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Monetary Reform: The Beginning of the Beginning

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The Daily Reckoning | Wednesday, August 10, 2011 London burns as aging western welfare economies continue to fall apart, Gold hits $1,790! Is a metal-backed currency closer than we think? Plus, Bill Bonner on why this is NOT "just like "2008" and plenty more... ................................................................................................. Who Gives A Damn About America's Credit Rating? I'm SICK of hearing about Keynesian vs. Austrian, fiat currency vs. Gold, U.S. credit ratings and other BORING economic theories you have ZERO control over... "WHO CARES!?" Truth is, if you want to make money in the markets, none of that stuff even matters! Let me prove it to you by showing you... From Riots to Riches A look at the upside-down world economy and its violent reversion Joel Bowman Joel Bowman, reporting from Glasgow, Scottland... Golden records..."anarchy" in the streets...and a collapsing economy six times the size of China... Yes, Fellow Reckoner, it's all happening. It's all hands on deck and all bums on seats for the spectacle of a lifetime. Let's take a look at the above events, not as unrelated as they may at first appear, in reverse order. First, we address the ongoing, slow motion collapse of the Anglo-Saxon Empire, centered predominantly around the Eurozone and in the United States of America. Stock markets in the western hemisphere are down big again today after yesterday's "dead cat bounce." Major indexes in the US were off between 3.2 and 3.7% last we checked. Measures from the Thames to the Rhine suffered similarly, with the London's FTSE 100 ending the session down more than 2% and averages in Paris and Berlin falling by 3.8 and 3.2% respectively. We've noted in these pages before the predicaments of the lumbering, western economies. That they are drowning in debt is news to nobody...with the possible exception of spendthrift politicians whose only response to the problem is to add more burdensome obligations, more debt, to the system. The economies are trying to free themselves...but instead of throwing them a lifeline, the politicos throw them a brick. Unsurprisingly, therefore, official growth rates in the Eurozone and the US are between zero and diddly. Real growth rates -- when adjusted for inflation -- are between diddly and negative. (The 2% official rate recorded in the US during the first two quarters was barely enough to keep pace with population growth.) Adding to that, the workforces in the developed world nations are shrinking. And government intervention is expanding. Populations in the west (and Japan) are aging and -- in part due to that demographic shift; in part due to swelling youth unemployment -- disaffected welfare recipients are multiplying. Manufacturing, too, is moving offshore to more cost-competitive, market-friendly locales. Capital, as we know, flows to where it is treated best. That is its nature. When combined, the economies of the Eurozone and the United States total about $30 trillion in annual gross domestic product - $16.3 for the euros and $14.1 trillion for the yanks. Expressed another way, that's a combined economy about six times the size of China's, itself worth roughly $5 trillion. (We've used an "all in" measure here, mind you, one that includes both private sector productivity and public sector parasitism. The very nature of The State means there's a lot of double counting in there...plenty of "robbing Peter to subsidize Paul" kind of caper. Nevertheless, it's probably a near enough measure to garner a back of the envelope, apples-to-apples comparison.) What we are witnessing, in other words, is a combined, inter-continental economy, one roughly equal to six Middle Kingdoms (or 9 Germanys...or 11 Frances...or 32 Australias), grinding to a slow, inexorable halt. It's anyone's guess as to when the last brick will fall...or how...or on whom. As one of our favorite non-economists, Jim Morrison, famously put it, "The future's uncertain...but the end is always near." The nature of an economy is, unsurprisingly, not unlike the nature of the men (and women) who comprise it. As a man ages, as he gains a little wealth, a little luxury, he becomes complacent. He grows pudgy around the middle and is unable and/or unwilling to perform the tasks that occupied his youth. He drinks more than he probably should, develops "love handles" and begins using retrospective, nostalgic phrases like "when I was a boy" and "the good ol' days." He is past his prime, in other words. Torpid. Lethargic. Slow. He is, in this way, not unlike the average "first world" worker. As for the Chinese worker, he is still young. He is lean and dynamic. He is nimble and driven, hungry for the good things in life...and he is both willing and eager to work for them. Today, there are about 780 million such Chinese men and women in the labor force, about seven times the size of the working American base...and more than double the entire US population. Call it mean reversion...or a Great Correction...or the Greater Depression. Whatever the sobriquet, the trend is the same. Just don't call it a "recovery"...and don't expect it to be over anytime soon. Equally, don't expect this to be a quiet, peaceful transition. On that last note, it is hardly surprising that we should see a bit of tension forming around the edges of these crumbling western economies; a few tears at the social fabric of the once-mighty western nations. Already we've seen protests and riots in Europe's peripheral countries, the Club Med economies of Greece, Italy, Spain and the like. Now it appears to have spread to England, too. Your editor was in London just last weekend, looking impossibly uncool in the nouveau chic, East End district of Hackney. The place reminded us of the DUMBO (Down Under Manhattan Bridge Overpass) area of Brooklyn a few years back. It's a newly gentrified part of London, the kind of place where you see Maybachs and Maseratis parked out front of shabby looking buildings with gourmet cafes and boutique clothing stores inside. It's the new "it" area, the place where the cool, edgy kids hang. Well, so we were told. This week, London's East End is ablaze. The inferno seems to grow around the city by the hour. Rioters storm the streets, hurling Molotov cocktails through shop fronts and indiscriminately vandalizing cars and other private property. This morning's paper carried a picture of an iconic double-decker bus, smoke and flames billowing out from its shattered windows. Hundreds have already been arrested and many wounded. Prime Minister Cameron (returning from vacation in Italy) has ordered 10,000 more police officers into the city to bring the situation "under control." Thousands of social media comments express shock and amazement that a place like London -- so civilized, so "first world" -- could descend into such chaos. But this is no chance event. England is a socialist state, like most mature, aging western nations. It is a toad in search of a tire...a "bug in search of a windshield," as John Mauldin puts it. As such, it is a breeding ground for ne're-do-wells, grifters, layabouts, leeches, social parasites and welfare recipients of all stripes. These individuals, guided by the blinding force of mob mentality, are simply doing what the state conditioned them to do: They are trying to get something for nothing. They are the violent sons begat of a violent institution. And they're giving anarchists a bad name. The destruction we see in London -- which has since spread to Birmingham, Liverpool and Bristol -- is neither unexpected nor is it the work of "anarchists," as those witless cretins in the mainstream media would have us believe. (The word anarchy, for the record, is derived from the Greek anarchíā and simply means "without ruler." Free, in other words. Acting voluntarily. Not a slave. It has nothing to do with violence or coercion or the destruction of property, though these would, ironically, be acceptable descriptions of the nature of The State...and all it produces.) England was looking for this, even if it didn't know it. In many ways, Mark Duggan is to England what the self-immolating Mohamed Bouazizi was to Tunisia; a catalyst to reveal the state's dark heart to the blissfully unaware public it rules. Expect more to come. But wait! We've run out of space to talk about gold, Mother Nature's own insurance policy against political and monetary disaster. The metal is at new highs again today, $1,780 an ounce. We'll have to save that discussion for tomorrow... The book the US Congress never wanted you to see... Ron Paul's "Lost" Gold Bible Buried away in secret since late in the last century, this 200-page guide shows you: * Why $15,000 gold is likely inevitable, BUT why that's not a GOOD thing for investors... * The only REAL way out of our monetary crisis... * And a glimpse into the future...when everything BUT the dollar could be used as money... We're spreading the word... Click here to find out more. The Daily Reckoning Presents Monetary Reform: The Beginning of the Beginning Charles Kadlec Fundamental reform of the world's monetary system has begun. It is way too early and too amorphous to be front-page news. We are only at the beginning of the beginning of a popular effort to restore gold backed money to the center of economic activity. The power of this incipient reform movement is its grounding in human nature and our propensity -- in Adam Smith's famous words -- "to truck, barter and exchange one thing for another." We forget money is a human invention, emerging from what Hayek calls the spontaneous order of the market, to make possible mutually beneficial exchanges over an ever-widening number of goods, across an expanding set of communities and through the keeping of promises of exchange, even over long periods of time. The invention of money made possible an extraordinary increase in commercial activity by liberating us from a direct barter system where I have to have something you need in order to trade. By ancient times, gold and silver coins had become the money of choice because they were better than any other medium at maintaining their rate of exchange into goods and services, thereby favoring neither buyer nor seller. Defining a dollar, or a British pound, as a fixed weight of gold was an innovation that further increased the usefulness of money. You could take currency and trade it for something you needed, or you could trade that money for a fixed weight of gold. As a general proposition, paying with paper money was no different than paying with gold, except paper money was more convenient to carry. Forty years ago, that order was up-ended by President Richard Nixon's decision to sever the final link between the dollar and gold. For the first time since Sir Isaac Newton established the British gold standard in 1717, all of the world's major currencies during a time of peace were free to float against one another and to fall in value against precious metals. The consequence has been a debasement of the dollar and all other currencies, an ever more cyclical economy, a 40-year hiatus in real wage increases for American workers and a growing fear of yet more financial crises created by monetary instability. As a consequence, support is growing to repeal tax and other legal barriers that effectively prevent people from using precious metals as money. In March, Utah repealed its capital gains tax on gold and silver coins it will recognize as legal tender. Twelve other states are considering similar legislation. Then, in June, Senators Jim DeMint (R-S.C.), Mike Lee (R-Utah) and Rand Paul (R-Ky.) introduced the Sound Money Promotion Act that would remove the 28% federal tax on gains realized in the use of gold or silver coins recognized as legal tender for use within a state. Now, in Switzerland, efforts are underway to create an official Gold Swiss franc (GSF) with a set of coins, each with a fixed content of gold. The proposed constitutional change would permit private institutions to issue an unlimited number of coins whose appearance, content and weight of gold, and definition would be under the supervision of the Swiss government. For example, the smallest coin would have a face value of 1 GSF and have 0.1 grams of gold in its center, similar to today's bi-metallic euro coins, and be worth -- at today's price of gold, about $4.00. Five, 10, 20 and 50 GSF coins would have 0.5, 1.0, 2.0 and 5.0 grams of gold and today would be worth approximately $20, $40, $80 and $200 respectively. Gold Swiss franc bank notes are conceivable, as are GSF bank deposits, but they would have to be 100% backed by gold held by the issuing institution. Credit transactions would be legal, but fractional reserve credit would be forbidden under Swiss law. "The primary purpose is to make it easy for the Swiss people to use or hold gold as an alternative to the Swiss franc and all other currencies," explains Thomas Jacob, the man behind the gold initiative who now heads the newly founded Goldfranc Association. In addition, Jacob believes the free coinage of Gold Swiss francs may alleviate the upward pressure on the Swiss franc. In the past year, it has shot up 15% against the euro and about double that against the dollar as people all over the world sought refuge in the Swiss currency. The importance of this initiative occurring in Switzerland goes beyond that country's reputation as a center of financial stability and sound banking practices through the millennia. Such a change in its constitution must be approved by the Swiss people through a referendum, and thus would demonstrate in a language politicians understand the popularity of making money again as good as gold. Within the next few weeks, signatures will be collected to launch an initial referendum that would require the Swiss National Bank to repatriate all of its gold holdings to within the borders of Switzerland, prohibit it from selling any more of its gold, and require a minimum 20% of its assets be gold. This initiative is likely to be very popular. The Swiss remember that during World War II, the United States refused to provide access to their gold reserves. More important, since 2000, the SNB has sold 1550 tons of gold -- more than a half of its total holdings -- mostly at prices below $500 an ounce, and bought European government bonds that have plummeted in value by SF40 billion, compared to a total federal budget of SF60 billion. This referendum will put the issue of gold as money on the political agenda. The next step is to offer a follow-on initiative permitting the free-coinage of GSF. The creation of a Gold Swiss franc and the free coinage thereof, along with the repeal of taxation by the U.S. of gold and silver coins used as legal tender, would liberate market participants to generate spontaneously a new monetary order. With government barriers removed, people all over the world will find ways to use gold-backed money to facilitate the exchange of goods and services with their counterparts anywhere in the world, and to engage in saving and investing, lending and borrowing using monies whose value would be anchored in the remarkably stable and trustworthy purchasing power of gold. Initially, such efforts would have little economic consequence. However, in a world of voluntary exchange, good money chases out bad money, turning Gresham's law upside down. That is why when the dollar's value was stable, it was the currency of choice throughout the world. No one can forecast how this process will evolve. However, we can anticipate that the creation of a Gold Swiss franc and the repeal of tax and legal barriers to the use of gold and silver coins as legal tender will be the antecedent to the reform of today's paper money system -- in the U.S and throughout the world. Regards, Charles Kadlec, for The Daily Reckoning Ed. Note: Mr. Kadlec is a member of the Economic Advisory Board of the American Principles Project, an author and founder of the Community of Liberty. Millions of Americans are Unprepared for what has Already Happened This single event could have catastrophic effects on your retirement nest egg. A nest egg you think you can count on at the golden age of 62. Whether you're already retired, or want to retire soon, I urge you to listen what I have to say now. Full details here. Don't wait, watch now And now over to Bill Bonner with the rest of today's Reckoning from Poitou, France... Not Like 2008 Why the next phase of the Great Correction is bound to be more painful than the last. Bill Bonner Welcome to 21st Century Hell... Stocks caught a break yesterday. The Dow rose 429 points. Gold rose $29. Interestingly...or even suspiciously...the stock market still seemed to be in sell mode after the Fed announced it would keep rates low into 2013. Then, it rose. It reminded us of the "plunge protection team," a group supposedly set up by the Clinton Administration to counter big drops in the stop market. Whether there ever was such a group or not, we don't know. But there is no doubt the feds were greatly relieved to see stocks going back up yesterday. There was also no doubt that stocks were ready for a bounce. ‘Even a dead cat bounces,' as they say on the street. And we noticed many financial services urging readers to buy. They said it was a great opportunity to get shares at "bargain" prices. "Just like 2008!" But it doesn't look like 2008 to us. And stocks don't look like bargains. With the Dow over 11,000 we need about 2 more weeks of 500-point daily drops -- about 5,000 points further down -- to get prices down to real bargain levels. And if we had a free market, we might have had them already. Instead, the feds are always stepping in...meddling...intervening...promising bailouts, lower rates, QEs, and other stimulus measures. As a result, investors have been programmed by half a century of experience that it doesn't pay to "fight the Fed" or to "bet against America." But history has not come to a stop. And central planning doesn't work any better for the US than it did for the Soviet Union. All the feds have really done, over the last half a century, was to aggravate the problem. Every time the growth of credit slowed...the feds made it easier to borrow. Now we have so much debt that households can't spend...corporations are hoarding cash...and the governments' own credit rating has been marked down. Where does this lead? We've already told you. It leads to 21st century Hell... Now, debt levels are so high in the US -- gross, official government debt passed 100% of GDP last week -- that it now weighs heavily on growth. Instead of growing at 3% annually, the US is barely growing at all. So, the feds can't get out the easy way. That is, they can't cool spending for a while and let the economy ‘grow its way out of debt.' Too much debt already. And the economy can't stomach the kind of austerity that would be required to get debt down to acceptable levels. We see what is happening in England. Riots in the streets. It would probably be worse in America. First, because the private sector is already in a deep correction; additional austerity from the government would push it into a depression. Second, because the US is running an empire...and empires are expensive. A week or so ago, we underestimated the cost of the imperial agenda. We said it was $1.2 trillion per year. It's actually more like $1.8 trillion. It's more than half total US spending, says our new Daily Reckoning correspondent in China, Dee Woo. The defense budget may be only $700 billion or so. But add in the military parts of other budgets -- including homeland security, veterans' benefits, foreign aid, active overseas wars, and the interest on the portion of the debt attributable to the military -- and you get 54% o f spending. It may be significant that Dee Woo, or "Woody" as we call him, would point this out to us. He is writing not for US readers...but for Chinese readers. He is showing the Middle Kingdom both how much the US spends on it empire...and how fat and dysfunctional it has become. Each empire is replaced by its major creditor. We don't know if that's true. But we like the sound of it. The US was Great Britain's major creditor. Now, China holds more US paper dollars and debt than anyone. Russia is in the news, calling the US a "parasite" for hogging the world's credit and resources. China calls on the US to act responsibly, in order to protect China's cache of dollars. The Soviets had to give up their challenge to the US because they couldn't match America's military spending. China won't even try. Instead, China will challenge the US empire in another way. It will use America's spending against it... by introducing low-cost, high tech alternatives, and letting the US choke on its own excess debt. More on that...below... Meanwhile, back in the USA itself... the gap between rich and everybody else grows wider. Shopping data from July showed a healthy 5% increase. But looked at more carefully, the numbers reveal "two Americas." Sales at Saks, for example, shot up more than 15%. Bloomingdales' and other upper-end marketers seem to be doing fine. But the bottom 75% of shoppers are living their own version of 21st Century Hell. They cannot spend more money. Prices are rising while incomes are not. This leaves most shoppers spending about the same amount, but getting less for it. Gasoline, for example, costs the nation about $10.9 billion more this year than it did the last. That money has to come from somewhere. And since a rich person drives about the same number of miles as a poor person, it costs the many a lot more than it does the few. And more thoughts... All that talk about the debt ceiling may have left you with the impression that the feds are finally getting serious about cutting spending. They've set up a Super Congress, that will come to terms with the budget -- or else! Or else -- supposedly -- automatic axes will fall on the military. Yes, dear reader, the system is set up so that if the pols can't get their act together America's national defense will be put in jeopardy. And if you believe that...we have a gold mine we'd like to offer you! The first thing to understand about the debt deal is that it didn't cut any debt. It's supposed to hack off nearly a trillion in debt over the next decade. But that is unlikely. As Congressman Ron Paul points out, the "Super Congress" is just a way for the real congress to shirk its responsibility. It is also a convenient way for lobbyists to focus their efforts...and for members of the super-committee to bring in more campaign contributions. What is it unlikely to do is either cut real debt itself...or allow any sort of automatic system to cut it. Instead, it will move the "baseline" around, so that it can appear to cut debt without actually cutting anything. *** And don't worry about the Pentagon. It has more lobbyists than anyone. There is no way they are going to roll over. Already, their team is at work...making the public think its safety is risk. ...the Dreaded "Doomsday Mechanism" Defense Budget Hysteria and Business as Usual -- or Reform? By Winslow T. Wheeler The rhetoric of people rushing to rescue Pentagon spending from "completely unacceptable" cuts is quite hysterical. Leading the chorus has been Secretary of Defense Leon Panetta. He termed the possible defense budget cuts (about $850 billion over 10 years according to most) a "doomsday mechanism," if the automatic sequestration trigger of Obama's debt deal with the Republicans in Congress is pulled. Some think tank types, opining in the Washington Post and the New York Times, have deemed these reductions "indiscriminately hacking away" at the Pentagon's budget and something that could "imperil America's national security." Their defense spending allies, including multiple generals and admirals sitting atop various Pentagon bureaucracies, confirm it all with descriptions like "very high risk" and "draconian." Some factual perspective puts the brown paper bag around this hot air. As analyst Harrison also informs us, the "doomsday mechanism" would reduce the Pentagon's "base" (non-war) budget to about $472 billion, the approximate level of the base DOD budget in 2007. I do not recall anyone declaring our national security being "imperiled" at that spending level in 2007. In fact, that level of spending for the "base" (non-war) Pentagon budget was a sixteen year high -- calculated using "constant" Defense Department dollars intended to compensate for inflation. Not exactly the result of "hacking away." If returned to the $472 billion 2007 level, the base DOD budget would be $73 billion higher than it was in 2000, the year before our various interventions started to occur. If spending were to be continued at the $472 billion level for the next 10 years, base Defense Department spending would be three quarters of a trillion dollars above the levels extant in 2000. And, not a penny of the additional monies to be spent on the wars would be eliminated. Regards, Bill Bonner, for The Daily Reckoning