasury says so,” or “the Federal Reserve System says so,” or “the Supreme Court says so”—begging the question of whether Congress, the Treasury, the Federal Reserve, or the Supreme Court has the authority to say so. Is this simply a matter of raw power?

Let’s have a quick reality check. I have some learning aids here. Here’s a card that says, “One cow.” Is this a cow? Next step: here’s a card that says, “By order of Congress: one cow.” Is this a cow? You’re getting the picture, aren’t you? Here we go, the next step: “By order of the Federal Livestock Board: one cow.” And then the final absurdity: “By order of the Federal Livestock Board: one cow. This is legal tender for all debts public and private.” You don’t have to be a farmer to understand the meaning of this little demonstration.

Let’s take it to another level. “One dollar.” Is it a dollar? “By order of Congress: one dollar.” “By order of the Federal Reserve Board: one dollar.” “By order of the Federal Reserve Board: one dollar. This is legal tender for all debts public and private.” Do you follow this? This is kindergarten material. As the Gershwins told us in Porgy and Bess, “it ain’t necessarily so” simply because someone writes it on a piece of paper.

Where do we look to find Congress’ powers and disabilities in this regard? Well, I guess you look in the Constitution. The Constitution actually mentions the word “dollar” in Article One, Section Nine, Clause One, the famous slave tax provision, that provided a tax or duty might be imposed on the importation of slaves, not exceeding ten dollars for each person. Do you think that was important at the time? It was one of the provisions that was put in as part of the compromise between the Southern slave-owning states and the Northern states. If something like that hadn’t been put in, the Constitution probably would never have been ratified by all the original colonies.

It’s also found in the Seventh Amendment, the word “dollars”: “In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved.” Do you think that was important to those people at that time? Trial by jury was known in that era as the palladium of British liberty, going back to Magna Carta. Do you think those people knew what the word “dollar” meant? Do you think they thought it meant this? [holding up a Federal Reserve Note] It must have had an accepted meaning at that time.

The proponents of the “Living Constitution” will say: “That time has passed, and now we have Congress, the Treasury, the Federal Reserve, the Supreme Court, whatever, to make a new determination”—of course begging the question of whether the definition of the “dollar” can be changed. I want to give you what I think is a conclusive analogy on this point.

If you read the Constitution, you’ll find the word “year” used. For instance: “The House of Representatives shall be composed of members chosen every second year by the people of the United States.” “The Senate of the United States shall be composed of two Senators from each State, chosen by the legislature, for six years.” If the meaning of “dollar” can be changed by Congress, why can’t the meaning of “year” be changed?

The principle is exactly the same. Yet we all know that if the Congress passed a statute, and the Supreme Court upheld it, saying that for constitutional purposes the word “year” will no longer mean three hundred and sixty-five days, but seven hundred and thirty days, or fourteen hundred and sixty days, or some arbitrary number, they would he howled down in hoots of ridicule. No one in this country would accept that. In fact, even we the people, amending the Constitution as we can do under Article Five, could not change the true definition of the word “year.” We could change the term of the Representative to something other than two years, the Senator to something other than six years; but we could not amend the Constitution to say that a “year” is something other than what it is. We cannot fly in the face of astronomical reality. Well, if it’s obvious for the word “year,” why isn’t it just as obvious for the word “dollar”?

You all know what the word “year” means in its astronomical significance, and therefore you know what it means in its constitutional significance. And if you knew what the word “dollar” meant in its historical significance, you would know what it meant, or what it means, in its constitutional sense. What did that word mean to the Founding Fathers? It certainly didn’t mean the Sacagawea dollar. It meant this: the Spanish milled dollar. [holding up a coin] And not just in the late 1700s.

The Spanish milled dollar was made the unit or standard for all foreign silver coins in the American colonies in 1704 by Queen Anne (there was a Parliamentary statute in 1707). It was made the standard for the United States by the Continental Congress under the Articles of Confederation, before the Constitution was even written. So in fact the dollar preceded the writing of the Constitution. It preceded the ratification of the Constitution. It preceded the first Congress, the first President, the first Supreme Court, the Federal Reserve Board, and everything else. Do you think it might be independent of all those things, having preceded them?

As a historical fact, the dollar is independent of the Constitution. The father of the dollar, in our system, was Thomas Jefferson. He was the one who proposed it to the Continental Congress. In the first government under the Constitution, Jefferson was Secretary of State, and Alexander Hamilton was Secretary of the Treasury. They didn’t agree on very much, if anything, except this: They both agreed on the monetary system. The Federalists and the Anti-federalists were in complete agreement. And what did Congress and the Treasury do in 1792 with the first coinage act? They went out to determine what the value of this “dollar” was.

How did they do that? They went to the marketplace. In what we would call statistical analysis, they collected a large sampling of Spanish milled dollars that were circulating, and they did a chemical analysis of them to determine on average how much silver they contained. This appears in the Coinage Act of 1792 where they wrote: “The Dollar or Unit shall be of the value of a Spanish milled dollar as the same is now current,” that is, running in the market, “to wit, three hundred and seventy-one and one-quarter grains of silver.”

Now you know something that 99.999% of Americans do not know, and probably a higher percentage of lawyers. The “dollar” is a silver coin containing three hundred and seventy-one and one-quarter grains of silver—and it cannot be changed by constitutional amendment, definitionally, any more than the term “year” can. And yet, as I mentioned before, if you ask the average person what a dollar is, he’ll probably hold this thing up. [holding up a Federal Reserve Note] Is there something wrong here? Do we see some kind of cognitive dissonance when we have a problem with this? I should hope so.

The second area in which the misuse of monetary powers and the disregard for monetary disabilities has corrupted the Constitution, as I said before, is the overextension of powers. I won’t go into these in great detail. If you look at the “Necessary and Proper” clause, which has been wildly expanded to give fantastic powers to Congress, what is the foundational case for that expansion? It’s usually cited to be McCulloch v. Maryland in 1819. What was that case about? It was about the Bank of the United States. It was a money case.

If we go to the doctrine of “Emergency Powers,” which is having a great uplift today, for obvious reasons, what was the foundational case that put that doctrine on the constitutional map? It was Knox vs. Lee, the legal tender cases brought after the Civil War. If we go to the doctrine of “Aggregate Powers,” the doctrine that says, “You can take a little here and a little there and kind of sum them all up, so that the whole is greater than the sum of the parts,” again we go back to the Knox case, a monetary case.

What’s very interesting is to read a dissenting opinion by Justice Stephen Field, the only Justice on the Supreme Court who had the integrity to dissent in every legal tender case that he heard. He wrote a dissenting opinion in Dooley vs. Smith, in 1872. He wrote, “The arguments in favor of the constitutionality of legal tender paper currency tend directly to break down the barriers which separate a government of limited powers from a government resting in the unrestrained will of Congress. Those limitations must be preserved, or our government will inevitably drift from the system established by our Fathers into a vast, centralized, and consolidated government.”

You notice he was not talking specifically about the monetary powers. He wasn’t saying that these arguments would lead to the monetary powers being unrestrained. It was destroying the concept of limited government. “The arguments in favor of the constitutionality of legal tender paper currency tend directly to break down the barriers which separate a government of limited powers from a government resting in the unrestrained will of Congress.” How do you define, or how would you characterize, a government resting in the unrestrained will of Congress, or any other political body? It is by definition a totalitarian government.

The philosopher Richard Weaver, and I’m sure you’re familiar with this statement that he made, said, “Ideas have consequences.” He could have gone further than that. He could have said that bad ideas, once they are politicized, almost inevitably generate crises and catastrophes. If we look throughout American history, we will see that failures of various unconstitutional currency and banking situations, and we’ve had different ones over different periods, have inevitably led to crises and catastrophes. Pre-Civil War, we had a series of cycle collapses (they called them panics in those days), which were brought about by the unstable system of state banks and, to a certain extent, by the national banks that Congress created, the two Banks of the United States.

If you go into the Civil War, you have the crisis of massive inflation that was caused by the emission of the greenbacks, and then the tremendous political controversy over the continuation or the termination of paper money inflationism. Then we come to the Federal Reserve System. Some people here may know of the arguments that were made in favor of the Federal Reserve System. It would have an elastic currency. Through scientific management of the monetary system, depressions would be eliminated. There would be stability in the banking system. What happened?

The Federal Reserve System was there when the greatest banking collapse in American history occurred, in 1932-1933, and in what was called the Great Depression of the 1930s. In that period what happened? The Roosevelt New Deal. What were the powers they were screaming for? Emergency powers. You’ll find that written into many statutes, e.g., The Emergency Banking Act of 1933. You should pay attention to the title, The Emergency Banking Act of 1933, and the “Aggregate Powers” doctrine. It’s been all downhill since then.

I will not say, and I doubt that anyone could say, or defend the idea, that if the constitutional monetary system had been strictly enforced throughout American history there would have been no economic crises, because we all know that economic crises are not caused solely by bad monetary and banking arrangements. But, as sure as I am standing here, I can say that if the Constitution had been observed during that period, there would have been none of the crises that did in fact occur. They would have been essentially impossible, bringing me back to the point I made earlier about the primacy of law.

How should that have been done? Well, Americans would have had to understand and enforce their Constitution. You notice I say Americans, not the Congress or the Supreme Court, because who is the final arbiter of this document? [holding a copy of the Constitution] It is not Congress, and it is not the Supreme Court. It is “we the people.” Read the thing. How does it start? “We the people do ordain and establish this Constitution for the United States”; not “we the politicians,” not “we the judges.” Those people are the agents of the people. We the people are the principals.

The doctrine is very clear that, being the principals, we are the Constitution’s ultimate interpreters and enforcers. You don’t have to take my word for it. Let’s go back to the Founding Fathers, if I can find the right place. [referring to a book]

The Founding Fathers were profound students of law and political philosophy. Their mentor in that era was William Blackstone, who wrote Blackstone’s Commentaries, probably the most widely read legal treatise of its time, certainly here in the United States. What did Blackstone write about this subject? He wrote, “Whenever a question arises between the society at large and any magistrate vested with powers originally delegated by that society, it must be decided by the voice of the society itself; there is not upon earth any other tribunal to resort to.”

We the people are the Constitution’s ultimate interpreters. But we all know that no people leads itself. Every people, for whatever reason, needs leadership. I look out on you people here today. You are representatives, or a cross-section, if you will, of this country’s elite. I don’t say that to be flattering. I don’t say that to be patronizing. In fact, I’m a messenger who, in a sense, is bringing you some bad news, because the American people out there have to depend on people like you in here, and others like you, for leadership. There’s a very simple reason for that. There’s no one else. Therefore, here’s the bad news: it ultimately is your responsibility to find out what your Constitution means with respect to monetary powers and disabilities, and then to do something about it, before history takes the opportunity out of your hands, and we all suffer the consequences.

Thank you.

Philip Judge
Anglo Far East

In recent times, Daily Dig has been pursuing the theme of War and the War Economy. Along the way we have done some digging into Trade, Globalization and Imperialism, and we arrived at several possible conclusions.

It appears that in history, overstretched empires have often resorted to fighting external wars in the vain attempt to preserve their ailing empire. We went further to claim that;

1) Through history more blood has been spilt, and more lives lost over gold than anything else. There have always been Gold Wars waged – historically, they centered on seizing by force the physical stockpiles or controlling strategic reserves of gold.

2) Today’s Gold War is more complex and deceptive. There is a very clear war being waged against gold (the same war that has been going on for close to 100 years).

3) The world is entering a period where energy (particularly oil and gas) is very quickly going to become more precious, exceedingly more difficult to come by and vastly more expensive.

4) In the future many more wars and conflicts (including military) will be fought over energy.

5) There is a very clear link between oil and gold. This HIDDEN “Oil/Gold” link becomes more important each day as we will see in the future.

This week someone asked me, “but what about currency wars, aren’t they important too, how about the Euro and the Dollar”? It is our view that in the world we are entering now, future wars will be fought over tangible assets more so than paper assets such as currencies.

2005 AD : Beijing signs long term supply contracts for oil, gas and coal (it does not care whether these supply contracts are in Euro or Dollars, providing it has the supply locked in for the long term). China has an energy problem and cannot get enough to meet its present requirements, let alone in the future, and so, will pay in any paper currency they want. Meanwhile the rest of Asia and the Middle East are buying up gold and silver as fast as possible. Middle Eastern nations understand that they have been trading a diminishing asset (oil) for paper (Euros & dollars).

While it may be impossible to fully understand Empires at War for Energy & Money, at least we can make a start by winding back the clock to the days and empires of old;

The Year 1000 AD ~ “THE EMPIRES OF ISLAM”. “Baghdad” is the Center of the World and the center of world trade.
“Rivals” : “Constantinople” in the Byzantine Empire and Kaifeng in Song dynasty China. Gold from Nubia and the Caucasus is minted into the dinar (the money of the day from Spain all the way east to the gates of Constantinople. Western Europe is still in the clutches of the Dark Ages (a) .

“World Population” : 300 million souls
“Above Ground Gold Per Person” : below 1oz per person (b).
“Most Valued Commodities” : 1) Gold, 2) Silk, 3) Slaves, 4) Porcelain, 5) Silver .
“Wars of the Day” : Fought over gold and strategic commodity trade routes (c)

The Year 1300 AD ~ “THE KINGDOMS OF KHAN”. Dadu (Beijing) is the Center of the World and the riches of the “Far-East” or Asia.
“Rival” : Back in Europe, Venice is the trade center, “Merchant of the Mediterranean” and financial center of greater Europe.
Khan’s (various) families rule from the Far to not so Far-East including China, Korea, Mongolia, Persia, Central Asia and parts of Russia.

“World Population”: 369 million souls
“Above Ground Gold Per Person”: 1.1 oz per person (b).
“Most Valued Commodities” : 1) Gold, 2) Slaves, 3) Silk, 4) Porcelain, 5) Spices.
“Wars of the Day” : Fought over gold and strategic commodity trade routes (c)

The Year 1500 AD ~ “THE OCEANIC EMPIRES OF EUROPE”. Constantinople is the Center of the World, the home of the Ottoman Empire, the resting place of vast riches of the former Byzantium Empire and the controller (and blocker) of the land-based commodity trade routes to the Far-East.
“Rival” : Florence, Italy is the center of the emerging European Renaissance. Now landlocked from the Far-East, Europe instead takes to the seas – the Portuguese discover India, and the Spanish, the Americas.

“World Population” : 480 million souls
“Above Ground Gold Per Person” : below 1 oz per person (b).
“Most Valued Commodities” : 1) Gold, 2) Porcelain, 3) Spices 4) Textiles 5) Guns .
“Wars of the Day” : Fought over gold and now both ocean and land strategic commodity trade routes (c)

The Year 1700 AD ~ “THE RISING AND FALLING EMPIRES OF EUROPE”. Versailles, France, is the Center of the World for all those wanting to be rich or famous, “Rivals” : London is the trade and financial center. Mexico City is the jewel and hub of the Spanish Americas. Spain is bankrupt and in decline (d), France is embarking on a short-lived time of power and affluence before also going bankrupt (e). Europe launches into a period of conflict; Spain and France at war with Britain, Austria and the Netherlands. In America, the French fight the British.

“World Population” : 640 million souls
“Above Ground Gold Per Person” : slightly above 1 oz per person (b).
“Most Valued Commodities” : 1) Gold, 2) Slaves, 3) Textiles, 4) Tea(f) 5) Timber.
“Wars of the Day” : Fought over gold and foreign lands and colonies.

The Year 1900 AD ~ “THE EMPIRE OF BRITANNIA” London is the Center of the World in every way with no real rival. The British Empire has amassed all the pieces and wealth of every declining European empire of the last 200 years and now spans the world to the point where it is said “the empire where the sun never sets”

“World Population” : 1,640 million souls
“Above Ground Gold Per Person” : Just above 1 oz per person (b).
“Most Valued Commodities” : 1) Gold, 2) Coal(g), 3) Timber, 4) Steel 5) Armaments.
“Wars of the Day” : Fought over borders, nationalism, foreign lands and colonies and commodities including gold.

The Year 2000 AD ~ “THE ELECTRONIC AND ENTERTAINMENT EMPIRE”. New York is the Center of the World rivaled by Beverly Hills, CA. World population continues to grow exponentially. Approximately 30% of world population consumes 80% of the world resources. The vast majority of the “Fortunate 30%” are busy consumed with cell phone coverage, Internet connection speed, and their share and property portfolios.

“World Population” : 6000 million souls
“Above Ground Gold Per Person” : Much less than 1 oz per person (b).
“Most Valued Commodities” : 1) Oil & Gas(h), 2) Airplanes, 3) Microchips, 4) Armaments, 5) Movies.
“Wars of the Day” : Fought for reasons uncertain and often vastly different from what we are told.

So what can we learn from this millennium trip down memory lane ? We can see that empires come and go, as will the “Electronic and Entertainment Empire” of today.
Energy never rated as a valuable commodity until 1900 AD, when coal became the second most valuable commodity and by 2000 AD, oil had become the most valuable commodity.

The world has changed dramatically in 5 years as stress cracks start to appear in the veneer of the “Electronic and Entertainment Empire”. Oil was top of the list as the most valuable commodity 5 years, but that was before anyone was taking seriously global declining production and growing demand. Today the price of oil is 150% above where in was in January 2000AD, and many believe that this is just the start.

Likewise there are major currency stress cracks appearing. The dollar has taken a beating, and while the EURO maybe up, many believe that it is an unsustainable trend with the massive deficits and bureaucratic problems facing the region.

Meanwhile gold, which for the 1st time in 1000 years did not rate as an important commodity in 2000, is now up over 50% as some start to abandon paper currencies for tangible assets.

We believe it is the beginning of a trend that will continue as currencies become increasingly unstable, and as nations start to scramble to secure the world’s diminishing energy assets.

We said earlier that through history more blood has been spilt, and more lives lost over “gold” than anything else. We believe that this will become the case again, only to now add “energy” along side “gold”.

And our job at the Daily Dig will be to keep digging around for information that will help give some perspective in a confusing age.

(a) Many will claim that dark ages were the result of the debasing of the coinage in the western Roman empire.
(b) Estimate based on estimated world gold production at the time.
(c) To control the trade routes is to control the commodities that travel over it.
(d) despite the plunder of untold monetary gold and other riches from the new world
(e) both Spain and France seem unable to control domestic spending and embark on overly ambitious and expensive military campaigns and conflicts.
(f) Showing the influence of the British consumer on world trade.
(g) Energy has climbed to second and become of major importance since the beginning of the industrial revolution in the late 1700’s. As the population grows so does its dependence on energy.
(h) Oil and gas has come to the top of the list

Philip Judge
Anglo Far East

April 2005. Simon Heapes
Anglo Far-East

Some would say it is “higher interest rates on loans” – possibly!
Others would say it is “the cost of goods going up” – again maybe!

INFLATION
According to the Oxford English Dictionary ~, the word “INFLATION” means;
Increase in available currency, resulting in INFLATION!
So literally INFLATION means to inflate the currency!

HOW IS THIS ACHIEVED?
First we must look at money itself, which in the modern world is paper currency or it’s official name is FIAT CURRENCY! The word FIAT meaning by Government decree. Basically the Government passes a law that says these notes are exchangeable for goods or services.

One of the attributes of money is a store of value or wealth! What if you were able to print or create electronically extra currency and place it into the community? Well since 1971 under President Nixon the United States has exactly been able to do so! They did this by removing the last remnant of a GOLD STANDARD backing the US dollar.

STANDARD
The key word being STANDARD. You see in a basic sense Fiat currency is a certificate issued against GOLD sitting in a nations treasury. The GOLD STANDARD kept Banks & Governments honest, because the only way they could place more FIAT currency into the system was by having more GOLD in their treasury. The only way a nation could acquire more Gold for it’s treasury is by having a Productive based economy! The basis for a Productive based economy is “Labor”! Labor either directly produced Gold through mining or the produce of Labor could be directly exchanged for Gold! Yet our Western economies today are Service based economies not Productive based. (Production article)

LOSS OF PURCHASING POWER
The more the currency is inflated into the system via the printing press or electronically created through debt, the more it waters down the purchasing power of each monetary unit. Eg; In 1971 one USD would buy you 1/35th of an ounce of Gold, today one USD will purchase you 1/440th of an ounce of Gold! Increased money supply is literally like adding water to paint. The more water you add to the paint the more coats of paint it takes on any given surface to achieve the same coverage.

THE DECEPTION
The general public in all cases of inflation in the short to medium term are always deceived into thinking that their assets are becoming more valuable, yet it is only taking more money to purchase the same goods & services.

DEBT
The main symptom of inflation is DEBT. Think about this, how do Banks & Governments get this extra money supply into circulation? The Banks drop the interest rates, by doing this they seduce the public into borrowing therefore creating the massive debts western governments & it’s citizens have today. Also think about this, they create this extra money out of thin air effectively making the borrower an agent for the Bank, because under law the lender is the true owner, not the borrower!

THE FRAUD
Lets take a look at the Fraud of inflation.

- “The first panic for a mismanaged nation is inflation of the currency;
the second is war.
- Both bring a temporary prosperity; both bring a permanent ruin.
- But both are the refuge of political and economic opportunists.”
- Ernest Hemingway.

Here is an example of the fraud. Remember how I previously mentioned the Gold Standard kept the Banks & Governments honest, it minimized the Inflation rate to practically Zero! Now in WWII, the debt of the United States government was $259 billion dollars by 1945, up from $43 billion in 1940. That’s a $216 billion dollar increase in just 5yrs! This was during the time when gold was officially $35/oz. That’s 7.4 billion oz. of gold equivalent. Gold is usually quoted in tonnes, so, that comes to 230,000 tonnes. That’s the value of the dollar debt of the U.S. government at the end of WWII.

Now according to the World Gold Council FAQ’s all the gold mined in the history of the world up to 2001 is a mere 145,000 tonnes.

Therefore, it is impossible for the U.S. government to have borrowed anywhere near 230,000 tonnes of gold. The loan was a fraud to begin with!

The same is true for Germany before WWII there massive inflation called the Weimar Republic funded their Military arms build up literally by fraud.

STANDARD OF LIVING
What has this fraud & deception done to our standard of living and social well being?

World inflation is running at between 7 & 8% on average, in some countries it is as high as 60%! Yet wage inflation as far back as 1950 is only running at approximately 2.5%! The inflation has been skillfully masked by manufacturing efficiency and formerly productive based nations relocating there productive industries to 3rd world countries over the last 25yrs! In the 1950’s & 60’s countries such as Britain, United States, Canada & Australia had 75%+ productive based economies and now have gone to less than 25% productive bases to predominantly service economies!

I personally believe this has now come to an end and the average individual is not able to keep up with the rising costs of living.

Eg; the cost of electricity, food, beverages, petroleum, gas and medical care! TAXATION are at all time highs! This is creating a situation where individuals are falling further behind, they are using more debt, they are borrowing or extracting more equity from their homes to maintain their standard of living.

TAXATION
Industry & Government are also affected. We currently have Copper, Zinc, Steel, Coffee, Corn, Soy, Platinum, Palladium, Coal, Oil & Gas just to name a few at 25yr HIGH’s! This then filters through to not only the cost of our goods going up but also higher Taxation because the Government has to meets it’s rising costs as well.

However before this happens government has three ways of obtaining money. Unfortunately increasing taxes is not a popular choice. Governments that increase taxes generally are not re-elected in their next terms of office. Because taxes are unpopular with the people, governments resort to an indirect means of taxation. It is what we know as inflation. If the government can find a means of depriving resources without the direct knowledge of its subjects, they will do so. In effect what the government resorts to is a form of counterfeiting. By creating money “out of thin air,” the government is creating its own money that wasn’t deprived directly through taxation. Counterfeiting is simply another name for inflation.

Inflation creates no social benefit for society. It is simply a means of redistributing wealth from producers to nonproducers. Inflation creates no new wealth. No new goods or capital stock are created by it. Wealth is simply transferred to those who benefit first from the creation of the new money. This is usually the bankers and the financial system through fractional reserve banking or the government through debt monetization. It takes time for inflation to work its way through the financial system and the economy. Those who receive the new money first profit the most from it. By the time the expansion of money works its way through the system in the way of higher prices, the people are the last to know. The inflation profiteers have long since made their profits. Society as a whole must now bear the cost of that inflation through higher prices.

However, in order to keep playing the game and transferring the people’s money, the inflation profiteers must keep the people deceived. That is why all government and central bank actions are shrouded with an air of mystery or secrecy. In his book “Secrets of the Temple,” author William Greider says it well by stating, “Like the temple, the Fed did not answer to the people, it spoke for them. Its decrees were cast in a mysterious language people could not understand, but its voice, they knew, was powerful and important…The Public’s confusion over money and its ignorance of money politics were heightened by the scientific pretensions of economics. Average citizens simply could not understand the language, and most economists made no effort to translate for them.”

My point being to maintain the inflation deception, it is important to keep people confused!

INVESTMENTS
The over supply of money causes Inflation which manifests itself in the Investment arena by stealth. For instance most stock market portfolio’s between 1995 & the yr 2000 were returning 15 to 20% per annum, the same has been true from the yr 2000 forward seeing double digit returns in Real Estate! Yet few see this as Inflation.

The present American dollar is only 69% of the value it was in 2000 when we adjust it for inflation! If you adjust the Dow Jones index in the same way, a 10,500 point Dow is really about 7200 points in inflation adjusted dollars, the same is true for people out there holding dollar denominated assets like bonds, stocks and real estate. Yet most people in the markets still think they are making money.

Over time we are looking at a building inflationary period on top of the current inflation, our financial engineers are backed into a corner, they have no other means of defending the existing economy other than to use the printing presses and finding more colorful ways of seducing the public into so called easy credit!

THE SOLUTION
The average people in our communities are starting to recognize it. When this happens we will see extra ordinary high appreciations in GOLD & SILVER as well as gold & silver shares!

I would like to end with a quote from an Author of a book named “Jens O. Parsson’s”. The name of the book is “Dying of Money.” It perhaps explains best where we are today and where we are headed.

I QUOTE;
“Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and an ineffectiveness of all traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.” – END QUOTE.

So on that note I would say to readers and investors alike, “Plan accordingly for the days ahead”.

by Simon Heapes
2005
(c) copyright 2005
www.anglofareast.com

Mr. Heapes has studied,
lectured and written on
Economic and Monetary
Ethics, the role that
gold and silver as
money have played through history,
and the eventual
consequences of today’s
fiat currency.

“I believe that if the people of this nation fully understood what Congress has done to them over the last 49 years, they would move on Washington; they would not wait for an election. It adds up to a preconceived plan to destroy the economic and social independence of the United States.”
George W. Malone, U.S. Senator (Nevada), speaking before Congress in 1957.

“The individual is handicapped by coming face to face with a conspiracy so monstrous he cannot believe it exists.”
J. Edgar Hoover

“People yield themselves with perfect docility to our molding hands.”
David Rockefeller

“The real truth of the matter is, as you and I know, that a financial element in the large centers has owned the government of the U.S. since the days of Andrew Jackson.”
Franklin D. Roosevelt

“In politics, nothing happens by accident. If it happened, you can bet it was planned that way.”
Franklin D. Roosevelt

“If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.”
Thomas Jefferson

“Give me control of a nation’s money and I care not who makes the laws.”
Mayer Amschel Rothschild

“I am a most unhappy man. I have unwillingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated in the hands of a few men.”
Woodrow Wilson 28th President of the United States

“Behind the ostensible government sits enthroned an invisible government owing NO allegiance and acknowledging NO responsibility to the people. To destroy this invisible government, to befoul this unholy alliance between corrupt business and corrupt politics is the first task of the statesmanship of today.”
President Theodore Roosevelt, 1906

“To achieve world government, it is necessary to remove from the minds of men, their individualism, loyalty to family traditions, national patriotism and religious dogmas.”
Brock Chisolm, former Director of the World Health Organization

We have restricted credit, we have restricted opportunity, we have controlled development, and we have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the world… no longer a government of free opinion, no longer a government by conviction and a vote of the majority, but a government by the opinion and duress of small groups of dominent men.”
Woodrow Wilson 28th President of the United States

“The real rulers in Washington are invisible & exercise their power from behind the scenes.”
Justice Felix Frankfurter, U.S. Supreme Court.

“The high office of President has been used to foment a plot to destroy the American’s freedom,
and before I leave office I must inform the citizen of his plight.”
John F. Kennedy, speaking at Columbia University, 10 days before his assassination

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Jeffersonian Concerns

The founding fathers knew that the freedoms they had fought and died for could easily be lost by future generations. They understood the price would be eternal vigilance. Thomas Jefferson, in particular, seemed to have understood the potential for a loss of freedom due to banking laws, and especially “Central Banks” akin to The Federal Reserve (the latter which is probably worst than anything that Jefferson imagined in his worst nightmares).

provides an extraordinary treatise on this subject. It begins with a quote from John Steele Gordon’s Hamilton’s Blessing, The Extraordinary Life and Times of Our National Debt:

“Today we tend to think of the American Revolution as having brought ‘democracy’ to the thirteen colonies. In fact it brought no such thing. The eighteenth century was an age of aristocracy, and the American colonies were no exceptions. Each colony had its oligarchy of the rich, established families who dominated the economic and, under the control of a royal governor, political affairs of that colony.”

“…With the removal of royal control, these oligarchies inherited a near monopoly of political power in each colony.” “…The oligarchies, it need hardly be said, abused this monopoly of political power; monopolies, whether private or governmental, are always abused by those who hold them.”

Alexander Hamilton, the first Secretary of the Treasury, in response to a huge debt to pay from the excesses of the Revolutionary War, created a central bank and issued paper notes to pay the debt. It was the beginning of The Federal Reserve and a system destined to result in a condition of monumental debt. From Hamilton’s viewpoint, “A national debt, if it is not excessive, will be to us a national blessing. It will be a powerful cement to our nation. It will also create a necessity for keeping up taxation to a degree which, without being oppressive, will be a spur to industry.”

Unfortunately, such cement has become the kind used to dispatch individuals into the East River. Furthermore, what Hamilton apparently failed to realize was the ease at which a national debt can become excessive. Furthermore, such a device leaves open the door to the machinations of Banksters of every stripe, and ultimately to excessive taxation — the kind of stuff from which the Revolutionary War was fought in order to free the nation.

Thomas Jefferson, seeing the dangers of Hamilton’s thinking, was forthright in expressing his opinions about the Bank of the United States (what is today The Federal Reserve): “This institution is one of the most deadly hostiles existing, against the principles and form of our constitution.” It is “…an institution like this, penetrating by its branches every part of the Union… [which] may in a critical moment, upset the government. I deem no government safe which is under the vassalage of any self constituted authorities, or any other authority than that of the nation…”

Jefferson realized that neither a country nor a man can be free and be in debt. This led him to believe that the Union might fall apart if Washington retired from public life. In a letter to Washington, while the latter was still the President of the United States, Jefferson said,

“It has been urged, then, that a public debt, greater than we can possibly pay… that this accumulation of debt has taken forever out of our power those easy sources of revenue… which would have answered them… and covered us from habitual murmurings against taxes and tax-gatherers… yet we are already obliged to strain the impost [imposition: literally a laying on, a tax, a deception] till it produces clamor, and will produce evasion and war on our own citizens to collect it.

“They cite propositions in Congress, and suspect other projects on foot still to increase the mass of debt…the banishment of our coin will be complicated by the creation of ten millions of paper money, in the form of bank bills now issuing into circulation.

“They think the ten or twelve percent annual profit paid to the lenders of this paper medium taken out of the pockets of the people, who would have had without interest the coin it is banishing:”

Jefferson was talking about money backed by something real or tangible, and not colored, Fiat Currency (money by decree) created by an institution over which the ordinary people who are deeply affected by its policies have no say. He saw that a system of debt impoverished the whole of life.

“…that all the capital employed in paper speculation is barren and useless, producing like that on a gambling table, no accession to itself, and is withdrawn from commerce and agriculture, where it would have produced addition to the common mass:

“…that it nourishes in our citizens habits of vice and idleness, instead of industry and morality:

“…that it has furnished effectual means of corrupting such a portion of the legislature as turns the balance between the honest voters, which ever way it is directed:

“…that this corrupt squadron, deciding the voice of the legislature, have manifested their dispositions to get rid of the limitations imposed by the Constitution by the general legislature, limitations, on the faith of which, the States acceded to that instrument:

“…that the ultimate object of all this is to prepare the way for a change from the present republican form of government to that of a monarchy…” [or totalitarianism]

“…they are still eager after their object, and are predisposing everything for its ultimate attainment.”

Other quotes from Jefferson, include:

“Because of the imperfections in human nature, evil men will always seek to gain control of the government to further their own ends. In order to prevent this, power must be vested in the people, whose interest it is to prevent the ascendancy of evil.

“Democrats consider the people as the safest depository of power in the last resort; they cherish them, therefore, and wish to leave in them all the powers to the exercise of which they are competent.”

“I am not among those who fear the people. They, and not the rich, are our dependence for continued freedom.” “Aristocrats fear the people, and wish to transfer all power to the higher classes of society.” “The people…are the only sure reliance for the preservation of our liberty.”

“No government can continue good, but under the control of the people.”

even provides more on Thomas Jefferson.

– FREE Report “10 Reasons Gold Has Farther to Run”

A principal (pardon the pun) definition of Money is: “a medium of exchange in the form of coins and/or paper money.” It can also be viewed, simultaneously, as wealth, property or assets convertible into currency. Thus, in the form of a medium of exchange, it can be anything agreed as currency by both buyers and sellers. It is a step above one-on-one bartering by virtue of it being construed to have specific value beyond any given exchange of products or services.

In this basic form, Paper Money as currency is the creation of governments or the governed. Any group can theoretically coin money, but the extent to which it is acceptable by those outside the group will be wholly dependent upon the nature of the currency. Gold coins, for example, issued in by a private group in Bhutan might be quite acceptable to a Chilean.

There is no requirement that the form of money, such as paper certificates of one form or another, have some manner of intrinsic value — provided that the individuals exchanging the currency have agreed to the valuation of the paper. But despite the fact that some of the world’s paper money (the so-called “hard currencies”) are readily acceptable everywhere, there is always the potential that sellers of products and services may decide at any point not to accept a particular form of paper money.

This often happens in countries where Currency Changes run rampant, where inflation — the latter being caused for any number of reasons (natural or artificial) — causes the national paper currency to lose value at a substantial rate. In the case of hyperinflation, the paper money quickly reaches the point of having so little value, that holders begin thinking in terms of papering their walls or lining their bird cages with the worthless certificates, rather than hold on to them as if they were something of value.

Any paper Money, which is not backed by something with intrinsic value, is always subject to becoming worthless once those using it begin to lose confidence in it. This was the case in the American colonies before and immediately after the American Revolution. It is also the reason that the Constitution of the resulting nation went to significant lengths to establish a national currency which was backed by tangible assets. It is also the gist of those Jeffersonian Concerns which dealt with the dangers of a Central Bank (as in The Federal Reserve), and the incompatibility of being free and in debt.

In the united States of America, paper money is illegal and unconstitutional. Article 1, Section 10, of the Constitution for the United States of America states, in part:

“No State shall.. make any Thing but gold and silver Coin a Tender in payment of Debts.”

The United States Code, Title 12, Section 152, states: “Lawful money shall be construed to mean gold or silver coin of the United States.”

Money is in fact defined as: “Coin, stamped metal; any piece of metal usually gold, silver, or copper stamped by public authority.” Bouvier’s Law Dictionary [1870, page 192] makes the definition even simpler: “Gold and silver coins. The common medium of exchange in a civilized nation.”

A 1934 Federal Reserve Note, however, contained the following statement: “This note is ‘legal tender’ for all debts public and private and is redeemable in ‘lawful money’ at the United States Treasury or at any Federal Reserve Bank.”

It might be thought curious that the Federal Reserve Note is ‘legal tender’, but can be redeemed for ‘lawful money’. Obviously, the two are not the same. In effect, Federal Reserve Notes are a legal tender, but not of the United States. Dollars are legal tender, but not all legal tender are dollars. Federal Reserve Notes cannot be “lawful money” for the United States.

More recent Federal Reserve Notes state: “This note is legal tender for all debts, public and private” Please note that there is no period at the end of the statement, suggesting that perhaps the statement is not complete. E.g. not redeemable? There is also the aspect that the note is for all debts… not necessarily a means of accumulating wealth, but merely a means of addressing debts (and not necessarily even paying off a debt!).

Take, for example, the case where a Court orders a judgment to be paid in dollars. Because the Federal government is not currently coining any Dollars (and the States are prohibited from doing so), no person can pay any debt arising from a judgment of the Court. Since there are no Dollars available to an accused to pay the debt judgment of the Court, the Court has no capacity to enforce the judgment, and therefore lacks the ability to effect a remedy (as in Remedy and Recourse). Thus, the Court has no jurisdiction in the case, and the case should be dismissed. [But don’t assume that the above constitutes legal advice, or that the Court will buy the argument for a nano-second! Their idea of remedy might be to throw you into jail! And thus not allow you to pass go.]

The founding fathers of the country specifically forbade the use of paper money as legal tender for good reason. This has been described in some detail by Robert S. Getman (an attorney, practicing with the firm of Kelley Drye & Warren in New York City) in his article, Gold and the Founding Fathers. His thoughts (and others’) include the following:

Emperors and kings in previous centuries were not totally free to increase taxes, inasmuch as they had to consider just how much their subjects were able and willing to bear. In the cases where their subjects might have reached a breaking point, the kings often resorted to skimming off some of the precious metals of their coins (thus reducing the actual weight of the coins), or more slyly, reducing the precious metal content of the coin’s alloy.

In modern times, considerable research has gone into finding ways to replace silver coins with coins of almost no silver. As a simple test, pick up an older American quarter dollar coin and compare it to a newer American quarter, one commemorating one of the States of the union. There is a noticeable difference. The newer coin is lighter! Surprise!

But this is just the tip of the iceberg. Modern governments have gone far beyond royal coin-clipping and debasement by the use of printing-press financing. Rather than openly imposing unpopular taxes, they simply create increasing quantities of paper money and credit without any regard for the resulting shrinkage of money’s value. It’s like a corporation constantly increasing the number of shares it issues, and thus causing the value of any single share to decrease due to unrestricted dilution of the company’s per-share value. It’s illegal for Corporations to do this without prior approval. Governments are not so inhibited.

Governments have, in fact, initiated “legal tender” laws that require citizens (i.e. leave them no viable alternative) to accept newly-printed paper money of increasingly less value in payment for goods and services. In this way, government raises revenues by covert theft. “The complexity, indirectness, and relative invisibility of this taxation-by-inflation has made the government’s spending activities unaccountable to the governed.”

It was because of the widespread fiscal frauds in the printing of money prior to and during the American Revolution, that the writers of the Constitution went to such great lengths to insure that gold and silver would be the only constitutional legal tender. Thus, from a constitutional point of reference the current issuance of alleged dollars in the form of irredeemable paper as legal tender is both unjustifiable and unjust.

“The Common Law Heritage is that Money is property. A basic question that the law has always faced is: Whose property — that of the government or that of the governed?

“Under the traditional legal precedents of the Common Law, this issue was framed in terms of the power of the sovereign. By the eighteenth century, the common law had progressed to the point at which it regarded money as private property whose debasement was beyond the rightful power of the sovereign.” [emphasis added]

Under the precepts of Common Law, the Rights of the governed were superior to that of the sovereign, and limited the sovereign’s power. Not the other way around! The limits on money contained in the Constitution was an attempt to ensure the Common Law aspect of limiting any sovereign or government’s ability to debase the national currency. As per the Supreme Court, the Constitution “must be interpreted in the Light of the Common Law … and [can] not be understood without reference to the Common Law.”

When the Constitution was written, the States had powers and constitutions already in place. The Constitution did not grant the States new powers, but did impose limitations on pre-existing powers (including the printing of money). At the same time, the federal government derived all of its powers from the Constitution. And under that directive, the federal government was to have no powers other than those expressly granted it.

One of those powers not granted was the power to make paper into legal tender. In the Constitution, Article 1, Section 8 gave Congress the power: “to coin Money, regulate the Value thereof, and of foreign Coin…” This principle is unambiguous, and important! The States are expressly prohibited from making anything but gold and silver as legal tender, and Congress has no power granted to it, but to coin silver and gold.

Various Justices of the Supreme Court have noted that the power of coining money and regulating its value was delegated to the Congress by the Constitution in order to create and preserve the uniformity of such a standard of value. Gold coinage was indispensable to that goal. The purpose of the Constitution’s monetary provisions was intended to exclude everything from use, except gold and silver. The intent was that the dollar might represent property and not a mere shadow of it.

The Constitution recognized the Common Law precept that money was private property and not to be debased by the government. Its framers forged a clear mandate for a metallic money, specifically one of gold and silver.

But this constitutional mandate was and is being flouted on a daily basis.

The American Civil War caused enormous damage to the Constitution for the United States of America — and not just in lives. There were unprecedented coercive measures by the government: the government forcing men into the army with the first draft law; meeting the financial cost, levying the first direct Federal tax on incomes, and by indirect means, through the depreciation of the paper money. This was followed in 1913 by the establishment of The Federal Reserve, and ultimately by granting this private corporation the rights previously restricted to the Congress. The Federal Reserve then initiated the use of worthless, colored (deceptive) paper money that had no intrinsic value, and ultimately could not be redeemed for anything of real value.

Nevertheless, the gold standard survived up until Franklin Roosevelt’s first term in office. But the “New Deal” and its devastating emergency measures, outlawed private ownership of gold by the infamous imposition of The Decree), eliminated the legal right to ensure the financial validity of contracts by tying them to the value of gold, and then progressively devalued the dollar. It wasn’t until the 1970’s that American’s right to own gold and base their contracts on real value was reinstituted. This latter effort is some of the first good news since the days of the Founding Fathers.

The idea of gold and silver as the basis for monetary policy is “an integral part of a system of free enterprise and limited government, of good faith and law, of promise-keeping and the sanctity of contract. It is this system — and the confidence to which it gave rise — that has been destroyed. It is this system that must be slowly and painfully rebuilt.”

The horrendous misuse of paper money is discussed in an article from the Rumor Mill News Reading Room Forum, a report on 30 December 2001 entitled: The Euro, Gold and the Dollar. A basic premise of the article is that the creation of paper money allows a government — specifically the United States — to acquire other nation’s natural resources, productivity, labor and wealth simply by printing up paper dollars, or even better, doing no more than making notations in a computer!

The quality of life in the USA is therefore derived in large part by a nefarious (definitely not judicious) use of banking manipulations. This technique has, however, no guarantees that it can be used indefinitely into the future, or in other words, that the con will continue to work. Judgment Day may be arriving sooner than expected! A condensed version of this scheme is provided under the heading of Eurogold, while the complete report is available at: .

The idea that only government can issue money is a fallacy. Money, like the fundamental right of free speech, properly flows from the individual. Taking the power of money creation away from the individual is, in fact, a denial of his civil rights.

By the same token, it is another lie when banks claim to be lending money, when, in fact, it is the borrower who is creating the money. But because of fractional banking, US banks can now loan anywhere from $30,000 to $70,000 for each $1,000 deposited. The lie is in the banker’s claim that the money being loaned is from the bank vault, when it is actually and simply being conjured up out of thin air.

“Now as through this world I ramble,

I see lots of funny men,

Some rob you with a six-gun,

And some with a fountain pen.”

Woody Guthrie, Pretty Boy Floyd.

Domestic banking is bad enough, but as Henry C. K. Liu (Economics Professor at the University of Colorado), international banking is more appropriately “predatory lending.”

“If a bank lends to a trust client who is a minor, or who had no business experience, to start a risky business, that resulted in the loss not only of the loan but the client trust account, the bank may well be required by the court to make whole the client.

“Now, there is a close parallel in most Third World debts, to the above example where sophisticated international bankers knowingly lend to dubious schemes merely to get the fees and high interest, knowing that ‘countries don’t go bankrupt’ as Walter Wriston famously proclaimed. The argument for Third World debt forgiveness contains a large measure of lender liability.”

There have been currency crises in 87 countries since 1975. Never in the history of the world have so many countries had such unstable banking systems. “By the late 1970s, there was a huge increase in the dollars floating around the world economy – the rate of growth in dollars between 1973 and 1980 was 20 times the growth in volume of trade.” [Adventures of the Dollar, by Howard M. Wachtel, professor of economics at the American University, Washington DC.]

The so-called “free trade” bottom line: Poor countries producing commodities cannot possibly compete against rich countries producing credit money. Yet they are being forced to do so.

Meanwhile, during the past 30 years the US has bombed or attacked Syria, Lebanon, Nicaragua, Sudan, Korea, Vietnam, Cambodia, Laos, Iraq, Guatemala, Japan, East Timor, Nicaragua, El Salvador, Colombia, Dominican Republic, Somalia, Haiti, Yugoslavia, and Panama. The common denominator of these nations is that they are all non-members of the World Trade Organization. Since the invention of the WTO only Japan has joined willingly; the South American countries have been “persuaded” by friends of the system.

Banking has become the primary “crime against humanity.”

The Banksters are, of course, domestic and Transnational Corporations, and gleefully incorporate within their beings all the horrors and dishonesties of the latter. Corporate Rule is not just based upon the producers of goods and services, it is fundamentally an economic rule made viable by a medium of exchange which has no more value than the “0” in a computer byte. The fact that governments tolerate, allow, and/or encourage this situation is simply an indicator of just how far governments have left the province of being of the people, by the people, and for the people.

On a lighter note, there is a classic Bank Letter, which has circulated through Cyberspace and recently showed up in e-mail in-boxes the world over. Perhaps, this humorous aside by also be food for thought; i.e. treat them as they’ve been treating you (sort of a reversal on The Golden Rule).

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by Rep. Ron Paul, MD

Ron Paul in the US House of Representatives, July 25, 2003

Mr. Speaker, I rise to introduce the Honest Money Act. The Honest Money Act repeals legal tender laws, a.k.a. forced tender laws, that compel American citizens to accept fiat (arbitrary) irredeemable paper-ticket or electronic money as their unit of account.

Absent legal tender laws, individuals acting through the markets, rather than government dictates, determine what is to be used as money. Historically, the free-market choice for money has been some combination of gold and silver, whenever they were available. As Dr. Edwin Vieira, the nation’s top expert on constitutional money, states: “A free market functions most efficiently and most fairly when the market determines the quality and the quantity of money that’s being used.”

While fiat money is widely accepted thanks to legal tender laws, it does not maintain its purchasing power. This works to the disadvantage of ordinary people who lose the purchasing power of their savings, pensions, annuities, and other promises of future payment. Most importantly, because of the subsidies our present monetary system provides to banks, which, as Federal Reserve Chairman Alan Greenspan has stated, “induces” the financial sector to increase leverage, the Federal Reserve can create additional money, in Mr. Greenspan’s words, “without limit.” For this reason, absent legal tender laws, many citizens would refuse to accept fiat irredeemable paper-ticket or electronic money.

Legal tender laws disadvantage ordinary citizens by forcing them to use money that is vulnerable to vast depreciation. As Stephen T. Byington wrote in the September 1895 issue of the American Federationist: “No legal tender law is ever needed to make men take good money; its only use is to make them take bad money. Kick it out!” Similarly, the American Federation of Labor asked: “If money is good and would be preferred by the people, then why are legal tender laws necessary? And, if money is not good and would not be preferred by the people, then why in a democracy should they be forced to use it?”

The American Federation of Labor understood how the erosion of the value of money cheated working people. Further, honest money, i.e., specie, was one of the three issues that encouraged ordinary people to organize into unions when the union movement began in the U.S. circa 1830.

While harming ordinary citizens, legal tender laws help expand the scope of government beyond that authorized under the Constitution. However, the primary beneficiaries of legal tender laws are financial institutions, especially banks, which have been improperly granted the special privilege of creating fiat irredeemable electronic money out of thin air through a process commonly called fractional reserve lending. According to the Federal Reserve, since 1950 these private companies (banks) have created almost $8 trillion out of nothing. This has been enormously advantageous to them.

The advantages given banks and other financial institutions by our fiat monetary system, which is built on a foundation of legal tender laws, allow them to realize revenues that would not be available to these institutions in a free market. This represents legalized plunder of ordinary people. Legal tender laws thus enable the redistribution of wealth from those who produce it, mostly ordinary working people, to those who create and move around our irredeemable paper-ticket electronic money which is, in essence, just scrip.

The drafters of the Constitution were well aware of how a government armed with legal tender powers could ravage the people’s liberty and prosperity. That is why the Constitution does not grant legal tender power to the federal government, and the states are empowered to make legal tender only out of gold and silver (see Article 1, Section 10). Instead, Congress was given the power to regulate money against a standard, i.e., the dollar. When Alexander Hamilton wrote the Coinage Act of 1792, he simply made into law the market-definition of a dollar as equaling the silver content of the Spanish milled dollar (371.25 grains of silver), which is the dollar referred to in the Constitution. This historical definition of the dollar has never been changed, and cannot be changed any more than the term “inch,” as a measure of length, can be changed. It is a gross misrepresentation to equate our irredeemable paper-ticket or electronic money to “dollars.”

However, during the 20th century, the legal tender power enabled politicians to fool the public into believing the dollar no longer meant a weight of gold or silver. Instead, the government told the people that the dollar now meant a piece of government-issued paper backed up by nothing except the promises of the government to maintain a stable value of currency. Of course, history shows that the word of the government (to protect the value of the dollar) is literally not worth the paper it is printed on.

Tragically, the Supreme Court has failed to protect the American people from unconstitutional legal tender laws. Salmon Chase, who served as Secretary of the Treasury in President Lincoln’s administration, when he was Chief Justice of the Supreme Court, dissenting in Knox vs. Lee, summed up the argument against legal tender laws in twelve words: “The legal tender quality [of money] is only valuable for the purposes of dishonesty.” [emphasis added.]

Another prescient Justice was Stephen Field, the only Justice to dissent in every legal tender case to come before the Court. Justice Field accurately described the dangers to our constitutional republic posed by legal tender laws: “The arguments in favor of the constitutionality of legal tender paper currency tend directly to break down the barriers which separate a government of limited powers from a government resting in the unrestrained will of Congress. Those limitations must be preserved, or our government will inevitably drift from the system established by our Fathers into a vast, centralized, and consolidated government.” A government with unrestrained powers is properly characterized as tyrannical.

Repeal of legal tender laws will help restore constitutional government and protect the people’s right to a medium of exchange chosen by the market, thereby protecting their current purchasing power as well as their pensions, savings, and other promises of future payment. Because honest money serves the needs of ordinary people, instead of fiat irredeemable paper-ticket electronic money that improperly transfers the wealth of society to a small specially privileged financial elite along with other special interests, I urge my colleagues to cosponsor the Honest Money Act.

Dr. Ron Paul is a Republican member of Congress from Texas

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What is Opacity
Some believe the Federal Reserve System is shrouded in what its critics call excessive secrecy. Meetings of some components of the Fed are held behind closed doors, and the transcripts are released with a lag of five years.[38] Even expert policy analysts are unsure about the logic behind Fed decisions.[39] Critics argue that such opacity leads to greater market volatility, because the markets must guess, often with only limited information, about how the Fed is likely to change policy in the future. The jargon-laden fence-sitting opaque style of Fed communication, especially under the previous Fed Chairman Alan Greenspan, has often been called “Fed speak.”[39]

The Federal Reserve System has also been considered reserved in its relations with the media in an effort to maintain its carefully crafted image and resents any public information that runs contrary to this notion. Maria Bartiromo reported on CNBC that during a conversation at the White House Correspondents’ Dinner in April 2006, Federal Reserve Board Chairman Ben Bernanke stated investors had misinterpreted his recent congressional remarks as an indication the Fed was nearly done raising rates. This triggered a drop in stock prices just when the market was about to close.[40][41][42]

Some critics argue that the lag in the release of FOMC transcripts, and the limited and carefully worded minutes and statement lead to public unawareness of the issues of major concern to the Fed, and leave the public with an inadequate understanding of the logic and rationale behind the decisions.[citation needed] Some argue that this is a concerted attempt to keep Congress and the public at arm’s length[citation needed], and that the Fed did not help this public attitude with their prior actions (transcripts of meetings were not released until 1994). Before that time, the Fed refused to give transcripts out on requests, even under the Freedom of Information Act. When a judge ordered the transcripts released in the 1970s, the Fed said they had stopped taking transcripts at all.[citation needed] In 1993, Rep. Henry Gonzalez confirmed that the Fed did have tapes and transcripts of the meetings and could have complied with the FOIA requests, but had misrepresented the existence of the transcripts and chosen to ignore questions from Congress.[43] After the existence of the transcripts was revealed, the Fed agreed to release the transcripts on a five-year time lag. The time period has been extended, so that for example 1992’s transcripts were not released until 1998.[43]

Some critics believe the Fed exacerbated this idea when the Fed decided to stop publishing the M3 aggregate of financial data,[citation needed] which details the total amount of money in circulation at a time. The Fed said that economists did not need M3 when they had M2.[citation needed] However, a staff writer from the Connecticut Journal-Inquirer disagreed and saw no reason (according to his own views) to stop posting the numbers other than to keep the amount of America’s debt or a pending stock market crash or worsening economy hidden.[44]

Lastly, at the foundation of what is supposed to be an economy based on free markets where buyers and sellers agree on prices based on arms length transaction, the Fed establishes the price of money (the discount rate) in secret.[citation needed]

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– FREE Report “10 Reasons Gold Has Farther to Run”

Article I, Section 10 of the Constitution explicitly forbids the states from making anything but coins “tender in payment,” whereas there is no corresponding explicit prohibition against the federal government. The Tenth Amendment refers to powers that only the states can exercise, but the states also possess “concurrent powers” that may be exercised by either the states or the federal government, such as the power to repel invasions and arguably the power to treat coins as legal tender. After all, Article I, Section 8 of the Constitution gives Congress power to “regulate the value” of both U.S. and foreign coins.

Regarding paper money, Nathaniel Gorham explained at the Constititonal Convention that he “was for striking out” an explicit power of Congress to issue paper money, but Gorham was also against “inserting any prohibition.”[5] That is what ultimately happened at the Convention. Article I, Section 8 of the Constitution gives Congress power to “borrow money on the credit of the United States,” and therefore Gorham envisioned that “The power [to emit paper money], as far as it will be necessary or safe, is involved in that of borrowing.”[5] In other words, the power to emit paper money (e.g. bank notes) has been derived from the Necessary-and-proper clause in combination with the power to borrow money.

The federal government began issuing paper money long before the Legal Tender Act of 1862. In 1791, the First Bank of the United States began issuing paper bank notes.[6]

In 1798, Vice President Thomas Jefferson wrote that the federal government has no power “of making paper money or anything else a legal tender,” and he advocated a constitutional amendment to enforce this principle by denying the federal government the power to borrow.[7] Even if Jefferson’s suggested amendment had been successful, still (as mentioned above) Article I, Section 8 of the Constitution gives Congress the additional power to “regulate the value” of both U.S. and foreign coins — which implies a power to make coins into a legal tender, according to Justice Stephen Field dissenting in the Legal Tender Cases. Field believed that Congress had no power to make paper money a legal tender, but believed “the Constitution says that Congress shall have the power to make metallic coins a legal tender.”[1]

– FREE Report “10 Reasons Gold Has Farther to Run”

a majority of the Convention, being wise beyond every event, and being willing to risk any political evil rather than admit the idea of a paper emission in any possible case, refused to trust this authority to a government to which they were lavishing the most unlimited powers of taxation, and to the mercy of which they were willing blindly to trust the liberty and property of the citizens of every state in the Union; and they erased that clause from the system.

Now, it is pretty obvious to me, that even a few hundred years ago they were fully aware that if we allowed the government to go to a system that was not measured by gold, it could mean the loss of liberty and property for every citizen of the union.

– FREE Report “10 Reasons Gold Has Farther to Run”

Article I, Section 10, provides that “No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

– FREE Report “10 Reasons Gold Has Farther to Run”

By Chris Powell
08/25/2007

Most of the important public policy decisions in the country now are being made not in any public forum nor even by elected officials. They are being made in secret by unelected officials — the Board of Governors of the Federal Reserve System.

While the governors are nominated by the president and appointed by the Senate, that is pretty much where accountability ends, since the governors serve 14-year terms, which is close to the life tenure of federal judges. There is a little more accountability for the board’s chairman and vice chairman, who are nominated by the president from among the board’s members and appointed by the Senate for four-year terms of leadership.

This structure is said to take politics out of the management of the money supply and interest rates. In practice it has only replaced public politics with private politics — and in regard to issues that have the greatest bearing on the country’s prosperity and economic opportunity and equality or inequality. The president and Congress spend most of their time on issues far less relevant to daily life than the issues that have been forfeited to the Federal Reserve.

And look how the Fed is functioning amid the turmoil in the world financial system that has been prompted by the collapse in the market for “subprime” mortgage bonds.

As it always does in crisis, the Fed has responded with secret meetings and telephone conferences with the great financial houses, deciding in secret whether to increase the money supply and government lending to financial houses and to raise or reduce interest rates. Such actions by the Fed will change the value of every dollar around the world. They will change the price of labor, goods, services, and real estate, as well as the return on savings.

But there will be no public hearings or public meetings at which the basis for the Fed’s actions will be examined and those actions explained. It all will be accomplished in secret, with a vague communique issued afterward.

And who constitutes the Fed’s Board of Governors and the officials of the regional Federal Reserve banks? Mostly people from the financial industry. So it is no wonder that the Fed usually seems to be operating more for the benefit of financial interests than for the country generally — just as it seemed when, in 1998, Fed Chairman Alan Greenspan persuaded Congress not to require government regulation of the sort of financial instruments, called derivatives, that have upended the markets lately. While derivatives always posed a risk to the financial system and the economy, they also promised great profits to financial houses.

In any case, however the Fed’s power is used, it is the power to influence and even rig markets and to decide all winners and losers in the economy. It is the ultimate patronage. And the exercise of that power, the monetary power of the United States — the power to determine what money is, how much there is, its price, and the terms of its circulation — is completely undemocratic, which is exactly why it is exercised in secret. For its exercise cannot bear scrutiny.

A few participants in the system occasionally have acknowledged as much, as when the Fed’s vice chairman, Alan Blinder, remarked on national television in 1994: “The last duty of a central banker is to tell the public the truth.”

Some of its critics consider the Fed unconstitutional. After all, the Founders opposed central banking, and the Constitution says Congress “shall have the power to coin money, regulate the value thereof, and of foreign coin.” But whether Congress can delegate its power over money creation is less important than the Constitution’s assertion that the decisions of the monetary power are among the most profound of government.

Of course Congress well may not want the political responsibility that comes with the monetary power. The Fed can be a convenient scapegoat for what is really the irresponsibility of the rest of the government. But Wall Street wants the monetary power and does not have to bear any political responsibility for it, and that is the system the United States now has — a system in which the monetary power has been turned over to what used to be called the Money Power. And this insult to public sovereignty over the most important issues of government is praised as the “independence” of central banking.

As the country faces another disaster engineered by the Money Power, it’s time for Congress to remake the Federal Reserve System into something democratic, open, and accountable, or to reclaim the monetary power itself.

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Financial Times
By Jeremy Grant in Washington

Published: August 14 2007 00:06 | Last updated: August 14 2007 00:06

The US government is on a ‘burning platform’ of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon, the country’s top government inspector has warned.

David Walker, comptroller general of the US, issued the unusually downbeat assessment of his country’s future in a report that lays out what he called “chilling long-term simulations”.

These include “dramatic” tax rises, slashed government services and the large-scale dumping by foreign governments of holdings of US debt.

Drawing parallels with the end of the Roman empire, Mr Walker warned there were “striking similarities” between America’s current situation and the factors that brought down Rome, including “declining moral values and political civility at home, an over-confident and over-extended military in foreign lands and fiscal irresponsibility by the central government”.

“Sound familiar?” Mr Walker said. “In my view, it’s time to learn from history and take steps to ensure the American Republic is the first to stand the test of time.”

Mr Walker’s views carry weight because he is a non-partisan figure in charge of the Government Accountability Office, often described as the investigative arm of the US Congress.

While most of its studies are commissioned by legislators, about 10 per cent – such as the one containing his latest warnings – are initiated by the comptroller general himself.

In an interview with the Financial Times, Mr Walker said he had mentioned some of the issues before but now wanted to “turn up the volume”. Some of them were too sensitive for others in government to “have their name associated with”.

“I’m trying to sound an alarm and issue a wake-up call,” he said. “As comptroller general I’ve got an ability to look longer-range and take on issues that others may be hesitant, and in many cases may not be in a position, to take on.

“One of the concerns is obviously we are a great country but we face major sustainability challenges that we are not taking seriously enough,” said Mr Walker, who was appointed during the Clinton administration to the post, which carries a 15-year term.

The fiscal imbalance meant the US was “on a path toward an explosion of debt”.

“With the looming retirement of baby boomers, spiralling healthcare costs, plummeting savings rates and increasing reliance on foreign lenders, we face unprecedented fiscal risks,” said Mr Walker, a former senior executive at PwC auditing firm.

Current US policy on education, energy, the environment, immigration and Iraq also was on an “unsustainable path”.

“Our very prosperity is placing greater demands on our physical infrastructure. Billions of dollars will be needed to modernise everything from highways and airports to water and sewage systems. The recent bridge collapse in Minneapolis was a sobering wake-up call.”

Mr Walker said he would offer to brief the would-be presidential candidates next spring.

“They need to make fiscal responsibility and inter-generational equity one of their top priorities. If they do, I think we have a chance to turn this around but if they don’t, I think the risk of a serious crisis rises considerably”.
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