Thursday, June 03, 2010

Modern World Economics Made Simple

Thanks to the Rev. H.R. Curtis, a fellow LCMS pastor and fellow advocate of Austrian Ecomomics, for sending this along. It's funny, but at the same time, it isn't.

This is what the founding fathers warned us about when they railed against "paper money" - that is currency unbacked by gold and silver (which the dollar has been, beginning in 1913 and brought to completion in 1971). The current economic collapse around the world is because we did not heed their warnings. What you think is money is really stacks of IOUs backed by other IOUs that nobody can pay. The dollar bills in your wallet and in your bank account are basically monopoly money that only has value because China has been willing to buy back them in expectation of getting interest payments. When we can't afford the interest, they will stop backing them.

The Euro is collapsing because it - like the U.S. dollar - is a ponzi scheme, basically a chain letter of intertwined loans and promises - by nations so far into debt that they cannot pay. But now the payments are coming due. So, who wants to pay?

The economic system of the world is nothing more than an Amway pyramid. And Americans need to be ready for the dollar to collapse in the same way as the Euro when the Chinese (who have already backed off in buying U.S. treasuries and are carefully shifting their reserves into gold) decide to take our credit card from us.

If we, as a national economy, don't wake up soon and peg our dollar to gold (as the Constitution actually says the dollar is supposed to be), start saving money, quit spending money and going into debt, and roll back the socialism we have injected into the economy - we will be looking at economic ruin and a worthless dollar. The solution will require frugality, discipline, and shedding the notion that other people can pay our bills. It will require an economic and philosophic revolution. Otherwise, we're looking at hyperinflation and total collapse.

We won't be laughing then.


gnesio-lutheran said...

Yes, we need to back our currency in gold and/ or silver. The problem is, the government no longer owns any. Fort Knox has not been audited in over 50 years, and is widely suspected to be empty or nearly so. The US government has been quietly selling off gold reserves since '71 to supress the price of gold relative to the dollar, in order to give the illusion of a "strong" dollar. The situation is thought to be the same in Europe. There is really no way to buy back enough gold or silver on the open market without driving up the price per ounce to astronomical levels. It is becoming quite clear that the Ponzi sceme is unravelling-- what will happen to our nation is up the God's mercy alone.

Father Hollywood said...

Dear Gnesio:

That is indeed a problem. It would be like the father of a family gambling away the savings. It makes things harder, but the point is, even when you're broke, you have to earn and save. Digging our way out of this hole will be hard for everyone.

But, the good news is that the value of the dollar doesn't have to follow the old $20 = 1 ounce of gold formula. At this point, the dollar (as an arbitrary measure of buying power) equals about 1/1200th of an ounce. Prices (in dollars) have largely shifted to reflect the inflation (though our incomes never quite catch up and our taxes always rise).

If we were to peg the dollar to gold at the current rate, it would bring about fiscal discipline. The actual number of dollars to a gold ounce (whether it is 20 or 20,000) is largely irrelevant.

The point is to bring stability, to give it an anchor, to stop its freefall right now.

One way to get there is Ron Paul's idea of introducing a competing currency. If we were to repeal the legal tender laws and allow debts to be paid in gold or silver along with the dollar, the competition would enforce a discipline on the dollar. The fed could not devalue it without a market consequence.

There are already e-gold schemes in place that allow for offsite gold ownership (private, not public) and for business transactions to be carried out using a kind of e-money that actually shifts the transfer of ownership - even in very small fractional amounts. The change in ownership is done in a warehouse with the records being kept on computer (not unlike paying your bills online). With current technology, this is not difficult to do at all.

If we had the choice to be paid in dollars (whose value diminishes over time) or in fractions of an ounce of gold (whose buying power is stable), would most people choose debt-ridden arbitrary dollars over gold? They might for a while, until they see their prices continue to rise while their co-workers who are paid in milligrams of gold being able to get ahead, while the people holding dollars fall further into debt.

I think the competing currency idea is worth a try. Right now, our money is literally monopoly money.

There are central banks around the world (notably China and India) buying large quantities of gold. They are trying to do it quietly so as not to cause a run on the price and make it more expensive for themselves.

There was talk a while back about Russia backing the ruble (at least in part) with gold. The ponzi scheme can;t go on forever. At some point, things are going to have to be paid in real money, not brightly-colored IOU slips.

The times they are a changin'.

gnesio-lutheran said...

A new PM backed currency is a nice idea, in theory.

But in reality, there is "0" political will in either political party to do any such thing. Ron Paul is a lone 'voice crying in the wildernes' who is painted as a kook by most mainstream press and politicains, left and right. His observations will continue unheeded until it's too late, which it probably is already. Things are unravelling before our eyes, and there are no more tricks left to pull out of the hat- it's all smoke and mirrors now. Our only hope is if God, in His infinite mercy, presents to us some solution. But I really see no reason why He would be inclined to do so.

Father Hollywood said...

Dear Gnesio:

This is true - to an extent. The "kook" factor has changed considerably as more people are actually looking under the hood of our banking and economic system. There is actually a strong consensus among Americans that the fed should be audited - a development that would have seemed impossible during the last "election" cycle.

I think there is a generational sea change afoot. The "end the fed" crowd is largely under 30. Older people are more concerned with keeping the ponzi scheme going as long as they can get SS and Medicare. Younger people can see where the script is going.

But even if there is no political will to move to hard currency in the US, someone somewhere will. And when China unpegs the yuan from the dollar, and when the oil economy is no longer operating in dollars, we will see the end of the dollar as the world reserve currency. There is a coming new economic order, and I do believe gold will be involved - even if fiat currencies manage to survive and also play a role. Right now, the ship is utterly rudderless.

But I think the pendulum is coming back the other way. Maybe it is too late to save the dollar and/or the American economy - but Americans would be wise to get out of dollars when it comes to savings and investments.

And if enough people begin trading in gold (such as using e-gold), there will be a defacto hard currency. Or, if Russia or China begins backing its currency in gold, we will be able to save in those currencies.

One way or the other, our standard of living is going to readjust as we have to stop the spending spree and start paying our bills. Wise people will minimize their losses by being frugal, carrying low (or no) debt, and by saving and investing money that has real value. The unwise will be trapped just like people were in Weimar Germany or in modern-day Zimbabwe.

Just my two cents (or 1,240,000th of an ounce of gold)...

Father Robert Lyons said...

So what you are saying, if I am reading you right, is that the Federal Government has picked up all the same lousy habits as the general populus with regards to handling money, and needs a father figure to 'explain it to them'. :)

Problem is, who fathers Big Brother? ;)


Father Hollywood said...

Dear Fr. Robert:

Excellent point. Who is guarding the hen-house?

The Constitution is supposed to keep government in its box.

Franklin's words are coming back to haunt us. When he was asked what kind of government the Philadelphia convention had created, he said: "A republic, if you can keep it."

A republic is neither a democracy nor a monarchy. But what has happened in the US is just what DeTocqueville warned us about. We have flirted with democracy to the point where the mob votes itself goodies out of the largesse. We are no longer a government of laws but of men.

On the one hand, our republic has degenerated into democracy (at home). On the other hand, our republic (like Rome's) has been supplanted by an empire (abroad). Big Government at home + Big Government abroad = bankruptcy.

There is simply not enough money to provide pensions and health-care to every person, police the world, and pay all the interest we have accrued doing those two things. We're broke. Printing more money just devalues the money. We're still broke.

When Rome's empire became too expensive, they began to devalue the currency by recalling the coins and reissuing new ones with less metal. This amounts to paying Mastercard with Visa. You can get away with it for a while (such as in wartime or a famine) - but if you don't replace your seed corn, if you don't save when times are good (i.e. when you buy on credit, be it big screen TVs or aircraft carriers), you can't expect to weather the next storm.

Maybe the children who occupy the capitol building are the ones who need father figures, someone to read them the story of the Three Little Pigs.

Robbie F. said...

AmWay at least sold a product you could use!