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Tear up your paper money

So what is it about money that the leaders of the eurozone don’t get?

Money has been around for a while, and it’s not terribly complicated.

The key element is trust. That was true when money was a piece of metal that you could bite or bounce. Now that money is just a piece of paper, it’s even truer. Today’s money is nothing but trust.

That’s why the euro crisis is so bizarre. The euro is, in theory, one of the world’s great currencies. And yet, as this crisis has demonstrated, nobody actually stands behind it. There is no lender of last resort. There is no “full faith and credit.” There’s nobody on the other end of the promise.

And it’s as if the leaders of the eurozone wanted to go out of their way to prove it. They’ve taken us up to the velvet curtain and then themselves, with a self-satisfied smile, pulled it aside to show us that there is no Great Oz.

And in the process they’ve done major, and perhaps irretrievable, damage to their own currency and to the very idea of money in our time. If you can’t trust the euro, what paper can you trust?

As solid as the solidus?

The idea of money may never have been grasped more clearly than in the Byzantine Empire, the great Roman Empire of the East.

From the time Constantine the Great minted the first gold solidus in 312 until the final coin was minted by Basil II, the Bulgar Slayer, around 1020, the solidus was minted at a steady rate of 72 coins to a Roman pound of gold, or 4.48 grams of gold per coin. When coins came back to the imperial treasury — all taxes had to be paid in solidi — they were [...]

The Mystery of Monetary Gold

Monetary gold buying has a certain mystery about it, which needs to be understood well, in order to understand what lies ahead for gold. Many have a preconceived view of the use of gold to be the same as used by central banks in the past, but global financial conditions have changed radically since then, as has the acceptable ways in which gold can be used in today’s global monetary system. We look at the difference between the private retail uses of gold and set it against the background of monetary gold to highlight the differences.


Developed World Retail Gold Buying

When a man in the U.S., Europe, or the United Kingdom goes out to buy gold, it’s usually for a special present for his wife or girlfriend and he rarely thinks of gold jewelry as part of his financial assets that could be sold in an emergency. Sometimes, usually if he is a coin collector, he will buy a gold coin for safekeeping at home as an investment for the worst of times. Rarely does he plan a ‘practical’ actual use for it, depending only on the vague assumption that it will be useful when hard times hit.


Developed World Retail Investment Buying

For the much richer buyer, buying gold as an investment comes in the form of a bar of gold bought for investment and stored in his safe deposit box or to be held in an unallocated account in the vaults of his bank. The quickest and cheapest way he would buy to hold gold long-term is through the shares of a gold Exchange Traded Fund. Please note that in these two examples banks are tied into the transaction one way or another. This strikes emerging market buyers as strange because banks may prove to [...]

The most insidious effects of fractional reserve banking

The most insidious of all of the unintended consequences of both fractional reserve banking and the judicial decisions of Sir William Grant in Carr vs. Carr [1811] and Lord Cottenham in Foley vs. Hill [1848] is the continued shrinkage of the size of the unit of measurement of exchange value.

The unit of money – the pound – is the unit of measurement we each use daily in measuring the value of what we do, what we earn, what we buy and the general course of our individual affairs. We depend on that unit for measuring and determining our future. We each rely on it. Yet, it is an untrustworthy tool for measuring because its size diminishes continually. Measurements taken at different times will not be measured with the same size of unit. Therefore, measurements taken at different times cannot be validly compared and formulae derived from such comparisons cannot produce the results predicted.

Imagine what would happen if the unit of measurement of time diminished continually. Suppose the clock on Big Ben set the official time. Suppose further that it had a mechanical fault so that it lost half a second a minute. Every 5 days we would lose an hour. Every 40 days we would lose 8 hours. Soon it would be dark at noon and light at midnight. Time would no longer be synchronized with nature. Farmers could not rely on the clock to feed their animals. Nights would get shorter and soon we would find that 8 hours sleep left us still tired. We wouldn’t be able to get everything done during a normal day’s work and would have to work later and later. What couldn’t be completed today will need to be done tomorrow. We would have to squeeze more and more into our already [...]

The Fiasco of Fiat Money

Today’s worldwide paper-, or “fiat-,” money regime is an economically and socially destructive scheme — with far-reaching and seriously harmful economic and societal consequences, effects that extend beyond what most people would imagine.

Fiat money is inflationary; it benefits a few at the expense of many others; it causes boom-and-bust cycles; it leads to overindebtedness; it corrupts society’s morals; and it will ultimately end in a depression on a grand scale.

All these insights, however, which have been put forward by the scholars of the Austrian School of economics years ago, hardly play any role among the efforts of mainstream economists, central banks, politicians, or bureaucrats in identifying the root cause of the current financial and economic crisis and, against this backdrop, formulating proper remedies.

This should not come as a surprise, though. For the (intentional or unintentional) purpose of policy makers and their influential “experts” — who serve as opinion molders — is to keep the fiat-money regime going, whatever it takes.


The fiat-money regime essentially rests on central banking — meaning that a government-sponsored central bank holds the money-production monopoly — and fractional-reserve banking, denoting banks issuing money created out of thin air, or ex nihilo.

In The Mystery of Banking, Murray N. Rothbard uncovers the fiat-money regime — with central banking and fractional-reserve banking — as a form of embezzlement, a scheme of thievery.[1]

Rothbard’s conclusion might need some explanation, given that mainstream economists consider the concept of fiat money as an economically and politically desirable, acceptable, and state-of-the-art institution.

An understanding of the nature and consequences of a fiat-money regime must start with an appreciation of what money actually is and what it does in a monetary exchange economy.

Money is the universally accepted means of exchange. Ludwig von Mises emphasized that money has just [...]

The Pernicious Dynamics of Debt, Deleveraging, and Deflation

At this moment, the news media is constantly clamoring about the “Three Ds” that are buffeting the markets: debt, deleveraging, and deflation. We intuitively sense that they’re linked — but how, exactly?

Understanding this linking is critical; as debt has fueled the global expansion, it will also dominate its contraction.

Debt and Deleveraging

To illustrate the forces of debt and deleveraging, let’s consider a home mortgage.

Suppose a buyer of a $100,000 home qualifies for a mortgage that requires only a 3% down payment in cash. The buyer ponies up $3,000 in cash and obtains a $97,000 mortgage. The cash collateral is thus leveraged about 33-to-1: Each $1 in cash has been leveraged into $33 of borrowed money.

Let’s say the owner wants to refinance at a later date, and to qualify for the new loan he must have 20% collateral for the new loan. (This is a simplified scenario; we will consider more complex examples later.) If the house value remains around $100,000, then the owner must boost collateral by paying down the mortgage $17,000. This boosts collateral to $20,000 (20%) while reducing the mortgage to $80,000.

The leverage has been slashed from 33-to-1 to 4-to-1: now each $1 of collateral leverages $4 of borrowed money. This is deleveraging.

Another common example is a margin stock-trading account. J.Q. Speculator can leverage his cash collateral 2-to-1 via margin: If he has $100,000 cash in his account, he can buy $200,000 of stocks. If (heaven forbid) the stocks he purchased decline in value by $50,000, then his collateral has shrunk to $50,000. Since margin accounts cannot exceed a 2-to-1 leverage, he must either sell enough of his portfolio to return the leverage to 2-to-1 (that is, $50,000 in cash value and $100,000 in stocks), or he must deposit another $25,000 in [...]

Silver and gold to test last year’s highs as the world waits for more money printing?

When will the global central banks press the button and start the electronic money printing presses rolling again? Will they first allow some hot air out of over-inflated stock markets or seize on a contracting global money supply as a reason to get on with it?

Money supply data is in retreat all over the world, even in China. It is an alarm bell for recession and all the latest data on manufacturing orders points to a synchronized global slowdown already. Printing money offsets this contraction to an extent.

Debt and more debt

The problem is that global central banks have been printing money to deal with the financial crisis for more than three years. All they have managed to do is delay a crash, they have not induced a recovery, and at the same time they have borrowed a very great deal more money.

Far more indeed than they have got back in GDP growth. If I borrow $2 from you and give you $1 to spend that is economic growth but at an uneconomic cost.

For a crisis caused by too much debt in the system it was never entirely clear how borrowing even more money would solve the problem. Getting a second credit card after the first is full allows you to spend again but leaves you deeper in debt.

Inflation is then your only salvation. Destroy your currency and you destroy your debts. The bad news is that you destroy the value of a lot of your other wealth in the process of inflation, unless you park your money in assets that offer protection from inflation.

So at the merest hint of central bank money printing last week due to tumbling stock markets it was the turn of precious metals to rally. This is perfectly logical. [...]

The Silver Squeeze: Bank Runs Versus EU Short Covering?

According to Google Trends, the number of Internet searches for the phrase “bank run” has reached an all-time high, demonstrating just how concerned many intelligent people are becoming over the stability of the global banking system.

Amid these troubling times for financial institutions, silver is continuing to shine as the “poor man’s gold” that will provide a safe haven investment asset if paper currencies lose even more of their already tenuous credibility.

Greek Bank Run Fears Grow as EU Exit Appears More Likely

Reports surfaced recently that worries about an imminent Greek exit from the Eurozone have sparked the withdrawal of almost a billion Euros in cash over the past few weeks from Greek banks. Over the last couple of years, withdrawals of cash on deposit from Greek banks have averaged between 2 and 3 billion Euros per month. Nevertheless, January’s withdrawals exceeded 5 billion Euros.

Due to this growing loss of confidence in the banking system, Greek officials are increasingly worried about a burgeoning bank run. Reuters even reported that Greek President Papoulias warned political leaders of a “great fear that could develop into a panic” during negotiations to form a governing coalition within the fragile Greek political arena.

Although Greek political leaders are making a concerted effort to discourage the ongoing cash withdrawals, the average man on the street seems to be increasingly losing faith in the solvency of Greek banks.

Paper Currency Looks Increasingly Tenuous as the Euro Trades Near Two Year Lows

While Greeks seem to prefer to have their cash in hand rather than held as deposits in the bank, how long will it be before these same people ask themselves if the paper currency they are holding is actually any good? When they eventually do, the relatively tiny physical silver market should see a [...]

The Government's Big Lie About the Dollar

There’s one thing for sure: the U.S. government is printing money like mad. If you require proof, all you have to do is look at this graph below, which comes from the St. Louis Federal Reserve Bank – straight from the horse’s mouth:

What’s the lie?

Well, the lie is that this money creation supposedly does not have any significant negative impact on the economy, employment, businesses, or even the overall health of the dollar itself.

And maybe you feel the same way. Maybe you feel that the U.S. Treasury CAN print as much money as it likes without any negative consequences.

But let’s compare and contrast the above chart with another chart showing oil prices over a similar time frame:

We can see that oil-price increases pretty closely match money creation increases – finally decoupling in late 2008 with the “financial” crisis.

Or perhaps that’s too much of a coincidence for you.

How about a chart of the population of employed people over the same time frame:

Now, this chart doesn’t match up exactly with money creation – but it does show a dramatic decrease in the employment rate that coincides with the huge amounts of money creation between 2001 and accelerating leading into 2009.

We can also look at a chart of a broad based commodity index – showing something remarkably similar:

Meanwhile, we hear from our leadership at the U.S. Treasury, Timmy Geithner, promising that he will not devalue the currency.

His words exactly: “It is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity, to (be) competitive. It is not a viable, feasible strategy and we will not engage in it.”

So there’s really not an honest [...]

Infographic: The history of gold

Visualcapitalist has put together an infographic on the history of gold. Click below for a full-size image of part I of a four part series.


“The stage remains set for more rallies” in gold, silver

Today’s positive reversal in precious metals and shares of most gold and silver companies has lent further credence to those who recently have said that the sector is due to resume its uptrend.

One individual in this camp is Bill Fleckenstein, who in his latest weekly column for MSN Money – entitled Has gold’s next bull run began? – argued that “the stage remains set for more rallies” in the sector.”

Describing the action of gold stocks over the past two weeks, Fleckenstein wrote that “The action in the miners the next day (i.e., the day last week’s column was published) was strong, but not definitive. Still, I felt there was some chance it could turn out to be “the” low for the year, while expecting that some part of the range between $1,580 and $1,540 an ounce for gold could be retested once or twice.”

“Tuesday was negative, as the metals went on a nerve-testing roller-coaster ride,” he continued. “First, they staged a pretty decent turnaround, led by silver, which declined about 1.5% overnight but quickly turned that loss into a similar-sized rally. That didn’t stick, however, and silver lost 1% on the day. Gold turned a roughly 1.5% loss into a tiny loss, then that fizzled, and it ended up losing over 1% on the day. However, gold mining stocks, amazingly, behaved pretty well.”

“The next day’s trading (Wednesday, May 23) brought a giant, stunning reversal to the upside in gold stocks, even as other metals were tanking, then reversed, making it seem very likely that their collective low on May 16 will not be broken.”

Looking ahead, Fleckenstein contended that ”What a precious metals bull would like to see is silver, gold and the miners all ratchet up ‘a level’ together on decent volume. We’ve seen [...]